Devika R.Agrawal, Ahmedabad vs Department Of Income Tax

ITO, Ward-7(1) Ms. Devika R. Agrawal Ahmedabad. Vs 70, Vasant Bahar Colony Bopal, Ahmedabad.

PAN : AGMPA 5250 C

अपीलाथ!/ (Appellant) "#यथ!/ (Respondent)

Revenue by : Shri Roopchand, SR Assessee(s) by : Shri S.N.Soparkar, AR

सन ु वाई क तार ख/ Dateof Hearing : 28/01/2015

घोषणा क तार ख / Date of Pronouncement: 02/02/2015

आदे श/O R D E R

PER BENCH: These are two appeals filed by the Revenue against the order of the Commissioner of Income-Tax (Appeals)-VI, Ahmedabad dated 28.2.2011 for Asstt.Year 2007-08 and 19.5.2011 for Asstt.year 2008-09. In both the appeals, the Revenue has taken the following common grounds of appeals:

"1. The ld.CIT(A) has erred in law and on facts in directing the AO to treat the income of Rs.54,03,776/- for A.Y.2007-08 and Rs.64,25,214/- for A.Y.2008-09 from transaction through PMS and market broker as capital gain, instead of business income as assessed by AO.

2. On the facts and circumstances of the case, the ld.CIT(A) ought to have upheld the order of the AO.

ITA No.1845/Ahd/2011 - 2 2 3. It is, therefore, prayed that the order of the ld.CIT(A) may be set aside and that of the AO be restored."

2. Brief facts of the case are that in Asstt.Year 2007-08, the AO observed that during the year under consideration, the assessee has shown income from purchase and sale of shares in normal trades of Rs.4,22,844/- and through portfolio management scheme ("PMS") of Rs.49,80,932/- aggregating to Rs.54,03,776/-. He observed that in Asstt.Year 2006-07, the assessee has indulged in similar modus operandi of transactions in shares through PMS and through normal sales through BSE/NSE in respect of sale of equities. Accordingly, short-term and long term capital gain shown by the assessee was taxed as business income. Therefore, in the assessment year under consideration also, facts being identical, the income from transactions in shares is taxed as business income of the assessee.

3. On appeal, the CIT(A) accepted the appeal of the assessee, and directed the AO not to treat these transaction as business as against capital gain disclosed by the assessee by observing as under:

"3.3 I have considered the facts of the case, assessment order and appellant's submission. Assessing officer treated income from share transactions done through PMS and stock exchange as business income as against capital gain disclosed by the appellant. Appellant submitted that similar issue came up before my learned predecessors and it was held that transactions were in the nature of investment and result of the same were taxable in the capital gain head as against business income treated by the assessing officer. The relevant extract of the order is quoted by the appellant in the submission. Appellant further submitted that jurisdictional ITAT in the case of Ravindra Agarwal in whose case appellant's income was clubbed since appellant was minor in earlier years held that that appellant was making investment in shares and the same were not shown as stock in trade and therefore the result is taxable as capital gain and not business income. Relevant extract of the ITAT's order is also quoted in the appellant's submission. Since transactions in this year are also identical, these grounds are covered in favour of appellant by the order of my learned predecessors and also by jurisdictional ITAT. Respectfully following the same, assessing officer is directed not ITA No.1845/Ahd/2011 - 2 3

to treat these transactions as business as against capital gain disclosed by the appellant. These grounds are therefore allowed."

4. Similarly, in Asstt.Year 2008-09 also, the AO for similar reason in the preceding Asstt.Year 2007-08, and 2006-07, held that the assessee has indulged in the similar modus operandi of transactions in shares through PMS and normal sales through BSE/NSE in respect of sale of equities, and held that gain from transactions was not short-term and long term capital gains, but was business income of the assessee, therefore, he taxed the gains from these transactions as business income of the assessee.

5. On appeal, the CIT(A) accepted the appeal of the assessee and directed the AO to recalculate the income from business and income from capital gain in the light of his decision by observing as under:

2.3 I have considered the facts of the case, assessment order and appellant's submission. Assessing officer treated long-term and short-term capital gain disclosed by the appellant as business profit on the ground that appellant was not making investment but trading in shares. On the identical facts, ITAT Ahmedabad in the case of Shri Sugam chand C Shah Vs AC1T, circle- 3 , Surat in ITA nos 3554/AHD/2008 four AY 2005-06 and 1932/AHD/2009 for AY 2006-07 held that in cases the shares are held for more than 30 days, the transaction has to be categorised as an investment transaction whereas the sales held for a period up to 30 days, the same shall be treated as business transactions. In arriving at this decision, the ITAT Ahmedabad has considered several decisions of various benches of ITAT, high courts and Supreme Court. The ITAT Ahmedabad has also considered the circular issued by the Central board of direct Taxes and has come to this considered finding. The relevant extract of this order is quoted below-

"The shares which are sold out of such investment this year were mostly purchased a year or earlier showing that the assessee had intention while purchasing them to hold them and they were reflected in that balance-sheet as investment. The assessee has enjoyed dividend income and declared the same in the return of income trading the transactions as investment, even if frequency of selling of shares may be more but in respect of shares held for a ITA No.1845/Ahd/2011 - 2 4

considerable longer period (for more than 366 days) as per finding given by the Learned CIT(Appeals). This finding remained uncontroverted. The assessee has earned gain of Rs.37,52,281/-, on sale of those shares which were held for more than 366 days and upto 6832 days. In any case, when those shares were purchased it could not be said that intention of the assessee was to deal in them and not to hold them as investment. Even in the case of investment it is for the assessee to decide when to dispose them off so that to give maximum return out of them. There is no theory that asset held long-term basis should be sold only at the time of need on in emergency. He can very well sale the investments to reap the benefit when prices of shares are high so as to earn better gains and make investment elsewhere. In Our considered' view, it is the decision of the assessee to dispose of an investment, if according to him, market value thereof have reached a plateau so as to make investment in other assets which have potential of appreciation in market value. This decision to sale his investment at high market price cannot convert an otherwise investment into trading. If in the past, the Department has accepted the sale of shares of holdings of more than a year as investment and profits thereon has been assessed under the head "capital gain", then there is no reason to hold differently this year. We accordingly confirm the order of the Learned CIT(Appeals) in respect of holding (hat profit of Rs.37,52,281/- should be assessed as 'long-term capital gain'.

15. In respect of profit of Rs.55,40,679/- being 'short-term capital gain' as claimed by the assessee and held as profits assessed under that business by two authorities, we find that in many cases there is delivery of shares and share were registered in the name of the assessee. The holding period of the shares IS from 'o' days to '366' days. In some cases, the frequency of transactions are apparently substantial as on one day the assessee has purchased several scripts and sold several of them on the same day.

16. The question is whether therefore, merely from frequency of the transactions carried on by the assessee, he is treated as dealer in shares or still he is held as investor. As found in the case of Sarnath Infrastructure (P) Ltd. vs. Asstt.CIT (supra) also, assessee adduced evidence to show that his holdings are for investment as recorded in the books of account. The holdings are valued at cost, and such accounting has been accepted by the Revenue in earlier ITA No.1845/Ahd/2011 - 2 5

years. There is no material to show that assessee has declared himself as a trader in shares and legal requirements therefore have been complied with. It is also a fact that he has not borrowed any money for investing in shares. Merely because, assessee had some -it would not by itself show that they were deployed in investment.

Notwithstanding, even borrowing are required to settle payments obligations 10 respect of investments, like one takes loan for purchasing a house. In any case, high frequency transactions and low period holdings indicate trade, whereas low frequency transitions and high period holdings indicate investment.

17. In this case the assessee has discharged the onus of showing that it is making investment but Revenue is able to show that there are high frequencies and low holdings in many transactions of shares indicating that assessee has some intention of purchasing and selling shares as a trader. The case of the assessee is supported by the fact that it has entered the purchases in the books as investment, shares are valued at cost and Revenue is holding such accounting treatment as investment in the past. Thus, there cannot be a fixed criteria to decide as in the present case whether, assessee has traded in Shares eventhough assessee held them as investment.

18. Though it has been held in the case of Sarnath Infrastructure (P) Ltd. (Supra) that delivery of shares is an important criteria for holding that assessee is investing in them but after, dematization Where shares are delivered in the DEMA T account the next day, it cannot be 'held that in all such eases, it Would be investment and not trading. If that is so held, then all those traders in shares in whose DEMAT accounts shares are Delivered can be said to have earned capital gains and not profits. Therefore, only one criteria i.e. Delivery of shares alone will not be sufficient to decide the issue. Even otherwise in Sarnath Infrastructure (P) Lid. (supra) itself it has been held t hat cumulative effect of several factors will decide the issue.

19. Considering the totality and peculiarity of the facts of this case, we find that assessee is neither fully acting as a trader nor as, fully investor. Demarcation is quite hazy;

though in the books he is showing all the purchases as investment but frequency of transaction in several cases is so large and holding period in many cases is so small - from ITA No.1845/Ahd/2011 - 2 6

0 to a week or so that assessee is de facto selling and purchasing shares as trader. He is also holding shares for long period - indicating that they are held as investment. Therefore, o criteria has to be fixed for, determining as to when he is acting as trader and when as investor. Accordingly, we decide following criteria to hold when gains are ,to be taxed as to be earned under the business or to be taxed as short- term capital gain, we hold that if shares are not held even say for a month, then the intention is clearly to reap profit by acting as a trader and he did not intend to hold them in investment port-folio. We believe that if a person intends to hold his purchases of shares as investment, he Would watch the fluctuation of rates in the market for which a minimum time is necessary, which We estimate at one month. Where share are held for more than a month, they should be treated as investment and on their sale short term capital gain should be charged. Where shares are held for less than a month, gain on them should be treated as profit from business.

20. The assessee will give the working and Computing 'short-term capital gains" on the above basis. The rest of the profit will be treated as assessable under the head "business".

Following the decision of jurisdictional tribunal on this issue on similar facts, it is held that whenever the assessee has held the shares for the period more than 30 days, the same is treated as investment resulting in long-term and short-term capital gain and wherever shares are held up to 30 days, the income arising there from is treated as business income of the appellant.

Assessing officer is directed to recalculate the income from business and income from capital gain the light of this decision."

6. At the outset, the AR of the assessee filed before us, a copy of the order of this Bench of the Tribunal in the case of the assessee itself for A.Y.2006-07 in ITA No.2485/Ahd/2009 and CO No.226/Ahd/2009 order dated 21.10.2011 and submitted that the issue is covered in favour of the assessee by this order of the Tribunal. The DR concedes to this submission of the assessee that the issue is covered in favour of the assessee by the order of the Tribunal cited supra.

ITA No.1845/Ahd/2011 - 2 7 7. We have considered submissions of both the parties and perused the orders of the lower authorities. We find that the Tribunal in Asstt.Year 2006-07 while deciding the appeal of the Revenue and CO of the assessee in ITA No.2485/Ahd/2009 an CO No.226/Ahd/2009 held as under:

"2. Revenue has raised the following ground:

1. Commissioner of Income-tax (A)-III, Ahmedabad has erred in law and on facts in considering the result of share transaction of Rs.1,82,14,479/- as capital gain by deleting the addition made by the AO who had taxed it as business."

2.1. Facts in brief as emerged from the corresponding assessment order passed u/s.143(3) of the I.T. Act, 1961 dated 29/12/2008 were that the assessee in individual capacity has earned salary income and also traded in shares. In paragraph No.4, the Assessing Officer has categorically stated that the activities carried out during the year under consideration were almost similar and in continuation of the activities carried out in earlier years.

Rather, the Assessing Officer has quoted that for the sake of convenience those findings of earlier years were not repeated in the impugned order. As far as the issue whether the gain on trading was a capital gain or a business income is concerned, the same had again been raised by the Assessing Officer and after a detailed discussion he has held that the trading in shares was in the nature of business income.

3. When the matter was carried before the first appellate authority , the Learned CIT(Appeals) has again reiterated the said fact that the activities of the earlier years were carried out for the year under consideration and in the earlier years the assessee was held as an investor of shares vide an order of Learned CIT(Appeals) for A.Y. 2005-06 dated 29/02/2008. The Learned CIT(Appeals) has concluded as follows:- "

9.4. In case of the appellant, the A.O. also has noted that nly the surplus funds, realized on disinvestment/sale, were invested in purchase of shares. The appellant/family members have been assessed to capital gains in the past. When seen in ITA No.1845/Ahd/2011 - 2 8

terms of the number of scripts, the number of independently assessed entities, the period involved, the number of days on which transactions took place, the number of year-wise details of bills raised by subbroker(s) etc. the volume of transaction by itself, would not render the appellant, as a trader. The details/explanation/rebuttal furnished by the appellant in respect of the premises of the A.O., (the gist of which is narrated in para 7.1 of this order) answers the doubts of the A.O. The sale/purchase of securities was apparently an independent activity and did not form the only source of share trading. The low ratio between purchases and sales and holding, the purchase of listed securities of independent companies and not as promoters, the delivery based transactions and the actual payments/receipts and not mere book entries, absence of lack of intra day trading and of repeated transactions of same scripts, etc. are factors, the holistic consideration of which leads to the conclusion that the appellant was an investor. Thus considering the details, submissions facts on record, the Board's circular, etc., the A.O. was not justified in holding the appellant as a trader and assessing his income, shown from capital gains, as being income from business. The action of the A.O. is therefore not sustainable. The A.O. is directed to treat the appellant as an investor and thereby compute the income from capital gains in respect of the transactions entered into through sub-brokers. The related ground of appeal is allowed."

4. With this factual background, parties were heard. At the outset, a consolidated order of the ITAT "A" Branch Ahmedabad is placed on record dated 28/01/2011 passed in the group of 30 cases wherein as per Sl.No.1 bearing ITA No.1725/Ahd/2008 (A.Y. 2005-06) titled as DCIT vs. Shri Ravindra M.Agrawal the identical issue had already been decided in favour of the assessee in the following manner:-

"10. The only dispute in this appeal by the Revenue is whether the profit from sale of shares is to be assessed as business income or as income from capital gain. To determine this, the most important test is whether the initial acquisition of the shares was with the intention of dealing in the shares or it was made as an investment. The intention of the assessee is best known to him and the dispute comes to the ITA No.1845/Ahd/2011 - 2 9

appellate authorities only when the Revenue authorities do not accept the claim of the assessee. The appellate authorities have laid down certain guidelines on the basis of which the intention of the assessee can be inferred. In the case of Sarnath Infrastructure Pvt.Ltd. (supra), the Lucknow Bench of the ITAT has laid various principles which may be applied to determine whether the transaction of purchase and sale of share is in the nature of trade or investment. The relevant findings of the ITAT read as under:

......

......

11. ............

12.............

13. ............. . Even for frequency, it was explained by the learned counsel that the assessee was mostly making the investment in B-Group scripts and to avoid risk he made investment in several scripts instead of investing in one script. For example, if the assessee had to invest Rs.10 lakhs instead of investment in one script, he used to investment in ten different scripts. He made a statement that the assessee never purchased and sold the same scripts frequently. He also stated that shares were kept for long period and there is no frequent purchase/sale of same scripts. This contention of the learned counsel appears reasonable and has not been factually controverted by the Revenue. There is a saying that "never put all your eggs in one basket" and if the assessee as a prudent person made investment in number of scripts instead of one scripts, it cannot be said that he was carrying on the business of purchase and sale of shares. There were substantial income from the dividend. In the case of Shri Ravindra M. Agarwal for A.Y.2001-2002, as per the revised return, the dividend income was as high as Rs.19,33,425/-. It is a settled law that, to determine whether the assessee is a trader or investor in shares, no single test is conclusive but cumulative effect of all the facts are to be seen. In the case of the assessee, one fact i.e. frequent purchase/sale of shares can be said to be against the assessee but all other facts which can be summarised as under are in favour of the assessee:

ITA No.1845/Ahd/2011 - 2 10 i) Shri Ravindra Agrawal is a qualified professional being Chartered Accountant, Company Secretary and Cost Accountant;

ii) Shri Agrawal was full time director of a public limited company at the relevant time, posted at Porbander;

iii) Shares were acquired with own money and there was no borrowing by Shri Ravindra Agrawal or any other family member;

iv) No office or any staff was maintained for looking after purchase and sale of shares;

v) There was substantial dividend income;

vi) His source of income was income from salary, capital gain, dividend and interest and he was not having any business income;

vii) In the original return of income furnished from time to time, income from sale of shares was disclosed under the head "capital gain" and was accepted by Revenue as such under Section 143(1).

When totality of all the above facts are considered, the inference drawn by the CIT(A) that the assessee is an investor in shares, appears to be correct. Apart from the above, on the principle of consistency also order of the CIT(A) on this point deserves to be upheld because in the original returns income from sale of shares was disclosed under the head "capital gain" and the same was accepted by the Revenue. ITAT, Mumbai Bench in the case of Goptal Purrohit (supra) held that though in income tax proceedings the rule of res judicata does not apply but there should be uniformity in treatment and consistency under the same facts and circumstances.

This decision is upheld by the Hon'ble Mumbai High Court in CIT Vs. Goptal Purohit, 228 CTR 582 (Bom). These decisions would be squarely applicable to the cases of the assessee under appeal because in these cases not only in earlier year but in the years under appeal also in original proceedings transaction of purchase and sale of shares shown as capital gain was accepted by the Revenue. Merely because, there was search at the assessee's premises, the nature of transaction would not change. In view of the above, after considering the totality of the facts and circumstances of the case and various judicial ITA No.1845/Ahd/2011 - 2 11

pronouncement referred above, we find no justification to interfere with the order of the CIT(A) on this point. The same is upheld and the Revenue's appeals are dismissed."

5. Since a view has already been taken by a Respected Co-ordinate Bench and held that the assessee is an investor and that the purchase and sales of shares was subject to capital gain, therefore, respectfully following the said view we hereby affirm the findings of the Learned CIT(Appeals) and dismiss this ground of the Revenue."

In the absence of any distinguishing features being pointed out by the DR, and the facts being identical, respectfully following the precedent, we dismiss grounds of appeals of the Revenue for both the years under appeal.

8. In the result, the appeals of the Revenue for both the years are dismissed.

Order pronounced in the Court on Monday, the 2nd February, 2015 at Ahmedabad.

Sd/- Sd/- (SHAILENDRA KUMAR YADAV) ( N.S. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad; Dated 02/02/2015