Smt. Nanda Dilip Gugale,, Pune vs Assessee

individual and filed her return of income on 30-09-2010 declaring

total income at Rs.11,48,860/-. The assessee derives income

from Profit and Gains of Business/Profession, short term capital

gain. In the return of income filed, the short term capital gain of

Rs.45,72,326/- earned during the year under consideration was

set /off against brought forward short term capital loss of Rs.

34,23,469/- relating to the earlier year. On being confronted by

the AO the assessee submitted that the shares available with the

assessee have been held as investments and shown as such in

the books and the hence the gains from transactions in shares 2

are shown as short term capital gains. The Assessing Officer

however noticed that the assessee has been dealing in various

numbers of shares and the frequency of purchasing and selling

the shares is regular and recurring. From the volume and

frequency of transactions in shares and securities, the AO noted

that the only business carried on by the assessee during the

relevant year has been to deal in shares and securities so as to

earn handsome gains/ According to the, AO, the assessee has

been deriving profit mainly from single activity, i.e. sale and

purchase of shares through the stock exchange, but it has been

artificially shown as short term capital gains in the return of

income. He observed that the manner in which shares are

shown, whether as stock in trade or investment is not conclusive

proof that it is not share trading business as propounded in the

case of Investment Ltd. Vs. CIT reported in 77 ITR 533.

2. 1 Referring to various decisions, definition of 'business', as

envisaged under sec. 2(13) of the I.T. Act and considering high

volume, frequency, continuity and regularity of the transactions

in shares and securities, the AO was prima facie of the view that

transactions were being carried out with a profit motive in an

organized manner and therefore profit on sale and purchase of

shares in the instant case was taxable as "Business Income" and

not "Capital Gains". He therefore asked the assessee to explain

as to why the profit from transactions in shares during the year

should not be considered as business profit and taxed

accordingly. In response, the assessee referred to the Instruction

of CBDT dated 31.08.1989 as well as Circular No. 4/2007 dated

15.06.2007 and distinguished the case laws quoted in the show

cause notice of the AO.

3

2.2 The various arguments advanced by the assessee however

failed to impress the Assessing Officer. According to the AO, the

assessee has failed to justify how the facts of the case were

distinguishable. The Board's circular relied upon by the assessee

states that the tests laid down in the decisions are not conclusive

but it depends on facts of each case. It was emphasized by the

AO that the activities of the assessee are nothing but only

'purchase and sale' of the shares and units and what needs to be

looked into is that whether the assessee has been purchasing and

selling shares and units in a systematic and organized manner

with a profit motive and the assessee's case is a fit case for

treating the said activity as business activity. In support of this

observation, the Assessing Officer tabulated the details of

transactions in shares and securities carried out by the assessee

during the year which are as under:

Sr. No. Details of Transactions A.Y. 2010-11 1. Total No. of shares purchased during the year 3,14,010 2. Total No. of shares sold during the year 2,32,810 3. Total Cost of shares purchased Rs.5,61,30,950

4. Total Value of shares sold Rs. 5,52,34,268

5. Maximum No. of shares sold in a day (23.11.09) 25,000 6. Total No. of transactions during year where 61 shares were purchased 7. Total No. of transactions during year where shares 47 were sold 8. Total No. of scripts dealt with by the assessee 94

2.3 From the above data relating to the transactions in shares

carried out during the year, the Assessing Officer noted that the

assessee has sold in all 2,32,810 shares during the year and on a

single day 25,000 shares were sold, which shows the high

frequency and the substantial nature of the transactions. It was

also pointed out that soon after the sale of shares, the sale 4

proceeds are utilized again in purchasing shares/units. It was

observed that in most of cases the assessee has purchased the

shares during the year and these shares were immediately sold

within a short span of 10-15 days just to earn handsome profit

by trading through shares. It was further noted by the AO that

the ratio of shares purchased to shares sold during the year is

more than 90%, which further substantiates the stand of the

department that the shares are purchased with an intention to

trade and not to hold as investment and therefore, the same

cannot be treated as an investment activity.

2.4 Further, seeking to differentiate the decision of Bombay

High Court in the case of CIT vs. Gopal Purohit (228 CTR 582),

the Assessing Officer observed that the Hon'ble High Court has

upheld the decision of the Tribunal that it is open to an assessee

to maintain two separate portfolios, one relating to investment in

shares and another relating to business activity involving dealing

in shares. According to the A O. the fact and circumstances in the

present case are different in the sense that the assessee is

engaged in business activity dealing in shares and the magnitude

of transactions is high and holding period is very low. The

Assessing Officer pointed out that the minimum holding period in

the present case clearly suggests that the assessee has never

intended to reap the benefits of the dividend and the securities

were acquired for the purpose of trading primarily and in fact on

huge turnover of more than five crores, the dividend income as

shown in the return of income is nil. As per the AO, in the instant

case, the dominating factor is therefore clearly earning profit in

short tenure by actively participating in share trading and the

activity of the assessee is never an investment activity but a 5

business activity and the decision of Bombay High Court is not

applicable to the facts of the present case.

2.5 Rejecting the various explanations given by the assessee

and distinguishing various decisions the AO treated the short

term capital gain of Rs.45,72,326/- declared by the assessee as

business income.

3. Before the CIT(A) it was submitted that from day one the

assessee has been involved in share trading activity as an

investor and even in earlier years with similar kind of volume, the

loss was treated as short term capital loss and was allowed to be

carried forward. It was argued that only in this year the Assessing

Officer tried to call this activity as business activity with the

intention of denying the set off and such an approach of the

Assessing Officer is not tenable in the eyes of law and the

Assessing Officer has to follow the consistency, if shares are held

as investments. For this proposition, the assessee relied upon the

decision of Hon'ble Bombay High Court in the case of CIT vs.

Gopal Purohit (2011) 336 ITR 287 (Bom) in which it has been

held that there ought to be uniformity and consistency in various

years when the facts and circumstances are identical. It was

further contended that the Assessing Officer treated the

transactions as business activity on account of high volume,

frequency, continuity and regularity involved in transactions and

although these criteria are important, but they are 'not

necessarily decisive and it has to be judged with reference to facts

of each case. It was argued that even otherwise the total no. of

transactions, where scrips are sold are only 47 and total number

of scrips involved is only 24 out of which some of the scrips were

brought forward from earlier years. It was submitted that 6

the assessee deployed her own funds for making investments in

shares and she was not having any borrowed funds. Referring to

the judgment in the case of Gopal Purohit (Supra), it was argued

that if the transaction is in the nature of investment transaction,

the profit received there from should be treated as either long

term or short term capital gains depending upon the period of

holding. The assessee also referred to the decision of Mumbai

Bench of the Tribunal in the case of DCIT vs. SMK Shares &

Stock Broking vide ITA no.799/Mum/2009, wherein it has been

held that mere large volumes of purchase and sales do not per se

means activity in business. For the same proposition, the

assessee also referred to decision of ITAT, Mumbai in the case of

Management Structure & System vs. ITO in ITA

No.6966/Mum/2007. The assessee urged that in view of these

facts, the Assessing Officer may be directed to treat the profits

and gains from transactions in shares as capital gain as claimed

by the assessee and allow the set off of brought forward short

term capital loss of earlier years.

3.1 In the alternative, the assessee stated that Assessing

Officer has treated the income from capital gains as business

income but did not grant reduction in the value of shares, by

valuing it at market value, held on the last day of the year as per

the Balance Sheet for the impugned year. The assessee

requested that the shares held as on the last day of the impugned

year as per balance sheet may be allowed to be valued at market

cost if the impugned income is treated as business income.

4. However, the Ld.CIT(A) also was not satisfied with the

explanation given by the assessee and upheld the action of the

Assessing Officer in treating the capital gain on sale of shares as 7

"business income". While doing so, he observed that the

magnitude and frequency of the transactions in shares of various

companies in the last three years are quite substantial. The sale

and purchase of shares of such magnitude regularly indicates a

systematic activity by the assessee with a motive to make profits

from dealing in shares and securities. The assessee is not a mere

investor in shares of a few companies The assessee has dealt in

shares of several companies and there was a systematic,

organized activity every year with a set purpose or conduct in the

matter of acquiring, holding and selling of shares. The sale and

purchase of shares have been made on regular basis in all the

years. If the transactions are adjudged from the point of view of

volume, frequency, continuity and regularity, it leads to an

inference that the intention of the assessee was to deal in shares

and securities. The conduct of the assessee all along and the

pattern of purchases and sale of shares of different companies

clearly indicate that this is not a case where the assessee

contented herself with merely making an investment-and looking

for dividend and maximization of investments.

4.1 As regards the submission of the assessee about the

treatment of purchase of shares as investments in its books, the

Ld.CIT(A) observed that entries in books of accounts of the

assessee by themselves are not conclusive and decisive factor in

treating the transaction of purchase and sale of shares as an

investment as an investment as such. To find out the real and

true motive of the assessee and the nature of transaction, it is

necessary to consider all other aspects of the case instead of

merely relying on the way in which accounts were prepared and

presented by the assessee.

8

4.2 He noted that in the case of assessee, it is amply

demonstrated from the frequency and magnitude of the

transactions and ratio of purchases and sales to total holdings

during the year and earlier years that there was a systematic,

continuous and organized carrying on of business activity of

purchase and sale of shares not only in the year under appeal but

also in earlier years and such activity constitutes an adventure in

the nature of trade. In such a situation, where the assesses was

carrying on business of purchase and sale of shares with a motive

to earn profit, even if such transactions are recorded in the books

of accounts of the assessee as investment, the Assessing Officer is

justified in law in computing income on sale of such shares

under' the head 'business'.

5. Aggrieved with such order of the CIT(A) the assessee is in

appeal before us with the following grounds :

"1. On the facts and in the circumstances of the case and in law Learned Assessing Officer has erred in treating Short Term Capital Gain on shares, a sum of Rs.45,72,326/- as Business Income of the appellant by disregarding appellants contention in this regard.

2. On the facts and in the circumstances of the case and in law Learned Assessing Officer has erred in not allowing the set off of brought forward Short Term Capital Loss of Rs.34,23,469/- and has also further erred in not allowing to carry forward of the said loss.

Without prejudice to above ground your appellant wishes to take following ground:

3. On the facts and in the circumstances of the case and in law Learned Assessing Officer has erred in treating the Income from Capital Gain as Business Income and consequently not granting the reduction in the value of shares held on the last day by the appellant.

Your appellant prays that if the income on account of shares is treated as Business Income then Assessing Officer may be directed to allow booking the reduction in the value of shares on the last day of the Balance Sheet.

4. On the facts and in the circumstances of the case and in law Learned Assessing Officer has erred in charging interest u/s.234B by disregarding the fact that appellant was not liable for payment of Advance Tax as she has brought forward Capital Loss and appellant 9

was under the bonafide belief that she is legally entitled for set off the loss."

6. The Ld. Counsel for the assessee strongly challenged the

order of the CIT(A). He submitted that the assessee since last so

many years has shown the gain/loss realized from sale of shares

under the head capital gain as per provisions of law and returns

have been filed accordingly. The assessee has been duly carrying

out the activity of investments as an investor and not otherwise.

The assessee has not utilized any borrowed fund and the shares

are shown in the balance sheet at cost under the head

investment. He submitted that all shares are delivery based. The

Ld. Counsel for the assessee submitted that during the A.Y. 2009-

10 the assessee suffered substantial loss due to the sudden crash

in the market and she suffered the short term capital loss of

Rs.34,23,467/- and the loss so incurred in the A.Y. 2009-10 has

been carried forward to the subsequent assessment year. Since

the market conditions improved the assessee earned short term

capital gain on sale of shares of a sum of Rs.45,72,326/- and

claimed set off of the brought forward short term capital loss of

earlier years against this gain. He submitted that since the

assessee was carrying out the activity of share as an investor and

since the gains are taxed under the head capital gain even when

there was volume and frequency, therefore, the lower authorities

are not justified in treating the same business income for the

impugned assessment year.

6.1 Referring to the following decisions he submitted that under

identical circumstances various judicial authorities have accepted

the short term capital gain as declared by the assessee as against 10

business income treated by the AO even when there was high

volume, frequency, continuity and regularity :

1. CIT Vs. Gurucharankaur Baldevsingh Wahi - ITA No.13/2004 order dated 05-02-2015 - Hon'ble Bombay High Court

2. CIT Vs. Gopal Purohit reported in 336 ITR 286

3. Gurucharankaur B. Wahi Vs. DCIT vide ITA Nos. 82 & 1332/PN/2011 order dated 22-03-2013

4. Addl.CIT Vs. RDA Holding and Trading Pvt. Ltd. - ITA No.2229/PN/2013 order dated 30-10-2014

5. Rajendra Baburao Shinde Vs. Dy.CIT - ITA No.1454/PN/2011 order dated 23-05-2013.

He accordingly submitted that the order of the CIT(A) be set aside

and the grounds raised by the assessee should be allowed.

7. The Ld. Departmental Representative on the other hand

heavily relied on the order of the CIT(A). He submitted that since

the assessee is carrying out the activity in a very systematic

manner and there is high volume, frequency, continuity and

regularity in such transactions and the shares were held for a

very few days, therefore, under the facts and circumstances of the

case the CIT(A) was justified in upholding the action of the AO in

treating such gain as business income.

8. 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. We find the AO

in the instant case considered the short term capital gain of

Rs.45,72,326/- declared by the assessee as business income on

the ground that there is high volume, frequency, continuity and

regularity and the transactions are being done with a profit

motive in an organised manner and the assessee has given them 11

a flavour of trade. We find the Ld.CIT(A) also upheld the action of

the AO. He also went by the theory of frequency and magnitude

of the transactions during the year and earlier years and held that

there was a systematic, continuous and organised carrying on

business activity of purchase and sale of shares and securities

not only in the year under appeal but also in earlier years and

such activity constitutes an adventure in the nature of trade.

8.1 It is the submission of the Ld. Counsel for the assessee that

since last so many years such profit on sale of shares has been

shown as short term capital gain or long term capital gain as the

case may be and the Revenue has accepted the same. The

assessee has not utilised any borrowed capital and the shares are

shown in the balance sheet under the head investment at cost

price.

8.2 We find under somewhat identical facts the Hon'ble

Bombay High Court in the case of Gurucharankaur Baldevsingh

vide ITA No.13/2004 and batch of other appeals order dated 05-

02-2015 had an occasion to decide the issue. In that case the

assessee earned profit from purchase and sale of shares. This

activity was quite mixed and for number of years the assessees

have made good profit in this activity also. They divided the profit

made in this line in three parts. The profit made in non delivery

based transactions of shares was classified as business income

which was susceptible to higher rate of income tax. The second

class was short term capital gain from delivery based

transactions. Here also higher rate of income tax was paid. The

third class was long term capital gain where the shares were held

after holding them for more than 12 months. In A.Y. 2005-06 the

assessee showed short term capital gain to the tune of Rs.28 12

lakhs. The AO accepted this as short term capital gain and not

business profit but during the A.Y. 2006-07 this income increased

to the tune of Rs.48 lakhs. In the A.Y. 2007-08 the short term

capital gain decreased to Rs.22 lakhs. The AO in the assessment

treated such short term capital gain as business income on

account of the following :

"(1) The regularity, frequency, volume and continuity is quite high.

(2) The assessee purchased shares and it's dominant intention was to earn profit within minimum time.

(3) The intention of holding the shares for longer period to earn dividend is missing unless the assessee had taken recourse to the benefit of section 94(7) of the I.T. Act.

(4) Whether two separate account and the entries are made in the books of accounts. It is found that no separate accounts distinguishing the investment and stock have been maintained.

(5) The assessee was riding very high in the boom period and wanted to make quick bucks".

8.3 The CIT(A) upheld the action of the AO. On further appeal

the Tribunal allowed the claim of short term capital gain declared

by the assessee. On further appeal by the Revenue the Hon'ble

Bombay High Court dismissed the appeal filed by the Revenue by

observing as under :

"5. In view of this, we would also examine the facts of these cases to find out whether the transactions which are shown by the assessee as short term capital gain or were adventures in the nature of trade? We hold that they were short term capital gain. The first reason is that the assessee were earning short term capital gain by sale of shares for years together. They further kept admitting that the transactions in share, which were not delivery based, earned them profit and the same was an income from business. So, from transactions in share, the assessees were regularly getting income as business income on one side and as capital gain on other side. This pattern continued for more than 25 years and so the assessing officer ought to have accepted this pattern for the assessment years also. Having regard to the law on the subject there was possibility that even the short term capital gain shown in the account book of the assessees could have been categorized as business profit but this would have amounted to discontinuing the earlier practice. This change was possible only on the basis of strong circumstances and evidence. There is no evidence on record besides the number of transactions and the profit earned. Indeed, the number of 13

transactions increased in the assessment year but the assessing officer ought to have collected evidence to at least suggest that the pattern of business activity of the assessee changed, their main line of transport was no longer continued as main line etc. If this was not done, we are not inclined to given importance to the circumstances for which the assessing officer placed reliance. Similar view is taken by the members of Tribunal. We need not think it necessary to change such finding. We confirm the same. Appeals dismissed."

8.4 We find the Hon'ble Bombay High Court in the case of CIT

Vs. Gopal Purohit reported in 336 ITR 287 has held as under :

"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.

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.

Insofar as Question (c) is concerned, again there cannot be any dispute about the basic proposition that entries in the books of account alone are not conclusive in determining the nature of income. The Tribunal has applied the correct principle in arriving at the decision in the facts of the present case. The finding of fact does not call for interference in an appeal under s. 260A. No substantial question of law is raised. The appeal is accordingly dismissed."

14 8.5 We further find the Pune Bench of the Tribunal in the case

of Rajendra Baburao Shinde Vs. DCIT vide ITA No.1545/PN/2011

order dated 23-05-2013 had an occasion to decide an identical

issue and the Tribunal allowed the claim of short term capital

gain as declared by the assessee by observing as under :

"12. On this aspect, the preliminary point made out by the learned counsel for the assessee is that the lower authorities have erred in treating the gain on sale of shares as business income in this year, which is inconsistent with the stand accepted by the Department for the preceding assessment years 2004-05 and 2005-06. In this regard, the learned counsel for the assessee has referred to the Paper Book in which the copy of the income tax return along with the financial statements for the assessment years 2004-05 and 2005-06 have been placed at pages 36 to 26 and 16 to 31 respectively to point out that the gain/loss on sale of shares/units was accepted asRajendra Baburao Shinde A.Y. 2006-07 assessable under the head capital gains. The assessment orders passed under Section 143(3) dated 10.10.2006 and 26.12.2007 for the assessment years 2004-05 and 2005-06 respectively have also been placed in the Paper Book in this regard. It is pointed out that even in the instant assessment year, the gain on the sale of shares/units is liable to be considered in the same light as in the two preceding assessment years and there is no change in facts and circumstances.

In support, the learned counsel has relied upon the judgement of the Hon'ble Bombay High Court in the case of CIT vs. Gopal Purohit (2011) 336 ITR 287 (Bom.). The Hon'ble Bombay High Court in the case of Gopal Purohit (supra) was considering an issue as to whether the income from trading in shares was to be construed as business income or capital gains. In the case before the Hon'ble Bombay High Court, in the preceding years the activity from the trading in shares was considered as an investment activity liable for capital gains. The Hon'ble High Court upheld the view of the Tribunal holding that the principle of consistency must be applied and did not approve of treating the trading in shares as business income activity. In view of the proposition laid down by the Hon'ble jurisdictional High Court, the preliminary plea of the assessee is relevant. In this background, the learned Departmental Representative was required to explain the position in the light of the material referred to by the assessee, which is placed on record. Ostensibly, in the earlier assessment years assessee has carried out similar transactions and their characterization as investment activity giving rise to the income under the head capital gains, has been accepted the Assessing Officer in assessments made under Section 143(3) of the Act.

Therefore, in the light of the principle of consistency, in this year also, the income from the sale of shares is liable to be treated as income from capital gains as declared by the assessee in its return of income. Notably, the Department has not shown any change in Rajendra Baburao Shinde A.Y. 2006-07 facts and circumstances in this year, so as to warrant any departure from the position accepted in the past years. Consequently, on this preliminary issue, the order of the CIT(A) is set-aside and the Assessing Officer is directed to treat the income from the sale of shares and units as assessable under the head 'capital gains' and not as business income. The assessee succeeds on this ground."

15 8.6 Since the assessee in the instant case is consistently

showing the gain on sale of shares as short term capital gain or

long term capital gain as the case may be, all the shares are

delivery based, the value of shares is shown in the balance sheet

under the head investment at cost price and there is no borrowed

fund utilised for purchase of the shares, therefore, following the

above decisions cited (Supra) we hold that the profit on sale of the

shares have to be treated as short term capital gain. We

accordingly set aside the order of the CIT(A) and the grounds

raised by the assessee are allowed.

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

Pronounced in the open court on 29-05-2015.

Sd/- Sd/- (VIKAS AWASTHY) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER

satish Pune Dated: 29th May, 2015

Copy of the order forwarded to :

1. Assessee 2. Department 3. CIT(A)-I, Pune 4. CIT-I, Pune 5. The D.R, "A" Pune Bench 6. Guard File

By order

// True Copy // Senior Private Secretary ITAT, Pune Benches, Pune