DCIT 13(2), MUMBAI V. ANAND GUPTA (HUF), MUMBAI

ITA 887/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 48920 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2011
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: G
• Next Hearing Date: 27-04-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 04-02-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Business income
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, G BENCH, MUMBAI. BEFORE SHRI D.MANMOHAN, VICE PRESIDENT AND SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER I.T.A NO.887/ MUM/2010 ASSESSMENT YEAR: 2006-07 ASST. COMMISSIONER OF INCOME TAX 13(2) .. APPEL LANT CIRCLE 13 (2), 477, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI VS ANAND GUPTA (HUF) .. RESPONDEN T 32/38F, IRON MARKET, AHMEDABAD ST, MUMBAI-20 PA NO.AAEHA 0857 R APPEARANCES: A.K. NAYAK, FOR THE APPELLANT ROHIT AGARWAL, FOR THE RESPONDENT O R D E R PER PRAMOD KUMAR: 1. BY WAY OF THIS APPEAL, THE ASSESSING OFFICER HA S CHALLENGED CORRECTNESS OF CIT(A)S ORDER DATED 31 ST DECEMBER, 2009, IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961, FOR THE ASSESS MENT YEAR 2006-07 ON THE FOLLOWING GROUNDS: 1 (A) THE LD CIT (A) ON THE FACTS AND IN THE CIRCU MSTANCES OF THE CASE AND IN LAW, ERRED IN DELETING THE ADDITION OF ` .27,62,776 MADE BY THE AO AS BUSINESS INCOME AS AGAINST STCG SHOWN BY THE ASSESSEE. (B) THE LD CIT (A) ON THE FACTS AND IN THE CIRCUMST ANCES OF THE CASE AND IN LAW, ERRED IN NOT APPRECIATING THE FACTORS LIKE VOLUME, FREQUENCY, PERIOD OF HOLDING AS CRITERION TO DETERMINE THE NATURE OF TRANSACTION . I.T.A NO.887/ MUM/2010 ANAND GUPTA (HUF) 2 2. BRIEFLY STATED THE RELEVANT MATERIAL FACTS ARE L IKE THIS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTIC ED THAT THE ASSESSEE HAS DECLARED SHORT TERM CAPITAL GAIN ON SALE OF SHARES AT ` .27,62,775 AND THAT THE ASSESSEE IS ALSO ENGAGED IN SPECULATION BUSINESS OF SHARES. ON GOIN G THROUGH THE DETAILS OF SHORT TERM CAPITAL GAIN, THE ASSESSING OFFICER FURTHER NOTICED THAT THE ASSESSEE HAS DEALT IN LARGE NUMBER OF SCRIPS. IT WAS IN THIS BACKGROUND THAT TH E ASSESSING OFFICER REQUIRED THE ASSESSEE TO SHOW CAUSE AS TO WHY THE ASSESSEE SHOUL D NOT BE TREATED AS A TRADER IN SHARES AND, ACCORDINGLY, GAIN ON SALE OF SHARES BE BROUGHT TO TAX AS BUSINESS INCOME. IT WAS SUBMITTED BY THE ASSESSEE THAT THE INVESTMEN TS HAVE BEEN MADE BY THE ASSESSEE OUT OF HIS OWN FUNDS WITH THE INTENTION OF INVESTMENT ONLY. IT WAS ALSO SUBMITTED THAT THE ASSESSEE HAS NOT ENTERED INTO TR ANSACTIONS SUCH AS BUYING AND SELLING OF SHARES WITHIN FEW DAYS OR WEEK AND THAT THE SHARES ARE HELD AFTER A CONSIDERABLE TIME GAP. THE ASSESSEE HAD FURTHER SU BMITTED THAT THE TRANSACTIONS ENTERED INTO BY THE ASSESSEE ARE NOT VOLUMINOUS WHI CH CAN BE TREATED AS PART OF TRADING IN SHARES. THIS EXPLANATION WAS NOT ACCEPT ABLE TO THE ASSESSING OFFICER. HE NOTICED THAT THE ASSESSEE HAD TRANSACTED WITH 100 C OMPANY SCRIPS AND THAT FEW OF THE SHARES BOUGHT AND SOLD BY THE ASSESSEE HAS BEEN TRADED WITHIN A FEW DAYS. THE AO FURTHER NOTICED THAT AS AGAINST TOTAL VALUE OF I NVESTMENTS AT THE END OF THE YEAR AT ` .67,40,585 , THE SHORT TERM CAPITAL GAIN DURING THE YEAR AMOUNTED TO ` .27,62,776, WHICH CLEARLY SHOWS THAT THE ASSESSEE IS INVOLVED I N TRADING ACTIVITIES RATHER THAN INVESTMENT ACTIVITIES. THE ASSESSING OFFICER TOOK NOTE OF DIVIDEND RECEIVED BY THE ASSESSEE OF ` .55,901 BUT OBSERVED THAT THE AMOUNT WAS SO SMALL T HAT IT CANNOT REFLECT THE PURPOSES FOR WHICH THE SHARES ARE TRADED. A RE FERENCE WAS MADE TO THE DECISION OF A CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF DCIT VS. SMT DEEPABEN AMITBHAI SHAH (99 ITD 219), WHICH HAS HELD THAT THE VOLUME, FREQUENCY, CONTINUITY AND REGULARITY OF TRANSACTIONS FOR PURCHASE AND SAL E OF SHARES WOULD REVEAL THAT THESE TRANSACTIONS WERE ENTERED INTO BY THE ASSESSEE WITH A MOTIVE TO EARN PROFITS OR TO MAKE INVESTMENT. THE AO FURTHER OBSERVED THAT IF T HE INTENTION OF THE ASSESSEE WAS TO HOLD SHARES IN A LONGER PERIOD AS INVESTMENT AND TO EARN DIVIDEND, THE ASSESSEE WOULD NOT HAVE DISPOSED OF THE SHARES WITHIN A FEW DAYS OF PURCHASE. IT WAS IN THIS I.T.A NO.887/ MUM/2010 ANAND GUPTA (HUF) 3 BACKDROP THAT THE ASSESSING OFFICER REJECTED THE AS SESSEES CLAIM ON SALE OF SHARES BEING TREATED AS SHORT TERM CAPITAL GAIN. THESE GA INS WHICH AMOUNTED TO ` .27,62,776 WERE BROUGHT TO TAX UNDER THE HEAD PROFIT AND GAIN S OF BUSINESS AND PROFESSION. AGGRIEVED BY THE STAND SO TAKEN BY THE ASSESSING OF FICER, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT (A). IN A SHORT ST ATEMENT OF FACTS FILED BEFORE THE CIT (A), IT WAS SUBMITTED BY THE ASSESSEE THAT DURING THE YEAR UNDER CONSIDERATION, THE APPELLANT HAS SOLD SHARES WHICH WERE ACQUIRED BY TH E APPELLANT FOR THE PURPOSE OF INVESTMENT EARNING LONG TERM CAPITAL AND SHORT TERM CAPITAL GAINS WHICH HAVE BEEN BROUGHT TO TAX BY THE AO UNDER THE HEAD BUSINESS I NCOME. AS IT APPEARS FROM THE IMPUGNED ORDER OF THE CIT (A), THE ASSESSEE RELIES UPON LARGE NUMBER OF JUDICIAL PRECEDENTS IN SUPPORT OF THE PROPOSITION THAT ADVER SE INFERENCE CANNOT BE DRAWN ON THE BASIS OF FREQUENCY OF TRANSACTIONS, VOLUME AND MAGNITUDE OF TRANSACTIONS AND THE PERIOD OF HOLDING AND ON THE BASIS OF THESE FACTORS , THE ASSESSEE CANNOT BE HELD TO BE DEALER IN SHARES. THE CIT(A) IN HIS VERY BRIEF, RA THER CRYPTIC, ORDER PROCEEDED TO ACCEPT THE PLEA OF THE ASSESSEE BY OBSERVING AS FOL LOWS: I HAVE CONSIDERED BOTH THE LEGAL AND FACTUAL SUBMI SSION OF THE ASSESSEE. IT IS SEEN THAT THE AO HAS DRAWN AN ADVERSE INFERENCE BY TREATING THE FREQUENCY OF TRANSACTIONS, THE VOLUME AND MAGNITUDE OF TRANSACTI ONS AND THE PERIOD OF HOLDING ALONGWITH MOTIVE TO COME TO A CONCLUSION TH AT THE ASSESSEE IS A TRADER AND NOT AN INVESTOR IN SHARES. HOWEVER, I AM UNABLE TO ACCEPT THE FINDINGS OF THE AO THAT THE ASSESSEE IS A TRADER IN SHARES AND IS NOT AN INVESTOR FOR THE FOL LOWING REASONS: I. THE MERE FACT THAT THE VOLUME OF TRANSACTIONS IS SO ME WHAT LARGE IS NOT DECISIVE OF THE FACT THAT THE ASSESSEE IS A TRADER IN SHARES AS HELD IN JANAK S.RANGWALLA VS ACIT(2009) 20 DTR 99(MUM). II. NO ASSESSEE WOULD HOLD ON TO THE SHARES TO INCUR LO SS WHEN THE VOLATILITY IN THE STOCK EXCHANGE WARRANTS THAT THE ASSESSEE WILL MINIMIZE HIS CAPITAL LOSS BY SELLING AT AN OPPORTUN E AND APPROPRIATE TIME AND MERELY BECAUSE THIS LEADS TO A HIGHER FREQ UENCY, THIS BY ITSELF WILL NOT NEGATE THE CLAIM OF THE ASSESSEE AS BEING AN INVESTOR. (GOPAL PUROHIT VS JCIT (2009) 20 DTR 99(MUM) III. MERELY BECAUSE THE ASSESSEE EMPLOYS THE INFRASTRUCT URE OF FINANCIAL CONSULTANCY ETC WILL NOT TURN AN INVESTMENT ACTIVIT Y IN THE BUSINESS ACTIVITY. (GOPAL PUROHIT VS JCIT (2009) 20 DTR 99(M UM) I.T.A NO.887/ MUM/2010 ANAND GUPTA (HUF) 4 IV. FURTHER HONBLE ITAT IN GOPAL PUROHITS CASE, HAS C ONSIDERED THE DECISION OF DCIT VS SMT DEEPABEN AMITBEN SHAH 99 IT D 219 AND THEN GIVEN A DECISION IN FAVOUR OF ASSESSEE. V. THE HONBLE MADRAS HIGH COURT IN CIT VS. N.S.S.INVE STMENTS (P)LTD., (2005) 277 ITR 149 AND HONBLE KERALA HIGH IN ACIT VS. KETHAN KUMAR A.SHAH (2000) 242 ITR 83 HAVE VERY CLEARLY HE LD IN FAVOUR OF ASSESSEE AND STATED THAT WHERE SHARES HAVE ALREADY BEEN HELD AS INVESTMENT AND NEVER TRANSFERRED OR CONVERTED AS ST OCK IN TRADE, THE PROFIT ON SALE OF SUCH SHARES IS ASSESSABLE AS CAPI TAL GAINS. ACCORDINGLY, THE SHORT TERM CAPITAL GAIN OF ` .27,62,776 AS SHOWN BY THE ASSESSEE IS ACCEPTED AND ITS TREATMENT AS A BUSINES S INCOME BY THE AO IS DELETED. 3. INTERESTINGLY, HOWEVER, THERE IS NOT EVEN A WHIS PER ABOUT MATERIAL FACTS OF THIS PARTICULAR CASE IN CIT(A)S ORDER AND HE HAS SIMPLY PROCEEDED TO ADJUDICATE ON THE MATTER, WITHOUT ANALYZING THE FACTS, BY APPLYING PR INCIPLES LAID DOWN IN CERTAIN JUDICIAL PRECEDENTS. THE ASSESSING OFFICER IS AGGR IEVED BY THE STAND SO TAKEN BY THE CIT (A) AND IS IN APPEAL BEFORE US. 4. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED THE FACTUAL MATRIX OF THE CASE AS A LSO THE APPLICABLE LEGAL POSITION. 5. WE FIND THAT THE OPENING STOCK OF SHARES HELD BY THE ASSESSEE WAS ` .27,69,216 WHEREAS PURCHASES MADE DURING THE RELEVANT PREVIOUS YEAR AMOUNTED TO ` .1,95,30,484 AND THE SALES MADE DURING THE YEAR AMO UNTED TO ` .2,07,36,038. AS AT THE END OF THE RELEVANT PERIOD, THE ASSESSEE HELD S HARES AMOUNTING TO ` .67,40,585. THESE FIGURES CLEARLY SHOW THAT THE TRANSACTION IN SALES AND PURCHASES OF SHARES ARE SEVERAL TIMES THE VALUE OF OPENING OR CLOSING STOCK OF SHARES. IF OPENING STOCK IS TO BE TAKEN AS BASIS OF COMPUTING STOCK TURNOVER RATIO, T HE RATIO WOULD BE ALMOST 1:8. LEARNED COUNSEL SUBMITS THAT THE SALES TO PURCHASE RATIO IS 0.9:1, BUT FIRSTLY WE ARE UNABLE TO UNDERSTAND AS TO HOW DOES IT INDICATE THA T ASSESSEE IS AN INVESTOR, AND, SECONDLY, IN CASE, THE RATIO COMPUTED BY THE ASSESS EE IS BASED ON NUMBER OF SCRIPS AND NOT VALUE OF SCRIPS. IN OUR HUMBLE UNDERSTANDIN G, FINANCIAL RATIOS ARE COMPUTED I.T.A NO.887/ MUM/2010 ANAND GUPTA (HUF) 5 ON THE BASIS OF MONETARY VALUES AND NOT QUANTITATIV E DETAILS. QUITE TO THE CONTRARY OF PROPOSITION LEARNED COUNSEL SEEKS TO CANVASS, A CL OSE RATIO OF PURCHASE AND SALE AT BEST INDICATES THAT THE ASSESSEE IS A TRADER. A HI GH STOCK TURNOVER RATIO, AS ON THE FACTS OF THIS CASE, ALSO INDICATES THAT ASSESSEE IS A TRA DER. THIS KIND OF HIGH TURNOVER CANNOT BE JUSTIFIED IN THE COURSE OF INVESTMENTS MADE IN S HARES AND WOULD CLEARLY INDICATE THAT THE ASSESSEE HAS BEEN TRADING IN SHARES. AS A MATTER OF FACT DURING THE RELEVANT PERIOD, THE ASSESSEE HAS MADE GAINS OF ` .51,77,043 WHEREAS THE ENTIRE CLOSING STOCK OF SHARES WAS ` .76,95,853. BY NO STRETCH OF LOGIC, SUCH PATTERN O F SALES AND PURCHASE IN SHARES WOULD INDICATE THAT THE ASSESSEE WAS AN I NVESTOR. WE HAVE ALSO NOTED THAT LESS THAN 10% CASES ON SALE OF SHARES WAS WITH RE SPECT TO CASES WHERE SHARES WERE HELD BY THE ASSESSEE FOR 180 DAYS OR MORE WHEREAS M ORE THAN 20% CASES REFLECTED THE CASES WHERE SHARES WERE HELD FOR LESS THAN 30 D AYS. THESE FIGURES ARE BASED ON THE INFORMATION FURNISHED BY THE ASSESSEE HIMSELF A T PAGE 6 OF COMPILATION OF PAPERS FILED BEFORE US. THESE LOW HOLDING PERIODS ALSO IN DICATE THAT THE PREDOMINANT PURPOSE OF ASSESSEES PURCHASE AND SALE OF SHARES WAS TO MA KE PROFITS ON SALES RATHER THAN INVESTING IN SHARES. A LOT OF EMPHASIS HAS BEEN PL ACED ON THE FACTS THAT THE SHARES HAVE BEEN TREATED AS INVESTMENT IN BOOKS OF ACCOUNT AND THE ASSESSEE HAS NOT BORROWED ANY FUNDS FOR THE PURPOSE OF MAKING INVEST MENT IN SHARES BUT THEN IT IS WELL SETTLED LAW THAT THE ACCOUNTING TREATMENT BY I TSELF CANNOT BE DECISIVE OF THE NATURE OF TRANSACTION AND THAT THE MERE FACT THAT T HE ASSESSEE HAS MADE INVESTMENT OUT OF HIS OWN FUNDS CANNOT BY ITSELF ESTABLISH THA T THE SHARES HAVE BEEN BOUGHT FOR THE PURPOSE OF MAKING INVESTMENT. A LARGE NUMBER O F JUDICIAL PRECEDENTS HAVE BEEN CITED AT THE BAR BUT ALL THESE JUDICIAL PRECEDENTS TURN ON THEIR OWN FACTS AND WE ARE UNABLE TO SEE ANY SUPPORT TO ASSESSEES CASE IN WHI CH ON APPRECIATION OF RELEVANT FACTS, WE HAVE TO COME TO CONCLUSION THAT THE ASSES SEE IS A TRADER IN SHARES AND NOT AN INVESTOR. THESE PRECEDENTS DO LAY DOWN THAT MERE N UMBER OF TRANSACTIONS OR SHORT HOLDING PERIOD CANNOT LEAD TO THE CONCLUSION THAT A SSESSEE HAS BEEN TRADING IN SHARES, AND CANNOT BE AN INVESTOR. WE HAVE NO QUARREL WITH THESE PROPOSITIONS. THE FACTORS RELATING TO HOLDING PERIODS OR EVEN VOLUME OF TRANS ACTIONS, IN ISOLATION WITH OTHER RELEVANT FACTORS, DONOT DETERMINE WHETHER ASSESSEE IS A TRADER OR INVESTOR. HOWEVER, IT IS ON AN APPRECIATION OF ALL THE MATERIAL FACTS OF THIS CASE TAKEN TOGETHER, I.E. VOLUME OF I.T.A NO.887/ MUM/2010 ANAND GUPTA (HUF) 6 TRANSACTIONS, HOLDING PERIODS, DEALING IN SPECULATI VE STOCK BUSINESS, TURNOVER RATIO AND QUANTUM OF OPERATIONS, THAT WE HAVE COME TO THE CONCLUSION THAT ASSESSEE IS A TRADER IN SHARES. IN ANY EVENT, RELIEF GRANTED BY THE CIT(A) IS WITHOUT EVEN GOING THROUGH THE MOTIONS OF EXAMINING FACTS OF THIS CASE AND ON THE BASIS OF GENERALIZED LEGAL PROPOSITIONS APPLIED IN VACUUM, AND THE SAME CANNOT BE SUSTAINED BY US. THE MATERIAL BROUGHT ON RECORD BY THE ASSESSEE DOES NOT SUPPORT THE STAND OF THE ASSESSEE EITHER. WE SEE NO REASONS TO HOLD THAT THE ASSESSEE IS AN INVESTOR IN SHARES AND NOT A TRADER IN SHARES. WE , ACCORDINGLY, UPHOL D THE ACTION OF THE ASSESSING OFFICER IN BRINGING TO TAX GAINS ON SALE OF SHARES AS BUSINESS INCOME. IN VIEW OF THIS, WE SET ASIDE THE ORDER OF THE CIT(A) AND RESTORE TH AT OF THE ASSESSING OFFICER. 6. IN THE RESULT, APPEAL IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON 31 ST MAY 2011. SD/- (D.MANMOHAN) VICE PRESIDENT SD/- (PRAMOD KUMAR) (ACCOUNTANT MEMBER) MUMBAI, DATED 31 ST MAY, 2011 PARIDA COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS),24, MUMBAI 4. COMMISSIONER OF INCOME TAX, 13 , MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, BENCH G, MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI