Jawaharlal Premraj Mehta,, Nashik vs Department Of Income Tax

Asstt. Commissioner of Income Tax, Circle-3, Malegaon. .... Appellant

Vs.

Shri Jawaharlal Premraj Mehta, Paras Building, Nehru Road, Satana, Tal. Satna, Dist. Nashik - 423 301. PAN : ABFPM6605H .... Respondent

Department by : Shri Rajib Jain Assessee by : Shri Nikhil Pathak Date of hearing : 03-02-2015 Date of pronouncement : 20-02-2015

ORDER

PER G. S. PANNU, AM

The captioned appeal by the Revenue is directed against an order of

the Commissioner of Income Tax (Appeals)-II, Nashik dated 30.08.2012

which, in turn, has arisen from an order dated 16.11.2009 passed by the

Assessing Officer u/s 143(3) of the Income-tax Act, 1961 (in short "the Act")

pertaining to the assessment year 2007-08.

2. By way of the present appeal, Revenue has raised the following

Grounds of Appeal :-

"1) The CIT(A) has erred in deleting the addition made by the Assessing Officer of Rs.25,64,710/- on account of Business Income and treating the same as Long Term Capital Gain.

2) The CIT(A) has erred in treating the amount of Rs.21,01,453/-

as Short Term Capital Gain out of Rs.33,30,032/- assessed by the A.O. as business income.

3) The Ld. CIT(A) has erred in holding that the income derived from trading of share is to be treated as Short Term/Long Term Capital Gain instead of business income.

4) The Ld. CIT(A) has erred in appreciating the fact of volume of trading, frequency of trading, intention of the assessee etc. which clearly 2 ITA No.2099/PN/2012

shows that the activity of purchase and sale of shares is trading of shares and income derived from trading of shares is to be treated as income from business."

3. At the time of hearing, the Ld. Representative for the assessee, at the

outset, submitted that identical controversy in the case of the assessee for an

earlier assessment year 2005-06 was a subject-matter of consideration of the

Pune Bench of the Tribunal in ITA No.1463/PN/2008 dated 29.11.2013. The

Ld. Representative submitted that the present appeal of the Revenue be

disposed-off in the light of the aforesaid precedent, which continues to hold

the field.

4. The aforesaid factual matrix has not been disputed by the Ld.

Departmental Representative appearing for the Revenue.

5. In the present appeal, dispute relates to the action of the Assessing

Officer in treating the long term/short term capital gain on sale of shares as

business income. The assessee had declared gain on sale of shares as long

term or short term capital gain depending on the period of holding. The CIT(A)

has allowed partial relief whereby the long term capital gain on sale of shares

has been held to be assessable under the capital gains as against the

business income considered by the Assessing Officer. With regard to the

short term capital gain, the CIT(A) noticed that so far as the intraday trading in

shares and futures and options are concerned the same has been declared by

the assessee as business activity and offered to tax as business income. With

regard to the balance of the short term capital gains, assessee raised a plea

before the CIT(A) contending that even the surplus on sale of shares held for

less than 9 months be treated as 'business income' to avoid protracted

litigation. As a consequence, the CIT(A) held that out of the total short term

capital gain at Rs.33,30,032/- declared by the assessee, a sum of

Rs.12,28,579/- be taxed as business income and the balance of 3 ITA No.2099/PN/2012

Rs.21,01,453/- be taxed as short term capital gain. The aforesaid decision of

the CIT(A) is challenged by the Revenue in appeal before us.

6. In assessment year 2005-06, the Tribunal vide its order dated

29.11.2013 (supra) has held as under :-

"9. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. There is no dispute to the fact that the assessee who is a retired employee, has indulged in purchase and sale of shares of a number of scrips of various companies. Due to the volume, frequency, repetitiveness and utilisation of borrowed funds for purchase of shares the Assessing Officer considered the income from purchase and sale of shares as business income as against long term and short term capital gain declared by the assessee which has been upheld by the CIT(A).

9.1 It is the submission of the Ld. Counsel for the assessee that the assessee is showing the shares as investment in the balance sheet, he is not a trader in shares, he was paying higher tax on capital gain on account of purchase and sale of shares in the past and the department has never treated the assessee as a trader. It is also the submission of the Ld. Counsel for the assessee that the dividend income of Rs.5,30,980/- out of the total income of Rs.42,40,838/- which is more than 10% of the total income shows that the assessee is basically an investor and not a trader.

9.2 We find some force in the arguments of the Ld. Counsel for the assessee. It is now the settled proposition of law that whether the activity of buying and selling of shares is in the nature of trade or investment is a mixed question of law and fact and every case depends on its own sets of facts. In the instant case, there is no dispute to the fact that the assessee has shown long term capital gain and short term capital gain on account of purchase and sale of shares since last so many years which has been accepted by the department. The submission of the assessee before the lower authorities that the shares have been valued at cost and not at cost or market value, whichever is less has not been controverted by the Revenue. In our opinion, mere magnitude of the transaction does not change the nature of transaction, which are being assessed as income from capital gains in the past several years.

9.3 We find the Mumbai Bench of the Tribunal in the case of Management Structure and Systems Pvt. Ltd. (Supra) has held as under :

"15. We have given our serious considerations to the different precedents relied on by the A.O in the assessment order, but in our opinion, the principles laid down in those decisions cannot be applied to the assessee's case to say that the activity of the assessee buying and selling of the shares amount to Trading Activity. It is well settled principle as has held in the case of H. Holsck Larzen (supra) that whether the activity of buying and selling of the shares is in the nature of trade and investment. It is a mixed question of law and fact. In this case, we have perused the Balance Sheet filed by the assessee and as per the books of account, the assessee has treated the entire investment in the shares as an investment only and not as a stock in trade. Another important aspect to 4 ITA No.2099/PN/2012

be considered here is the assessee is not a share broker nor he is having a registration with any Stock Exchange. Moreover, some scripts are held for more than five years and it is not a case of the A.O that there were any derivative transactions by the assessee nor is it a case of the A.O that there were transactions without any delivery. In the present case, both the authorities have not disputed that the transactions are completed with the delivery. The intention of the assessee cannot be read from his mind but it reflects in its conduct, the way he treats the transactions. The assessee has not borrowed any money for investing in shares and used his own surplus funds and these facts have not been disputed by the A.O. The proposition has been accepted by the Board also in Circular No. 4/ 2007 that the assessee is entitled to maintain two portfolios. In the case of the assessee, in the preceding years, the assessee is consistently declaring the gain/profit on the sale of the shares under the head 'Capital Gain' either Long Term and Short term and the same has been accepted by the A.O. It is true that the rule of res judicata is not applicable to the Income Tax Proceedings, but at the same time, it is also well settled principles that if there is no change in the facts, then, there should be consistency in the approach of the Revenue authorities while deciding the tax liability of the assessee.

16. Another aspect to be considered here is that the assessee has received the substantial dividend and that is also disclosed. After considering the totality of the facts, we are of the opinion that the transactions of sale and purchase of the shares by the assessee cannot be treated in the line of trading in the shares nor it can be treated as an adventure in the nature of the trade. For the reasons given herein-above, we hold that the entire income from the sale and purchase of the shares is to be assessed under the head 'capital gain' as rightly declared by the assessee either Long Term Capital Gain (LTCG) or Short Term Capital gain (STCG) depending upon the period of holding, We, therefore, direct the A.O to accept the capital gains declared by the assessee from the sale of the shares and accordingly, set aside the order of the Ld CIT(A)."

9.4 We find the Mumbai Bench of the Tribunal in the case of Janak S. Rangwalla (Supra) at para 7 of the order has observed as under :

"7. In the facts of the present case, the assessee is holding the shares as investment from year to year. It is the intention of the assessee which is to be seen to determine the nature of transaction conducted by the assessee. Though the investment in shares is on a large magnitude but the same shall not decide the nature of transaction. Similar transactions of sale and purchase of shares in the proceeding years have been held to be income from capital gains both on long-term and short-term basis. The transaction in the year under consideration on account of sale and purchase of shares is same as in the preceding years and the same merits to be accepted as short-term capital gains. There is no basis for treating the assessee as a trader in shares, when his intention was to hold the shares in Indian companies as an investment and not as stock-in- trade. The mere magnitude of the transaction does not change the nature of transaction, which are being assessed as income from capital gains in the past several years. The AO is directed to set off the long-term capital loss against the short-term capital gain of the year under consideration. The grounds of appeal raised by the assessee are allowed."

5 ITA No.2099/PN/2012 9.5 We find the Hon'ble Bombay High Court in the case of Gopal Purohit (Supra) has held as under :

"2. The Tribunal has entered a pure finding of fact that the assessee was engaged in two different types of transactions. The first set of transactions involved investment in shares. The second set of transactions involved dealing in shares for the purposes of business (described in para 8.3 of the judgment of the Tribunal as transactions purely of jobbing without delivery). The Tribunal has correctly applied the principle of law in accepting the position that it is open to an assessee to maintain two separate portfolios, one relating to investment in shares and another relating to business activities involving dealing in shares. The Tribunal held that the delivery based transactions in the present case, should be treated as those in the nature of investment transactions and the profit received therefrom should be treated either as short-term or, as the case may be, long- term capital gain, depending upon the period of the holding. A finding of fact has been arrived at by the Tribunal as regards the existence of two distinct types of transactions namely, those by way of investment on one hand and those for the purposes of business on the other hand. Question (a) above, does not raise any substantial question of law.

3. Insofar as Question (b) is concerned, the Tribunal has observed in para 8.1 of its judgment that the assessee has followed a consistent practice in regard to the nature of the activities, the manner of keeping records and the presentation of shares as investment at the end of the year, in all the years. The Revenue submitted that a different view should be taken ,for the year under consideration, since the principle of res judicata is not applicable to assessment proceedings. The Tribunal correctly accepted the position that the principle of res judicata is not attracted since each assessment year is separate in itself. The Tribunal held that there ought to be uniformity in treatment and consistency when the facts and circumstances are identical, particularly in the case of the assessee. This approach of the Tribunal cannot be faulted. The Revenue did not furnish any justification for adopting a divergent approach for the assessment year in question. Question (b), therefore, does not also raise any substantial question".

9.6 Since the facts of the instant case are identical to the facts of the cases cited above, therefore, respectfully following the decisions cited (Supra) and considering the totality of the facts of the case, we are of the considered opinion that the income from purchase and sale of shares by the assessee has to be treated as income from short term capital gain or long term capital gain as the case may be as against business income treated by the Assessing Officer and upheld by the CIT(A). However, since the assessee has availed some borrowed funds and has submitted before the Assessing Officer that he has no objection to consider the profits from share transaction of the shortest period to be income from business, therefore, we hold that the income from purchase and sale of shares with holding period of less than 30 days at Rs.4,22,935.76 (the details of which are filed at paper book 58 to 62) should be treated as business income. The remaining amount has to be treated as long term capital gain or short term capital gain as the case may be. The order of the CIT(A) is modified to this extent and the grounds raised by the assessee are partly allowed.

10. In the result, the appeal filed by the assessee is partly allowed." 6 ITA No.2099/PN/2012

7. As per the aforesaid order of the Tribunal, assessee has been held to

be an investor in the shares and not a trader in shares and therefore in so far

as the gain on shares held for more than 12 months is concerned, it was

directed to be assessed as a long term capital gain. With respect to the profit

derived from share transaction of less than 30 days period, the Tribunal

directed that the same be assessed as income from business. In this context,

the Tribunal held that income from purchase in shares, where the holding

period is of less than 30 days, be treated as business income and the balance

of the gain relating to shares held up to 12 months be treated as a short term

capital gain. The aforesaid decision of the Tribunal squarely covers the

controversy before us. Though, in the instant assessment year, the CIT(A)

has held that surplus of purchase and sale of shares with a holding period for

less than 9 months be treated as business income as against the decision of

the Tribunal to hold that income from purchase and sale of shares with holding

period less than 30 days to be business income, however, there is no cross-

appeal by the assessee on this aspect. Therefore, we hereby affirm the order

of the CIT(A) on this aspect also whereby the income from purchase and sale

of shares with holding period less than 9 months be treated as business

income.

8. In the result, following the precedent by way of the order of the Tribunal

dated 29.11.2013 (supra) in assessee's own case, the captioned appeal of the

Revenue is hereby dismissed.

Order pronounced on 20 th February, 2015.

Sd/- Sd/- (SUSHMA CHOWLA) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER

Pune, Dated: 20 th February, 2015. Sujeet 7 ITA No.2099/PN/2012

Copy of the order is forwarded to: - 1) The Assessee; 2) The Department; 3) The CIT(A)-II, Nashik; 4) The CIT-II, Nashik; 5) The DR "B" Bench, I.T.A.T., Pune; 6) Guard File.

By Order //True Copy//

Assistant Registrar I.T.A.T., Pune