DCIT CIR 4(2), MUMBAI V. SMK SHARES & STOCK BROKING LTD, MUMBAI

ITA 799/MUM/2009

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 6272 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 9 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-11-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 30-08-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 06-02-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIRENDRA OZA
• Keywords: Capital asset; Business income
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUMBAI BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER. AND SMT ASHA VIJAY RAGHAVAN, JUDICIAL MEMBER ITA NO.799/MUM./2009 (ASSESSMENT YEAR : 2005 06 ) DATE OF HEARING: 30.8.2010 DY. COMMISSIONER OF INCOME TAX 4 (2) AAYAKAR BHAVAN, M.K. ROAD MUMBAI 400 020 .. APPELLANT V/S M/S. SMK SHARES & STOCK BROKING PVT. LTD. ,244, P.J. TOWER, DALAL STREET, FORT, MUMBAI 400 001 PAN AABCS4531Q .... RESPONDENT REVENUE BY : SHRI VIRENDRA OZA ASSESSEE BY : SHRI SATISH MODY O R D E R PER S.V. MEHROTRA, A.M. THIS APPEAL BY THE REVENUE, IS DIRECTED AGAINST THE IMPUGNED ORDER DATED 18 TH NOVEMBER 2008, PASSED BY THE LEARNED CIT(A) IV, MUMBAI, FOR ASSESSMENT YEAR 20 05 06, ON THE FOLLOWING GROUNDS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LEARNED CIT(A) ERRED IN TREATING INCOME FROM SHARE TRADING AS INVESTMENT INCOME. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LEARNED CIT(A) ERRED IGNORING THE FACTS THAT DUE TO HIGH FR EQUENCY OF TRANSACTIONS, THE PROFITS FROM SUCH TRANSACTION SHO ULD BE TREATED AS BUSINESS INCOME. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LEARNED CIT(A) ERRED NOT APPRECIATING THE FACT THAT THE ASS ESSEE HAS IN SUBSEQUENT YEARS DECLARED INCOME FROM SIMILAR TRANS ACTIONS AS BUSINESS INCOME. ITA NO. 799/MUM./2009 SMK SHARES & STOCK BROKING P. L. 2 2. BRIEF FACTS OF THE CASE ARE THAT, THE ASSESSEE COMP ANY, A MEMBER OF BOMBAY STOCK EXCHANGE, IN THE RELEVANT ASSESSMENT Y EAR, FILED RETURN OF INCOME DECLARING TOTAL INCOME AT RS.58,92,409/- WHI CH WAS DULY ACCOMPANIED WITH TAX AUDIT REPORT UNDER SECTION 44A B OF THE INCOME TAX ACT, 1961 (FOR SHORT THE ACT ). THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAD DISCLOSED SHORT TERM CAPITAL GAINS DUR ING THE YEAR AT ` 42,34,000 AND LONG TERM CAPITAL GAINS AT ` 60,95,000. HE NOTED THAT THE ASSESSEE HAD PURCHASED SHARES IN SMALL LOTS AND ENT ERED INTO MORE THAN 300 TRANSACTIONS DURING THE YEAR. THUS, THE ASSESSEE HA D CONSISTENTLY PURCHASED AND SOLD THE SHARES DURING THE YEAR. CONSIDERING TH E VOLUME AND FREQUENCY OF SALE AND PURCHASE, THE ASSESSING OFFICER CONCLUD ED THAT THE ASSESSEE HAD NO INTENTION TO HOLD THE SHARES. HE FURTHER OBSERVE D THAT THE ASSESSEE IS A BROKING FIRM AND, THEREFORE, THE SHARE TRANSACTIONS RELATE TO THE BUSINESS OF THE ASSESSEE. HE FURTHER POINTED OUT THAT IN SUBSEQ UENT ASSESSMENT YEAR, THE ASSESSEE HAD TREATED INCOME FROM SIMILAR TRANSA CTIONS AS BUSINESS INCOME. HE, THUS, CONCLUDED THAT INCOME RETURNED AS SHORT TERM CAPITAL GAINS WAS ACTUALLY BUSINESS INCOME, OBSERVING AS UNDER:- 7.3 IN CIT V/S SUTLEJ COTTON MILLS SUPPLY AGENCY LT D. (1975) 100 ITR 706 (SC), THE RESPONDENTASSESSEE SUBSCRIBED FO R 3,49,000 SHARES OF A NEW ISSUE OF GWALIOR RAYON AND PAID THE APPLICATION AND CALL MONEY. SUBSEQUENTLY, IT SOLD 1,58,200 SHARES W ITH A PROFIT. THE INCOMETAX APPELLATE TRIBUNAL FOUND THAT THE TRANSA CTION CONSTITUTED BUSINESS BEING AN ADVENTURE IN THE NATURE OF TRADE AND THAT THE PROFIT WAS LIABLE TO INCOMETAX. ON REFERENCE TO HIGH COUR T OF MADHYA PRADESH HELD THAT THE TRANSACTION WAS NOT AN ADVENT URE IN THE NATURE OF TRADE. ON APPEAL TO THE HONBLE SUPREME COURT, T HE DECISION OF THE HIGH COURT WAS REVERSED HOLDING THAT THE TRIBUNAL H AD CONSIDERED THE EVIDENCE ON RECORD AND APPLIED THE CORRECT TEST OF LAW, AND THERE WAS NO SCOPE FOR INTERFERENCE WITH THE FINDING OF THE T RIBUNAL. THE COURT WHILE DECIDING THE CASE ALSO OBSERVED IF A TRANSACTION IS IN THE ASSESSEES ORDINARY LINE OF BUSINESS THERE CAN BE NO DIFFICULTY IN HOLDING THAT IT IS IN THE NATURE OF TRADE. BUT THE DIFFICULTY ARISES WHERE THE TRANSACTION IS OUTSIDE THE ASSESSEES LINE OF B USINESS AND THEN, IT MUST DEPEND UPON THE FACTS AND CIRCUMSTANCES OF EAC H CASE WHETHER THE TRANSACTION IS IN THE NATURE OF TRADE. ALSO T HE VIEW OF THE TRIBUNAL WAS, IT WAS WITH BORROWED FUNDS THAT THE ASSESSEE P URCHASED THE SHARES. IT IS NO DOUBT TRUE THAT THERE WAS NO EVIDE NCE TO SHOW THAT THE MONEY WAS SPECIFICALLY BORROWED FOR THE PURPOSE OF BUYING SHARES. BUT THERE WAS EVIDENCE BEFORE THE TRIBUNAL FOR ITS FIND ING THAT THE LIABILITIES OF THE ASSESSEE EXCEEDED ITS ASSETS. THE FINDING, T HEREFORE, THAT THE ITA NO. 799/MUM./2009 SMK SHARES & STOCK BROKING P. L. 3 SHARES WERE PURCHASED WITH BORROWED FUNDS ON WHICH THE ASSESSEE WAS PAYING INTEREST, WAS A FINDING SUPPORTED BY EVI DENCE. THE REASONING OF THE TRIBUNAL THAT IT IS MOST IMPROBABL E THAT THE ASSESSEE WOULD BE INVESTING BORROWED MONEY ON WHICH INTEREST WOULD HAVE TO BE PAID IN SHARES WHICH YIELDED NO DIVIDEND WAS COR RECT. WE CANNOT SAY THAT THIS WAS NOT A RELEVANT CIRCUMSTANCES OF T HE TRIBUNAL TO TAKE INTO CONSIDERATION FOR COMING TO THE CONCLUSION THA T THE TRANSACTION WAS AN ADVENTURE IN THE NATURE OF BUSINESS. 3. BEFORE THE LEARNED CIT(A), THE ASSESSEE SUBMITTED T HAT THE COMPOSITION OF ITS LONG TERM CAPITAL GAINS AND SHOR T TERM CAPITAL GAINS WAS AS UNDER: A) SHORT TERM CAPITAL GAINS (WITHOUT STT) 2,82,973 B) SHORT TERM CAPITAL GAINS (WITH STT) 39,51,295 42,34,268 C) LONG TERM CAPITAL GAINS (WITHOUT STT) 15,48,988 D) LONG TERM CAPITAL GAINS (WITH STT) 45,46,233 60,95,221 SHORT TERM CAPITAL GAINS (WITHOUT STT) REGULAR TRANSACTIONS 251410.13 IN SHORT DURATION / AUCTION SALE 102296.88 353707.01 SHORT TERM CAPITAL GAINS (WITH STT) 3851063.97 REGULAR TRANSACTIONS 3851063.97 IN SHORT DURATION / AUCTION SALE 100231.21 3951295.18 LESS: SERVICE TAX / TRANSACTION / OTHER CHARGES 70733.80 TOTAL: 4234268.39 4. IT WAS POINTED OUT THAT SHORT TERM CAPITAL GAINS OF ` 10,13,678 WERE OUT OF THE OPENING INVESTMENTS AND ` 28,37,386 WERE OUT OF THE PURCHASES DURING THE YEAR. THE ASSESSEE FURTHER POINTED OUT T HAT THE MAIN OBJECT OF THE ITA NO. 799/MUM./2009 SMK SHARES & STOCK BROKING P. L. 4 COMPANY IS TO CARRY ON THE BUSINESS OF SHARES AND S TOCK BROKERS WHICH READS AS UNDER: TO CARRY ON THE BUSINESS AS SHARE AND STOCK BROKER S, UNDERWRITERS SUBUNDERWRITERS, AGENTS AND BROKERS FOR TAKING HOL D, DEALING IN, CONVERTING STOCK, SHARES AND SECURITIES OF ALL KIND S, BROKERS FOR UNITS UNIT TRUST OF INDIA, BROKERS FOR DEBENTURES, BONDS, GOVERNMENT SECURITIES, NATIONAL SAVINGS CERTIFICATES, SMALL SA VING SCHEME AND GENERALLY FOR SECURITIES OF ALL KINDS AND A CARRY O N THE ABOVE BUSINESS IN INDIA OR ABROAD. 5. THE ASSESSEE FURTHER SUBMITTED THAT SURPLUS FUNDS H AD BEEN UTILIZED FOR MAKING INVESTMENT IN THE SHARES WHICH IS EVIDENT FR OM THE FOLLOWING ANALYSIS OF BALANCE SHEET. SHARE CAPITAL 250.00 250.00 RESERVES AND SURPLUS 399.49 277.53 SECURED LOAN 2.97 NIL INVESTMENT 319.08 282.82 6. THE ASSESSEE POINTED OUT THAT NO BORROWED FUNDS WER E UTILIZED FOR MAKING INVESTMENTS IN SHARES AND SECURITIES. THE IN TENTION OF THE ASSESSEE WAS TO ACQUIRE AND HOLD THE SHARES AND SECURITIES A S AN INVESTMENT. THE SHARES WERE HELD FOR A REASONABLE PERIOD OF TIME BE FORE SELLING THE SAME. FURTHER, IT WAS POINTED OUT THAT THE SHARES HELD AS INVESTMENT HAD BEEN VALUED AT COST AND THE PROFIT ON SALE OF SUCH SHARE S HAD BEEN SHOWN AS PROFIT ON SALE OF INVESTMENT. THE ASSESSEE HAD RELIED ON V ARIOUS DECISIONS NOTED AT PAGES 5 TO 7 OF THE ORDER PASSED BY THE CIT(A). THE ASSES SEE HAD SUBMITTED THE DETAILS OF SALE AND PURCHASE OF SHARES FROM WHI CH IT WAS NOTICED THAT MAJORITY OF SHARES HAD BEEN HELD BY THE ASSESSEE FO R MORE THAN 300, 200 AND 100 DAYS AND ONLY IN A VERY SMALL NUMBER OF CAS ES, SHARES WERE SOLD WITHIN TEN DAYS. FURTHER, CBDT CIRCULAR DATED 15 TH JUNE 2007 WAS POINTED OUT BEFORE THE CIT(A), WHEREIN IT WAS CLARIFIED BY THE CBDT THAT IT WAS POSSIBLE FOR A TAX PAYER TWO PORTFOLIOS I.E., AN IN VESTMENT PORTFOLIO COMPRISING OF SECURITIES WHICH ARE TO BE TREATED AS CAPITAL ASSETS AND A ITA NO. 799/MUM./2009 SMK SHARES & STOCK BROKING P. L. 5 TRADING PORTFOLIO COMPRISING OF STOCK-IN-TRADE WHIC H ARE TO BE TREATED AS TRADING ASSET. WHERE THE ASSESSEE HAS TWO PORTFOLIO S, THE ASSESSEE MAY HAVE INCOME UNDER BOTH THE HEADS I.E., CAPITAL GAINS AS WELL AS BUSINESS INCOME. 7. LEARNED DEPARTMENTAL REPRESENTATIVE REFERRED TO PAG E 8 OF ASSESSMENT ORDER, WHEREIN AOS FINDINGS HAVE BEEN S UMMED UP. HE FURTHER REFERRED TO PAGE 24 OF THE PAPER BOOK WHEREIN THE COMPUTATION OF INC OME IS CONTAINED WHICH SHOWS PROFIT ON SALE OF INVESTMENT WAS ` 1,03,29,489 AS AGAINST WHICH THE DIVIDEND INCOME WAS ` 3,29,999 ONLY. THUS, HE SUBMITTED THAT IT IS EVIDENT THAT ASSESSEES INTENTION WAS NO T TO EARN DIVIDEND BUT TO TRADE IN SHARES. HE SUBMITTED THAT MAGNITUDE AND FR EQUENCY OF THE TRANSACTIONS AND THE RATIO OF SALES TO PURCHASE AND TOTAL HOLDINGS CLEARLY DEMONSTRATE THAT THE ASSESSEES INTENTION WAS TO TR ADE IN SHARES. LEARNED DEPARTMENTAL REPRESENTATIVE POINTED OUT THAT IN SUC H CIRCUMSTANCES, THE TWIN CRITERIA FOR DECIDING SUCH ISSUE IS TO CONSIDE R THE FREQUENCY OF TRANSACTIONS AND TO FIND OUT THE INTENTION OF THE A SSESSEE AS TO WHETHER TO EARN PROFITS OR TO EARN DIVIDEND. HE POINTED OUT TH AT THE CIT(A) HAS GONE ONLY BY ONE REASONING WITHOUT CONSIDERING THE ENTIR ETY OF FACTS. HE POINTED OUT THAT ONE OF THE BENCH MARKS FOR DECIDING TRUE I NTENTION OF THE ASSESSEE IS TO FIND OUT WHETHER THE ASSESSEE HAD INTENTION TO E ARN DIVIDEND BY HOLDING THE SHARES AS INVESTMENT OR TO EARN PROFIT BY TRADI NG IN THE SAME. HE REFERRED TO THE ASSESSMENT ORDER FOR ASSESSMENT YEA R 2001 02 CONTAINED AT PAGES 1 TO 4 AND POINTED OUT THAT LONG TERM CAPITAL GAINS WERE 7,67,976 WHEREAS SHORT TERM CAPITAL GAIN WAS ONLY RS.20,584 WHICH WAS VERY SMALL AS COMPARED TO DIVIDEND WHICH WAS ONLY ` 4,90,957 BEING 50% OF THE TOTAL CAPITAL GAINS. THIS SUGGESTS THAT THE ASSESSEE HAD INTENTION TO EARN DIVIDEND. HE REFERRED TO THE COMPUTATION OF INCOME FOR ASSESS MENT YEAR 2002 03 CONTAINED AT PAGE 5 OF THE PAPER BOOK AND POINTED OUT THAT THE ASSESS EE HAD INCURRED LOSS ON SALE OF INVESTMENT OF ` 1,12,290 AS AGINST WHICH IT HAD EARNED DIVIDEND OF ` 2,95,776, WHICH SUGGESTS DIVIDEND EARNING MOTIVE O F THE ASSESSEE. HE FURTHER REFERRED TO THE COMPUTATIO N OF INCOME FOR ASSESSMENT YEAR 2003 04 CONTAINED AT PAGE 10 OF THE PAPER BOOK AND POINTED OUT THAT IN THIS YEAR, THE ASSESSEE HAD SHO WN PROFIT ON SALE OF ITA NO. 799/MUM./2009 SMK SHARES & STOCK BROKING P. L. 6 INVESTMENT OF ` 11,57,076 WHICH WAS CONSISTENT WITH THE ASSESSEES MOTIVE OF HOLDING SHARES AS INVESTMENT. THE SAME WAS THE P OSITION FOR ASSESSMENT YEAR 2004 05 AS PER THE COMPUTATION OF INCOME CONTAINED AT PA GE 15 OF THE PAPER BOOK. WITH REFERENCE TO THE ABOVE COMPUTATION , LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE CONCLUSIONS DRAWN IN EARLIER YEARS COULD NOT BE A YARD STICK FOR THE CURRENT YEARS TRANSACT IONS CARRIED ON BY THE ASSESSEE. IT IS PRIMARILY THE MOTIVE OF THE ASSESSE E WHICH IS TO BE EXAMINED. HE RELIED ON THE DECISIONS OF MUMBAI BENCH OF THE T RIBUNAL IN ITA NO.3608/MUM./2007 IN THE CASE OF JAYSHREE PRADIP SH AH, VIDE ORDER DATED 24 TH FEBRUARY 2010 AND IN ITA NO.2586/MUM./ 2009, IN TH E CASE OF SMT. SADHNA NABERA VS ACIT, VIDE ORDER DATED 26 TH MARCH 2010, IN SUPPORT OF HIS CONTENTIONS. 8. PER CONTRA, LEARNED COUNSEL REFERRED TO PAGE 8 OF THE ASSESSMENT ORDER TO DEMONSTRATE THAT THE ASSESSING OFFICER HAD QUESTIONED THE ASSESSEES TRANSACTIONS ONLY IN REGARD TO WHICH THE ASSESSEE HAD RETURNED ITS INCOME AS SHORT TERM CAPITAL GAINS OF ` 42,34,000. HE POINTED OUT THAT LONG TERM CAPITAL GAINS OF ` 60,95,000 HAVENOT BEEN DISPUTED BY THE ASSESSING OFFICER. HE FURTHER REFERRED TO PARA 2.4 OF THE CIT(A)S ORDER WHEREIN THE CIT(A) HAD NOTED THAT MAJORITY OF SHARES WERE HELD BY THE ASSESSEE FOR MORE THAN 300, 200 AND 100 DAYS AND IN A VERY SMALL NUMB ER OF CASES, THE SHARES WERE SOLD WITHIN TEN DAYS. 9. LEARNED COUNSEL FURTHER REFERRED TO THE ASSESSMENT ORDER FOR ASSESSMENT YEAR 2001 02 CONTAINED AT PAGES 1 TO 4 AND POINTED OUT THAT THE ASSESSING OFFICER, UNDER SECTION 143(3), HAD AC CEPTED THE ASSESSEES CLAIM REGARDING LONG TERM CAPITAL GAINS AND SHORT T ERM CAPITAL GAINS WITH RESPECT TO SHARES SOLD BY IT. HE REFERRED TO PAGE 7 OF THE PAPER BOOK, WHEREIN BALANCE SHEET AS ON 31 ST MQARCH 2002, IS CONTAINED TO DEMONSTRATE THAT INVESTMENTS AS ON 31 ST MARCH 2001 AND 31 ST MARCH 2002 CONTINUED TO REMAIN ALMOST SAME. HE POINTED OUT THAT THE ASSESSE E HAD NOT BORROWED ANY FUNDS FOR MAKING INVESTMENT IN SHARES AND IT WAS AS SESSEES OWN SURPLUS FUNDS WHICH HAD BEEN KEPT INVESTED IN SHARES. FURTH ER, LD. COUNSEL POINTED OUT THAT ASSESSEE HAD NO INTENTION TO AVOID TAX WHI CH IS EVIDENT FROM THE FACT ITA NO. 799/MUM./2009 SMK SHARES & STOCK BROKING P. L. 7 THAT THOUGH THE MARKET VALUE OF QUOTED INVESTMENT A S ON 31 ST MARCH 2002 WAS ` 1,30,96,743, THE ASSESSEE HAD SHOWN THE INVESTMENT AT ` 2,04,50,680=54. HE SUBMITTED THAT THE ASSESSEE DID NOT CLAIM THE DIFFERENCE ON ACCOUNT OF FALL IN VALUE OF SHARES AS LOSS. 10. LEARNED COUNSEL FURTHER POINTED OUT THAT IN THE IMM EDIATELY PRECEDING YEAR VIZ. 2004 05, THE ASSESSEES PROFIT ON SALE OF INVESTMENT OF ` 58,00,769 WAS DULY ACCEPTED BY THE DEPARTMENT AND, THEREFORE, SINCE NO NEW FACTS HAVE IN THIS YEAR, THERE IS NO REASON TO DEVIATE FR OM ASSESSEES STAND OF TREATING PART OF ITS SHARES UNDER THE INVESTMENT PO RTFOLIO AND BALANCE AS PART OF TRADING PORTFOLIO. HE SUBMITTED THAT THERE IS NO BAR ON BROKERS BEING INVESTORS ALSO. LEARNED COUNSEL FURTHER SUBMITTED T HAT THE DIVIDEND EARNED CANNOT BE COMPARED WITH THE PROFIT ON SALE OF INVES TMENT. COUNSEL FURTHER SUBMITTED THAT THE SHORT TERM CAPITAL GAINS TO THE EXTENT OF ` 10,00,000 WERE OUT OF OPENING INVESTMENT AND, THEREFORE, INVE STMENT TO THIS EXTENT WAS ALREADY ACCEPTED IN EARLIER YEAR. COUNSEL RELIE D ON THE DECISION OF MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF GOPAL P UROHIT V/S JCIT, (2009) 122 TTJ 87 (MUM.), WHEREIN IT WAS, INTER ALIA, HELD THAT THERE BEING NO CHANGE IN THE MODUS OPERANDI OF THE ASSESSEE, BENEF IT CONFERRED BY THE LEGISLATIVE AGENCIES IN THE FORM OF INTRODUCTION OF SECURITIES TRANSACTIONS TAX AND CONSEQUENTLY ALLOWING CONCESSIONAL RATE OF TAX @ 10% ON SHORT TERM CAPITAL GAINS COULD NOT BE DENIED. HE ALSO RELIED O N THE FOLLOWING DECISIONS, WHEREIN SIMILAR VIEW HAS BEEN TAKEN AS IN THE CASE OF GOPAL PUROHIT (SUPRA): I) DECISION OF MUMBAI BENCH OF THE TRIBUNAL IN ITA NO. 3676/MUM./2008 IN THE CASE OF SHRI RAMESH G. BHUTA, ITA NO.3677/MUM./2008 IN THE CASE OF SHRI PRABODH G . BHUTA, AND ITA NO.3678/MUM./2008 IN THE CASE OF DIL IP G. BHUTA, VIDE CONSOLIDATED ORDER DATED 19 TH MAY 2009; II) DECISION OF MUMBAI BENCH OF THE TRIBUNAL IN ITA NO. 6544/MUM./2008 IN THE CASE OF SHRI BHARAT KUNVERJI KANIA, VIDE ORDER DATED 15 TH MAY 2009; III) DECISION OF MUMBAI BENCH OF THE TRIBUNAL IN ITA NO. 3861, 3862 & 3863/MUM./2001 IN THE CASE OF SHRI ITA NO. 799/MUM./2009 SMK SHARES & STOCK BROKING P. L. 8 MOTILAL OSWAL, VIDE CONSOLIDATED ORDER DATED 28 TH AUGUST 2006; AND IV) DECISION OF MUMBAI BENCH OF THE TRIBUNAL IN ITA NO. 2801/MUM./2000, ITA NO.2802/MUM./2000 AND ITA NO. 5488/MUM./2001, IN THE CASE OF J.M. SHARES AND STOC K BROKERS LTD., VIDE CONSOLIDATED ORDER DATED 30 TH NOVEMBER 2007. 11. LEARNED COUNSEL SUBMITTED THAT INSOFAR AS SMT. SADH NA NABERA (SUPRA) CASE IS CONCERNED, THE SAME IS DISTINGUISHA BLE ON FACTS BECAUSE THAT WAS A CASE CONCERNING TRANSACTIONS BETWEEN SHARES O F GROUP COMPANIES. FURTHER, THE ASSESSEE HAD BORROWED FUNDS FOR MAKING INVESTMENT IN SHARES AND IN EARLIER YEARS, THERE WAS NIL INCOME FROM CAP ITAL GAINS OR VERY SMALL LONG TERM CAPITAL GAINS. THESE FEATURES CLEARLY DIS TINGUISH THE CASE OF THE ASSESSEE FROM THAT OF SMT. SADHANA NABERA (SUPRA). AS REGARDS THE DECISION IN THE CASE OF JAYSHREE PRADIP SHAH (SUPRA), LD. CO UNSEL SUBMITTED THAT IN THE SAID CASE, THE ASSESSEE HAD SHOWN NON DELIVERY BASED TRANSACTIONS UNDER THE HEAD BUSINESS INCOME , WHEREAS, ALL THE TRANSACTIONS WHEREIN DELIVERY OF SHARES HAD BEEN TAKEN WERE RETURNED UNDER THE HE AD SHORT TERM CAPITAL GAINS . THE TRIBUNAL, TAKING NOTE OF FREQUENCY OF TRANSA CTIONS, HAD CONCLUDED THAT THE ASSESSEE WAS CARRYING ON TRADING ACTIVITY ONLY. HOWEVER, IN THE PRESENT CASE, THE ASSESSEE HAD RETURNED UNDE R THE HEAD SHORT TERM CAPITAL GAINS , NOT ONLY IN RESPECT OF SHARES ACQUIRED DURING THE YEAR BUT ALSO IN RESPECT OF OPENING INVESTMENT CARRIED FORWA RD FROM EARLIER YEAR. THUS, LEARNED COUNSEL SUBMITTED THAT BOTH THE CASES RELIED ON BY THE LEARNED DEPARTMENTAL REPRESENTATIVE ARE DISTINGUISHABLE ON FACTS. 12. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE OR DERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABLE ON RECORD. THERE IS NO DISPUTE ON FACTS PARTICULARLY WITH REGARD TO INCOME RETURNED A S SHORT TERM CAPITAL GAINS TO THE EXTENT OF ` 10,00,000 BEING OUT OF OPENING INVESTMENT. BY NOW, THE ISSUE THAT A PERSON CAN BE BOTH INVESTOR AS WELL AS TRADER IN SHARES IS NO MORE RES INTEGRA. IN THIS REGARD DRAFT INSTRUCTION NO.2005, UNDER THE SUBJECT DISTINCTION BETWEEN SHARES HELD A STOCK IN TRADE AND SHARES HELD IN INVESTMENT TESTS FOR , READS AS UNDER: ITA NO. 799/MUM./2009 SMK SHARES & STOCK BROKING P. L. 9 THE CENTRAL BOARD OF DIRECT TAXES IN ITS INSTRUCTIO N NO.1827 DATED 31.8.1989 HAD LAID DOWN CERTAIN TESTS TO DISTINGUIS H BETWEEN SHARES HELD AS STOCKINTRADE AND SHARES HELD AS INVESTMEN T. THE FOLLOWING SUPPLEMENTARY INSTRUCTIONS IN THIS REGARD WILL PROV IDE FURTHER GUIDELINES FOR DETERMINING WHETHER A PERSON IS A TR ADER IN STOCKS OR AN INVESTOR IN STOCKS. I. WHETHER THE PURCHASE AND SALE OF SECURITIES WAS ALL IED TO HIS USUAL TRADE OR BUSINESS WAS INCIDENTAL TO IT OR WAS AN OCCASIONAL INDEPENDENT ACTIVITY; II. WHETHER THE PURCHASE IS MADE SOLELY WITH THE INTENT ION TO RESALE AT A PROFIT OR FOR LONG TERM APPRECIATION AND / OR FOR EARNING DIVIDENDS AND INTEREST; III. WHETHER SCALE OF ACTIVITY IS SUBSTANTIAL; IV. WHETHER TRANSACTIONS WERE ENTERED INTO CONTINUOUSLY AND REGULARLY DURING THE ASSESSMENT YEAR; V. WHETHER PURCHASES ARE MADE OUT OF OWN FUNDS OR BORR OWINGS; VI. TYPICAL HOLDING PERIOD FOR SECURITIES BROUGHT AND S OLD; VII. RATIO OF SALES TO PURCHASES AND HOLDING; VIII. THE TIME DEVOTED TO THE ACTIVITY AND THE EXTENT TO WHICH IT IS THE MEANS OF LIVELIHOOD; IX. THE CHARACTERIZATION OF SECURITIES IN THE BOOKS OF ACCOUNT AND IN BALANCE SHEET AS STOCK IN TRADE OR INVESTMENTS; X. WHETHER THE SECURITIES PURCHASED OR SOLD ARE LISTED OR UNLISTED; XI. WHETHER INVESTMENT IS IN SISTER / RELATED CONCERNS OR INDEPENDENT COMPANIES; XII. WHETHER TRANSACTION IS BY PROMOTERS OF THE COMPANY; XIII. TOTAL NUMBER OF STOCKS DEALT IN; AND XIV. WHETHER MONEY HAS BEEN PAID OR RECEIVED OR WHETHER THESE ARE ONLY BOOK ENTRIES. 13. CBDT, VIDE CIRCULAR NO.4/2007 DATED 15 TH JUNE 2007, HAS OBSERVED THAT WHETHER A PARTICULAR HOLDING OF SHARES IS BY W AY OF INVESTMENT OR FORM PART OF THE STOCK IN TRADE IS A MATTER WHICH IS WIT HIN THE KNOWLEDGE OF THE ASSESSEE WHO HOLDS HIS SHARES AND HE SHOULD, IN NOR MAL CIRCUMSTANCES, BE IN A POSITION TO PRODUCE EVIDENCE FROM HIS RECORDS AS TO WHETHER HE IS MAINTAINING ANY STOCK-IN-TRADE OR HOLDING THE SHARE S BY WAY OF INVESTMENT. IN THE PRESENT CASE, IT IS NOT DISPUTED THAT THE AS SESSEE HAD MAINTAINED THIS DISTINCTION IN ITS RECORDS. IT IS TRUE THAT VOLUME OF TRANSACTION IS AN IMPORTANT INDICATOR OF THE INTENTION OF THE ASSESSEE WHETHER TO DEAL IN SHARES AS TRADING ASSET OR TO HOLD THE SHARES AS INVESTOR BUT CERTAIN LY NOT THE SOLE CRITERION. IN OUR CONSIDERED OPINION, THE ASSESSING OFFICERS CON CLUSION THAT SINCE SALE AND PURCHASE HAD BEEN DETERMINED BY THE VOLATILITY IN T HE MARKET, THE SAME IS AGAINST THE BASIC FEATURE OF INVESTOR, IS NOT BASED ON SOUND RATIONAL REASONING. A PRUDENT INVESTOR ALWAYS KEEPS A WATCH ON THE MARKET TRENDS ITA NO. 799/MUM./2009 SMK SHARES & STOCK BROKING P. L. 10 AND, THEREFORE, IS NOT BARRED UNDER LAW FROM LIQUID ATING HIS INVESTMENTS IN SHARES. THE LAW ITSELF HAS RECOGNISED THIS FACT BY TAXING THESE TRANSACTIONS UNDER THE HEAD SHORT TERM CAPITAL GAINS . IF THE ASSESSING OFFICERS REASONING IS ACCEPTED, THEN IT WOULD BE AGAINST THE LEGISLATIVE INTENT ITSELF. IT IS ALWAYS A VEXED QUESTION TO FIND OUT AS TO WHETHE R THE ASSESSEE WAS HOLDING THE SHARES AS STOCK IN TRADE OR UNDER AN IN VESTMENT PORTFOLIO PARTICULARLY BECAUSE ONE HAS TO INFER THE INTENTION OF THE ASSESSEE WHICH IS PRIMARILY WITHIN HIS OWN KNOWLEDGE. THE CONDUCT OF THE ASSESSEE ASSUMES SIGNIFICANCE IN THIS REGARD. IT HAS BEEN LAID DOWN IN VARIOUS JUDICIAL PRONOUNCEMENTS THAT THERE IS NO ACID TEST TO DECID E THIS ISSUE. IN THE PRESENT CASE, WE FIND THAT THE ASSESSING OFFICER W HILE PASSING ASSESSMENT ORDER UNDER SECTION 143(3) FOR ASSESSMENT YEARS 200 1 02 AND 2004 05, DID NOT DISPUTE THE ASSESSEES CLAIM REGARDING PROFIT O N SALE OF INVESTMENT. ONE MORE IMPORTANT ASPECT IS THAT THE ASSESSEE HAD NOT BORROWED ANY FUND FOR INVESTMENT IN SHARES AND THIS FACT CANNOT BE LOST S IGHT OFF WHILE DECIDING THE TRUE INTENTION OF THE ASSESSEE. 14. LEARNED DEPARTMENTAL REPRESENTATIVE POINTED OUT THA T IN ASSESSMENT YEAR 2001 02, THE DIVIDEND WAS ` 4,90,957 AS AGAINST PROFIT ON SALE OF INVESTMENT OF ` 7,67,976 AND, THEREFORE, THERE WAS NO REASON TO DI SPUTE THE ASSESSEES CLAIM. HOWEVER, IN ASSESSMENT YEAR 2004 05, WE FIND THAT THE DIVIDEND WAS ONLY ` 3,06,219 AS AGAINST THE PROFIT ON SALE OF INVESTME NT OF ` 58,00,769. THUS, THIS OBJECTION OF THE LEARNED DEPA RTMENTAL REPRESENTATIVE DOES NOT HOLD GOOD. IT IS TRUE THAT PRINCIPLES OF R ES JUDICATA DO NOT STRICTLY APPLY TO INCOME TAX PROCEEDINGS BUT AT THE SAME TIM E IT IS A WELL SETTLED LAW THAT THE PRINCIPLES OF CONSISTENCY SHOULD NOT BE IG NORED. THE UNIFORMITY IN TREATMENT AND CONSISTENCY UNDER THE SAME FACTS AND CIRCUMSTANCES IS ONE OF THE FUNDAMENTALS OF THE JUDICIAL PRINCIPLES WHICH C ANNOT BE BRUSHED ASIDE WITHOUT PROPER REASON. WHEN APPROXIMATELY ` 10,00,000 WAS OUT OF THE EARLIER INVESTMENT THEN IF THE MODUS OPERANDI OF TH E ASSESSEE REMAINED THE SAME IN REGARD TO OTHER SHARES PURCHASED DURING THE YEAR, THEN THE ASSESSEES CLAIM COULD NOT BE NEGATED ONLY ON THE B ASIS OF FREQUENCY OF THE TRANSACTION. THIS IS A CASE FOR ASSESSMENT YEAR 200 5 06 AND POSSIBLY MAJOR CONSIDERATION WHICH WEIGHED THE ASSESSING OFFICERS CONCLUSION WAS ON ITA NO. 799/MUM./2009 SMK SHARES & STOCK BROKING P. L. 11 ACCOUNT OF THE INTRODUCTION OF SECURITIES TRANSACTI ONS TAX BY FINANCE ACT, 2004, CONSEQUENT TO WHICH THE SHORT TERM CAPITAL GA INS WERE TAXED AT A CONCESSIONAL RATE OF TAX I.E., 10%. FURTHER, SINCE THERE WAS NO CHANGE IN THE MODUS OPERANDI OF THE ASSESSEE FROM EARLIER YEAR, T HERE WAS NO REASON TO DEVIATE FROM EARLIER YEARS CONCLUSIONS. THE ASSESS EE HAS MAINTAINED SEPARATE INVESTMENT PORTFOLIO AND ALL THE SALES OUT OF THIS PORTFOLIO ARE IDENTIFIABLE TO PURCHASES MADE IN THE SAID PORTFOLI O. ASSESSEES CLAIM REGARDING LONG TERM CAPITAL GAIN HAS NOT BEEN DISTU RBED BY THE ASSESSING OFFICER AND, THUS, ASSESSING OFFICER HIMSELF HAS AC CEPTED THAT THE ASSESSEE WAS INVESTOR IN SHARES ALSO. ALL THESE FACTORS OUTW EIGH THE TEST OF FREQUENCY OF TRANSACTION BEING UNDERTAKEN BY THE ASSESSEE IN DECIDING THE TRUE INTENTION OF ASSESSEE . WE, THEREFORE, CONFIRM THE ORDER OF THE LEARNED CIT(A). 15. IN THE RESULT, REVENUES APPEAL STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 24/11/2010 SD. SD/- ASHA VIJAY RAGHAVAN JUDICIAL MEMBER SD. SD/- S.V. MEHROTRA ACCOUNTANT MEMBER MUMBAI, DATED: 24 TH NOV. 2010 COPY TO : (1) THE ASSESSEE (2) THE RESPONDENT (3) THE CIT(A), MUMBAI, CONCERNED (4) THE CIT, MUMBAI CITY CONCERNED (5) THE DR, A BENCH, ITAT, MUMBAI TRUE COPY BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI PRADEEP J. CHOWDHURY SR. PRIVATE SECRETARY