Hema Hiren Dand, Mumbai vs Department Of Income Tax

ITA No.3469/Mum/2012 ( Assessment Year :2008-09) Hema Hiren Dand, C-25, Vs. JCIT 17(1), Mumbai Adinath Co-op, Hsg. Society Ltd., 79/B, Mazgaon Road, Mazgaon, Mumbai-400 010 PAN/GIR No. : AEBPD 0926 P ( Appellant) .. ( Respondent) AND ITA No.4164/Mum/2012 ( Assessment Year :2008-09) JCIT 17(1), Mumbai Vs.Hema Hiren Dand, C-25, Adinath Co-op, Hsg. Society Ltd., 79/B, Mazgaon Road, Mazgaon, Mumbai-400 010 PAN/GIR No. : AEBPD 0926 P ( Appellant) .. ( Respondent)

/Assessee by : Shri S.C.Tiwari /Revenue by : Shri Love Kumar Date of Hearing : 07/01/2015 Date of Pronouncement : 18/02/2015 ORDER

PER R.C.SHARMA (A.M.) :

These are the cross appeals field by the assessee and Revenue

against the order dated 26-3-2012, for the assessment year 2008-09, in

the matter of order passed u/s.143(3) of the I.T.Act. 2

ITA Nos.3469&4164/2012

2. The solitary issue in both the appeals relates to taxing the capital

gains as business income.

3. Rival contentions have been heard and record perused. The

assessee filed return at income of Rs.1.25 crores. The AO observed that

the assessee has offered income out of dealing in shares as short term

capital gains or long term capital gains depending on the period of

holding. The AO stated that assessee's principal source of income is from

purchase and sale of shares. The assessee is involved in the share

business activities for several years. After dealing with number of script

which were 13 and considering the transactions of purchase and sales of

shares as well as holding period, the AO concluded that assessee was

engaged in trading of shares. Accordingly, both long term and short term

capital gains offered by the assessee was treated as business income.

4. By the impugned order, CIT(A) allowed assessee's claim of long

term capital gains and partly allowed the claim of assessee regarding

short term capital gains and confirmed the balance of short term capital

gains as business income, against which both assessee as well as

Revenue are in appeals before us.

5. We have considered rival considered rival contentions, carefully

gone through the orders of the authorities below and also deliberated on

the judicial pronouncements cited at bar. From the record we found that

assessee was consistently holding shares as investment. By observing

that assessee has traded in shares, the AO did not accept assessee's

contention regarding long term and short term capital gains, and held the

same as business income. From the record we found that in the 3 ITA Nos.3469&4164/2012

assessment year 2004-05, the AO has treated the short term capital gains

as business income. In an appeal filed before the CIT(A), the matter was

decided in favour of assessee and in all the subsequent assessment

years, the AO has treated capital gains offered by assessee as such.

After appreciating the entire facts the CIT(A) principally agreed that

assessee was an investor and not a trader. However, while analyzing the

individual scripts, the CIT(A) observed that in case of some of the shares,

the transactions were more. Accordingly, the CIT(A) treated part of the

short term capital gains as business income. It was explained that, as a

matter of fact, in screen based transactions, which is known as bolt, one

may not be able to buy or sell a fixed amount of quantity owing to the

limitations of system. Therefore, one may have to make piecemeal buying

and selling. We had also analysed the investment made by the assessee

in each scripts, its holding period, business transaction of sale, wherein

we found that average period of holding was 2.84 months. Main script in

which she earned maximum gain was held for almost 12 months.

Assessee had not done any future or option contract nor done any

transaction of speculation nature. The assessee has not borrowed any

fund from outside party on interest but used her own money and family

fund. Furthermore, there was no repetition of transaction meaning thereby

the same shares were not purchased after selling.

6. The Hon'ble Supreme Court in the case of CIT vs. Associated

Industrial Development Co. (P.) Ltd. [1971] 82 ITR 586 (SC) has observed

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 4 ITA Nos.3469&4164/2012

knowledge of 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 any distinction between those shares which are its stock-in-trade and those which are held by way of investment."

7. We have deliberated upon various case laws cited by the ld.

Authorized Representative and ld. CIT DR and in the context of factual

matrix of the case. We had also deliberated on the case laws referred to

by lower authorities in their respective orders. 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 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 transaction 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 invested in shares of Indian Companies since last 5 - 6 5 ITA Nos.3469&4164/2012

years, which is clear from the statement of shareholding of the assessee.

Thus, the fact of the assessee investing in shares for the last several

years is not in dispute. There is also no dispute to the fact that the

assessee has treated the equity shares of Indian Companies as

investment i.e. capital asset all along. The assessee has also taken the

shares at cost of acquisition 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 had 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 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

principle of 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 without proper 6 ITA Nos.3469&4164/2012

reasoning. In this regard, reliance can be placed on the decision in case

of S.M.K. Shares and Stock Broking Private Limited, I.T.A. No.

799/Mum/09 order dated 24.11.2010. In this proposition, the decision of

Hon'ble Supreme Court in the case of Gopal Purohit, 228 CTR 582, is

very much relevant and important.

8. Merely because the assessee liquidates its investment within a

short span of time, which had given better overall earning to the

assessee, would not lead to the conclusion that the assessee had no

intention to keep on the funds as investor in equity shares, but was

actually intended to trade in shares.

9. Here, it is pertinent to mention the intention of Government for

introducing the security transaction tax 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. It 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 applicable 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 capital gains were taxed at the rate of 10% (without

indexation) and 30% respectively. In case of a trader in securities, 7 ITA Nos.3469&4164/2012

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 after the amendment 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 that 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 the Finance (No.2) Bill, 2004, and came into effect from

01.10.2004. Further, clause (38) has been inserted in section 10 of the

Income-tax Act, so as to provide exemption from long-term capital gains

arising out of securities sold on the stock exchange. A new 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 assessment 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 8 ITA Nos.3469&4164/2012

has been raised to fifteen percent. Thus, w.e.f. 01.10.2004; on the share

transactions 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, dated 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 trading assets. In view of these facts, profit arose on shares in

respect of delivery based transaction are liable to be taxed as capital gain

and not as business income.

10. Analysis of balance sheet of assessee reflects of 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 Court

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 transaction tax and exempting

the long term capital gain or from sale of share and levying 10% tax on

short term capital gain or from sale of shares also supports the case of

assessee. The idea behind introduction of security transaction tax is to

end the litigation on the issue, whether the profit earned from delivery

based sale of shares is capital gains for business profit.

11. Even the Hon'ble Apex Court in the case of K.P. Verghese vs TO,

131 ITR 597 (SC) observed as under:-

9

ITA Nos.3469&4164/2012

„‟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 be 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 Minister‟s 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 597 (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 of 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.‟‟

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

unless there is a material change in facts, meaning thereby, there must be

material change in the facts.

12. 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 10 ITA Nos.3469&4164/2012

receipts as well as from sale of gitti and during the impugned 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 the 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. However, 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 which 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 Shares & 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 Limited, 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 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 proposition 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 would 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.

Order pronounced in open Court on 4th August, 2010."

11 ITA Nos.3469&4164/2012

13. The aforesaid decision was affirmed by the Hon'ble Madhya

Pradesh High Court 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 gains on sale of shares as STCG. In that case,

the assessee was engaged in the business of trading of 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 consistency 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 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

was hold the shares in his books as investor, as well as tock-in-trade

separately. 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, 12 ITA Nos.3469&4164/2012

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. If the conclusion

drawn in the impugned order, observations made from the assessment

order, assertions made by respective counsel and 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 was

correctly shown as capital gains i.e. LTCG and STCG depending upon

period of holding.

14. In view of the above discussion, we do not find any merit for treating

the capital gains offered by the assessee as business income.

15. In the result, appeal of the assessee is allowed, whereas appeal of the Revenue is dismissed.

Order pronounced in the open court on this 18th Feb..2015.

Sd/- Sd/- ( ) ( ) (VIVEK VARMA) (R.C.SHARMA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER Mumbai; Dated 18/02/2015 /pkm, PS Copy of the Order forwarded to : 1. / The Appellant 2. / The Respondent. 3. / The CIT(A) Mumbai. 4. / CIT / BY ORDER, 5. / DR, ITAT, Mumbai

6. Guard file.

//True Copy// (Asstt. Registrar) / ITAT, Mumbai