Reena R.Agrawal, Ahmedabad vs Department Of Income Tax

ACIT, Cent.1(4) Smt.Reena R. Agrawal Ahmedabad. Vs 70, Vasant Bahar Colony Bopal, Ahmedabad.

PAN : ABXPA 1382 K

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: 30/01/2015

आदे श/O R D E R

PER BENCH: This appeal is 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. The only ground raised in this appeal of the Revenue is as under:

"1. The ld.CIT(A) has erred in law and on facts in treating business income of Rs.68,96,248/- as capital gains."

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

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 earned income from sale of shares in normal trades of Rs.3,97,319/- and through portfolio management scheme ("PMS") of Rs.64,98,929/-

ITA No.1276/Ahd/2011 2 aggregating to Rs.68,96,248/-. 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. After considering the facts and circumstances of the case, the AO taxed short term as well as long term capital gain as business income. Therefore, in the current year also he held that the gain from the share transactions is to be assessed as business income

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 appellant's own case in earlier years held 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 to treat these transactions as business as against capital gain disclosed by the appellant. These grounds are therefore allowed."

4. 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 Shri Ravindra M. Agrawal for A.Y.1999-2000 to 2005-06 in ITA No.2117/Ahd/2008 to 2123/Ahd/2008 order dated 28.1.2011 and submitted that the issue is ITA No.1276/Ahd/2011 3

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.

5. We have considered submissions of both the parties and perused the orders of the lower authorities. We find that the Tribunal for A.Y.1999-2000 to 2005-06 in ITA No.2117/Ahd/2008 to 2123/Ahd/2008 vide order dated 28.1.2011 held as under:

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 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:

"The following principles can be applied on the facts of a case to find out whether transaction(s) in question are in the nature of trade or are merely for investment purposes:

(1) What is the intention of the assessee at the time of purchase of the shares. This can be found out from the treatment it gives to such purchase in its books of account--whether it is treated as stock-in-trade or investment; whether shown in opening/closing stock or shown separately as investment or non-

trading asset.

(2) Whether assessee has borrowed money to purchase and paid interest thereon. Normally, money is borrowed to purchase goods for the purposes of trade and not for investing in an asset for retaining.

(3) What is the frequency of such purchases and disposal in that particular item ? If purchases and sales are frequent, or there are substantial transactions in that item, it would indicate trade.

ITA No.1276/Ahd/2011 4 Habitual dealing in that particular item is indicative of intention of trade. Similarly, ratio between the purchases and sales and the holdings may show whether the assessee is trading or investing (high transactions and low holdings indicate trade whereas low transactions and high holdings indicate investment).

(4) Whether purchase and sale are for realizing profit or purchases are made for retention and appreciation in its value? Former will indicate intention of trade and latter, an investment. In the case of shares whether intention was to enjoy dividend and not merely earn profit on sale and purchase of shares. A commercial motive is an essential ingredient of trade.

(5) How the value of the items has been taken in the balance sheet ? If the items in question are valued at cost, it would indicate that they are investments or where they are valued at cost or market value or net realizable value (whichever is less), it will indicate that items in question are treated as stock-in-trade.

(6) How the company (assessee) is authorized in memorandum of association/articles of association ? Whether for trade or for investment ? If authorized only for trade, then whether there are separate resolutions of the board of directors to carry out investments in that commodity ? And vice versa.

(7) It is for the assessee to adduce evidence to show that his holding is for investment or for trading and what distinction he has kept to the records or otherwise, between two types of holdings: if the assessee is able to discharge the primary onus and could prima facie show that particular item is held as investment (or say, stock-in-trade) then onus would shift to revenue to prove that apparent is not real.

(8) The mere fact of credit of sale proceeds of shares (or for that matter any other item in question) in a particular account or much frequency of sale and purchase will alone will not be sufficient to say that assessee was holding the shares (or the items in question) for investment.

(9) One has to find out what are the legal requisites for dealing as a trader in the items in question and whether the assessee is complying with them. Whether it is the argument of the assessee that it is violating those legal requirements, if it is claimed that it is dealing as a trader in that item ? Whether it had such an intention (to carry on illegal business in that item) since beginning or when purchases were made ?

ITA No.1276/Ahd/2011 5 (10) It is permissible as per CBDT's Circular No. 4 of 2007 of 15- 6-2007 that an assessee can have both portfolios, one for trading and other for investment provided it is maintaining separate account for each type, there are distinctive features for both and there is no intermingling of holdings in the two portfolios.

(11) Not one or two factors out of above alone will be sufficient to come to a definite conclusion but the cumulative effect of several factors has to be seen.

The assessee-company was dealing in shares and it had dealt in shares both as stock-in-trade as well as investment. It sold shares from the investment portfolio and claimed that the profit arising therefrom was capital gain. The Assessing Officer held that main business of the assessee was purchase and sale in shares. It was neither a share dealer nor a share broker. The details for purchase and sales affected by the assessee company revealed that sales and purchases were quite substantial and would not be made by a person who invested in shares. Further, the assessee did not have sufficient funds to make such investments and the assessee was claiming to have made investment out of borrowed capital. He, therefore, held that the profit in question was assessable as business income.

Held that the undisputed fact was that the assessee was dealing in shares both as business as well as investment. It had kept separate accounts in respect of two portfolios. No material was brought on record to show that demarcation line between business and investment was hazy or that the assessee had not maintained an investment portfolio and it was dealing in shares only like a trader. Thus, on appreciation of cumulative effect of several factors present it was to be held that the surplus was chargeable to capital gains only and the assessee was not to he treated as trader in respect of sale and purchase of shares in the investment portfolio."

The ITAT, Mumbai Bench in the case of Janak S. Rangwala (supra) held as under:

"The mere volume of transaction transacted by the assessee would not alter the nature of transaction. It is an established principle that income is to be computed with regard to the transaction. The transaction in whole has to be taken into consideration and the magnitude of the transaction does nor after the nature of transaction. Though the principle of res judicata does not apply to the Income-tax proceedings as each year is an ITA No.1276/Ahd/2011 6

independent year of the assessment but in order to maintain consistency, it is a judicially accepted principle that same view should be adopted for the subsequent years unless there is a material change in the facts. (Para 6]

In the facts of the instant case, the assessee was holding the shares as investment from year to year. It was the intention of the assessee which was to be seers to determine the nature of transaction conducted by the assessee. Though the investment in shares was on a large magnitude but the same would not decide the nature of transaction. Similar transactions of sale and purchase of shares in the preceding years had been held to be income front capital gains both on long-tern and short-term basis. Tire transaction in the year under consideration on account of sale and purchase of shares was same as in the preceding years and the same was to be accepted as short-term capital gains. There was no basis for treating the assessee as a trader in shares, when his intention was to hold shares its the 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 ITAT, Mumbai Bench in the case of Gopal Purohit (supra) followed the decision of the ITAT, Lucknow Bench in the case of Sarnath Infrastructure Pvt. Ltd. (supra) and held as under:

"Further, on the basis of merits also, in view of the ratio of the decision of Sarnath Infrastructure P. Ltd.'s case (supra), it was held that the delivery based transaction should be treated as of the nature of investment transactions and profit therefrom should be treated as short term capital gain or long term capital gain depending upon the period of holding."

In addition to the above, the ITAT, Mumbai Bench also accepted the claim of the assessee on the ground that in the preceding year, similar claim was accepted by the Revenue. The relevant findings of the ITAT are as under:

"Thus, the nature of activities, modus operandi of the assessee, manner of keeping records and presentation of shares as investment at the year end were same in all the years, and, hence, apparently, there appeared no reason as to why the claims made by the assessee should not be accepted. However, the revenue authorities had taken a different view in the year under consideration by holding that principle of res judicata was not applicable to the assessment proceedings. There could not be any ITA No.1276/Ahd/2011 7

dispute on this aspect, but there is also another judicial thought that there should be uniformity in treatment and consistency under the same facts and circumstances and it was as already found that facts and circumstances were identical even though a different stand had been taken by the revenue authorities.:

The Revenue filed the appeal before the Hon'ble Bombay High Court against the decision of the ITAT in the case of Gopal Purohit (supra) and a specific question was raised against the rule of consistency applied by the ITAT. The Hon'ble High Court vide order dated 6-1-2010, 228 CTR 582 (Bom) upheld the order of the ITAT and held as under:

"3. In so far as Question (b) is concerned, the Tribunal has observed in pare 8. 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 year 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."

11. On merit also, Their Lordships upheld the findings of the ITAT holding the same to be pure finding of the fact.

12. Similar view is taken by the other Benches of the ITAT in various decisions relied upon by the learned counsel. However, for the sake of brevity, the same are not discussed here in detail.

13. The learned DR had contended that the above decisions of the ITAT would not be applicable to the case under appeal before us, because, in these cases the transactions of the purchase and sale of shares were disclosed to the department, while in the case of the assessee, these were undisclosed transactions detected by the Revenue only as a result of search. To verify factual correctness of the contention of the Revenue, the assessee was asked to furnish the copy of original computation as well as ITA No.1276/Ahd/2011 8

revised computation in the case of Ravindra Agrawal for any one assessment year. The assessee furnished the detail for A.Y.2000- 2001 from which we find that the original return was furnished by the assessee on 7-11-2001 whereas the search has taken place at the assessee's premises on 29-10-2004. In this original return long term capital gain of Rs.10,02,774/- was disclosed. In response to the notice under Section 153A, the assessee furnished return disclosing capital gain of Rs.7,31,096/- which was filed on 30-11-206. This return was again revised on 24-4- 2007 in which the capital gain of Rs.7,33,450/- was disclosed. The fact remains that the capital gain was disclosed by the assessee in the original return as well. Of course there is some variation in the amount of capital gain disclosed. In the order under Section 153A also there is no finding by the AO that the transaction of purchase and sale of shares were not disclosed by the assessee. The same is not assessed as income from undisclosed sources, but assessed as business income. Therefore, the contention of the learned DR that the transaction of purchase and sale of shares was not disclosed to the department is factually not correct.

Moreover, whether the transaction of purchase and sale of shares was disclosed before the date of search or not would not be relevant for determining whether the transaction was in the nature of trading transaction or in the nature of investment. Therefore, whether the transaction of purchase and sale of shares was a trading transaction or investment will have to be examined considering the totality of the facts of the assessee's case. We find that Shri Ravindra M. Agarwal is a Chartered Accountant, Cost Accountant as well as Company Secretary by education. He was an Executive Director in Saurahstra Chemicals Ltd., Porbandar at the relevant time. He was not in the business of purchase and sale of shares. In the original return of income furnished prior to the search, the profit from sale of shares was offered to tax as capital gain and the same was accepted by the Revenue under Section 143(1). No money was borrowed by the assessee for the acquisition of the shares. All shares were acquired by utilising own fund. Neither any office nor any staff was kept and maintained for the purpose of sale of purchase/shares.

However, there were frequent transactions of purchase and sale of shares. There is dispute with regard to total number of share transactions of purchase and sale of shares by various assesses. As per the Revenue the total number of transaction by all the assessees during the various assessment years under appeal was totaling to 36,000 (approx.). As per the assessee the number of transactions were 4611. The Revenue has not given any basis for the figure of 36,000 mentioned in the assessment order while the assessee has given working how there were 4,611 transactions by various assessees ITA No.1276/Ahd/2011 9

in several years. Whether the transactions were 4,611 or 36,000, the facts remain that there were frequent transactions of purchase and sale of shares. However, except the parameter of frequency in purchase/sale of shares all other parameters indicate that the transactions were in the nature of investment and not the trade transactions. 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:

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 ITA No.1276/Ahd/2011 10

"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 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.'

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 appeal of the Revenue.

6. In the result, the appeal of the Revenue is dismissed.

Order pronounced in the Court on Friday, the 30th January, 2015 at Ahmedabad.

Sd/- Sd/- (SHAILENDRA KUMAR YADAV) ( N.S. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad; Dated 30/1 /2015