Jaikishan S. Vaswani, Mumbai vs Assessee

/Assessee by : Shri Hari S. Raheja /Revenue by : Shri Sachidanand Dubey

Date of Hearing : 1st January, 2015 Date of Pronouncement : 7th January, 2015

ORDER

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

This appeal is filed by the assessee against the order of CIT(A),

dated 11-11-2010, for the assessment year 2007-08, in the matter of

order passed under Section 143(3) of the I.T. Act.

2. The only grievance of assessee relates to CIT(A)'s action in

confirming the AO's action of treating short term capital gains as business

income.

3. Rival contentions have been heard and record perused. From the

record, we found that assessee is an individual - non-resident Indian

settled in Jeddah since more than 30 years. The assessee was having 2 ITA No.9052/2010

income from house property, dividend income, perquisites from private

limited company and capital gain on sale of shares in India. Assessee

was investing in shares since last 5-6- years and was claiming dividend

income and capital gain thereon. In all the earlier years, the capital gain

declared by the assessee was accepted, however, in the assessment

year under consideration i.e. 2007-08, the AO held that assessee has no

other business in India, therefore, fully engaged in the business of

purchase and sale of shares, therefore, gain arising on sale of such

shares was liable to be taxed as business income. He also stated that

during the previous year relevant to assessment year under consideration

the assessee was indulged in an average of one transaction in every

three days. The assessee has alleged to have earned long term capital

gain of Rs.30,06,635/- and short term capital gain of Rs.1,07,47,320/-.

Accordingly he held that short term capital gain arising out of sale of

shares was adventure in nature of trade, liable to be taxed as business

income. By the impugned order, the CIT(A) confirmed the action of the

AO and assessee is in further appeal before us.

4. We have considered rival contentions, gone through the orders of

the authorities below and found from the record that assessee is an

individual and non-resident Indian settled in Jeddah since more than 30

years and doing business at Jeddah. Not only the assessee has made

various investments in house property and bank FDR but also invested in

shares and earning income from house property, interest and dividend

and capital gains. We found that the assessee is consistently investing in

shares since many years which have resulted into dividend income, long 3 ITA No.9052/2010

term capital gains and short term capital gains. Assessee's claim of

investment in shares and thereby earning capital gain as all along been

accepted by the department and gain on sale of shares were assessed as

long term capital and short term capital gains depending upon holding

period of shares. For the first time during the year under consideration,

the AO has sought to tax short term capital gain as business income

whereas he has accepted the assessee's claim on long term capital

gains. Not only in the earlier assessment years but also in the subsequent

assessment years 2010-11 assessee's claim have been accepted while

framing scrutiny assessment u/s.143(3). In respect of assessment year

2009-2010 addition made by the AO by treating capital gain as business

income was deleted by the CIT(A) and the Revenue has not filed any

appeal against the said order, meaning thereby department had accepted

CIT(A)'s action for treating same as capital gains. There is no change in

the facts and circumstances as well as style and method of earning

income during the year as compared to earlier and subsequent years.

Assessee has not claimed STT while computing capital gains. Neither it is

the case of the AO that assessee has valued the investment at the year

end at cost or market price, whichever is lower. It is also not the case of

AO that there was any repetitive investment in any script. In respect of the

shares held as at the end of the year, the same were reflected as

investments in the audited accounts. The average holding period varies

from one month to eleven months. During the year assessee has earned

dividend income of Rs.41,13,545/- as against short term capital gain of

Rs.1,07,47,320/-. Thus, the dividend income itself constitute 40% of short 4 ITA No.9052/2010

term capital gain so earned, thus, showing the nature as that of

investment. The intention of the assessee has always been to make

investment and not trade, hence, the holding period and investment has

gone from year to year from Rs.6 crores to Rs.22 crores and capital of the

assessee during the year was Rs.22.38 crores. The funds investment in

shares were own funds and no borrowing has been taken either interest

bearing or interest free.

5. Ld. AR has placed reliance on the decision of coordinate bench in

the case of Mrs. Vineet Sethi, ITA No.4324/Mum/2010, dated 24-1-2014,

Shri Rajesh C. Shah, ITA No.4135/Mum/2012, dated 7-3-2014, Smt.

Poonam Ishwardas Kirpalani, ITA No.3225/Mum/2012, dated 27-9-2013

and in the case of Shri Ramesh T.Vala, ITA No.5157/Mum/2011, dated 7-

6-2013. In all these decisions, proposition has been dealt with regard to

the principle of consistency and the intention of assessee to hold

investment, the frequency of transaction, etc.

6. 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.

7. 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 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 5 ITA No.9052/2010

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,

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. 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 6 ITA No.9052/2010

(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 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. Thus, Government

envisages win-win position both for investor and revenue authorities.

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

131 ITR 597 (SC) observed as under:-

''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.'

9. 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 7 ITA No.9052/2010

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.''

10. 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.

11. 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 8 ITA No.9052/2010

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 is

holding the shares in his books as investor. 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, 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.

12. We have gone through the judicial pronouncements cited at bar by

the ld. AR which are fully applicable to the facts of the instant case. It is

also pertinent to mention here that capital gain was earned only on

delivery basis transactions and there was no income by way of

speculation or further and options. The assessee has not only earned not

only dividend income but also short term and long term capital gains in

respect of investments in shares held by it since last 7-8 years. The AO

has not shown any reason to deviate from the conclusions drawn in

earlier year and subsequent years vis-a-vis treatment of investment

shown by assessee in its audited account. The fact that assessee has

earned substantial long term capital gain amounting to Rs.30,06,635/- and 9 ITA No.9052/2010

also dividend income of Rs.41,13,545/- clearly establishes intention of

assessee regarding holding of shares as investment. Since intention of

assessee was always to make investments and not trade, hence, the

holding period and investment gone from year to year from 6 crores to 22

crores. Without any cogent material the AO has reached to the conclusion

that assessee has traded in shares since he was not having any business

in India, whereas the fact is that assessee is an NRI, engaged in his

business at Jeddah since more than 30 years.

13. In view of the above discussion, we do not find any merit in the

action of the lower authorities for treating capital gain as business income.

14. In the result, appeal filed by the assessee is allowed.

Order pronounced in the open court on this 7th January.2015.

7th Jan,2015

Sd/- Sd/- ( ) ( ) (VIJAY PAL RAO) (R.C.SHARMA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER Mumbai; Dated 7/01/2015 /pkm, PS Copy of the Order forwarded to : 1. / The Appellant 2. / The Respondent. 3. / The CIT(A), Mumbai. 4. / CIT 5. / DR, ITAT, Mumbai

6. Guard file.

//True Copy// / BY ORDER,

(Asstt. Registrar) / ITAT, Mumbai