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Income Tax Appellate Tribunal, ‘’ A ’’ BENCH, AHMEDABAD
Before: SHRI WASEEM AHMED
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Commissioner of Income Tax (Appeals)-VI, dated 03/05/2011 ( in short “Ld.CIT(A)”) arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") dt.22/12/2008 relevant to the Assessment Year 2006- 2007.
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The assessee has raised the following grounds of appeal; “1.1 The order passed u/s. 250 of the Act on 03.05.2011 for A.Y. 2006-07 by CIT(A)-VI, Abad is wholly illegal, unlawful and against the principles of natural justice. 1.2 The Ld. CIT(A) has grievously erred in upholding the disallowances without considering fully and properly the explanation offered and evidence produced by the appellant. 1.3 The Ld. CIT(A) has grievously erred in law and/or on facts in upholding that the surplus of Rs. 1,86,83,436/- on sale of shares was business income. 2.2 That in the facts and circumstances of the case, the Ld. CIT(A) ought not to have upheld that the surplus arising on sale of shares was business income. 2.3 The Ld. CIT(A) has failed to appreciate that merely because the shares were hold for small period would not ifso facto be construed as trade of the appellant so that the surplus arising on sale thereof could be assessed as business.”
The interconnected issue raised by the assessee is that the Ld. CIT (A) erred in upholding the order of the AO in treating the Capital Gain Income of Rs. 1,86,43,436/- as Business Income.
2.1 The facts of the case are that the assessee an Individual and engaged in the business of Trading of Tobacco Products etc. The assessee in the year under consideration declared Short Term Capital Gain (in short STCG) amounting to Rs. 1,86,83,436/- in his income tax return. The assessee generated such capital gain on transactions of purchase and sale of equity share.
2.2 However, the AO during the assessment proceedings observed that the assessee in the year under consideration has entered into approx 50 transactions of purchase and sale of shares. The quantity and value of purchase and sale of shares were also very high. The AO accordingly was of the view that the profit earned by the assessee on transaction of purchase and
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sale of shares is in the nature of business income. Therefore the AO further to decide the issue of whether profit arises on purchase and sale of shares would be treated as capital gain or business income referred to the circular no. 4/2007 issued by the CBDT dated 15-06-2007 in which some parameters were given to decide the capital gain or business income which are as under;
“i) where a company purchases and sells shares, it should be shown that they were held as stock in trade, for the activity to constitute business, ii) the substantial nature of transactions, the manner of maintaining of books of accounts, the magnitude of purchase and sale and the ratio between purchase and sale of shares needs to be looked into. iii) whether the motive behind purchase and sale of shares was earning profit or income by way of dividend, etc.” 2.3 In addition to the above, the AO further considered the judgment of Hon’ble Mumbai Tribunal in the case Smt. Neerja Birla v/s ACIT reported 66 ITD 148 where two more parameters were included in deciding the issue discussed above. “i) whether the purchase and sale of shares has been made through borrowed funds and ii) whether the activity of purchase and sale of shares has been continued for more than one year. In this connection.”
2.4 Thus the AO in the light of the parameters given in the circular and order observed certain facts as detailed under:
Nature of Transaction: - On perusal of the list of the transaction the assessee traded in shares of approx. 20 companies and volume of the transactions were in the range of 1,500 to 25,000 shares.
Frequency of Transactions: - The purchase and sale of shares were completed within a very short period ranging from 2 days to 15 days.
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The magnitude of Transactions: - The assessee entered into the transactions worth of Rs. 27 crores and earned a profit of Rs. 1.87 crores. 4. The magnitude of Income: - The assessee has declared a total income of Rs. 2,08,55,810/- in his return of income comprising of capital gain amounting to Rs. 1,86,83,436/- whereas the business was only Rs. 6,49,424/-. The assessee was engaged in the business of share trading; therefore, he generated such a huge profit from the sale and purchase of shares. 2.5 Thus the AO in view of the above concluded that the assessee was engaged in full-fledged in buying and selling of shares to generate profit continuously in the year under consideration as well as in preceding and succeeding years. Accordingly, the AO treated the capital gain of Rs. 1,86,83,436/- as business income of the assessee.
The aggrieved assessee preferred an appeal before the Ld. CIT (A). The assessee before the Ld. CIT (A) submitted that the investment was made in shares to earn dividend rather than profit. All the shares were purchased out of his own funds instead of borrowed funds. Therefore the profit generated on the purchase and sale of shares should be taxed under the head capital gain. The circular issued by the CBDT as relied upon by the AO is not applicable since these shares were not held as stock in trade. As such, there was no motive to earn a profit on the sale of such shares. Similarly, the shares were not purchased out of the borrowed money.
3.1 The assessee further submits that income will be treated as business income if the transaction of sale purchase of shares will be continued year
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after year. But he made sale purchase of share during the period of 5 to 6 months only.
3.2 The assessee also submitted that his main business is of trading in the cigarette.
3.3 However, the Ld. CIT (A) observed that the assessee was indulged in frequent buying and selling of shares as the period of holding was not more than 15 days. Thus it is very clear that his intention was not to earn dividend but to earn profit from share trading.
3.4 Thus, the Ld. CIT (A) concluded that the frequency and the number of the transactions evidence his intention, i.e. to earn business profit and not the capital gain.
3.5 The Ld. CIT (A) further relied on the order of Hon’ble ITAT Ahmedabad in the case Sugam Chand C Shah v/s ACIT reported in ITA No. 3554/AHD/2008 and accordingly concluded that if the shares held for a period less than 30 days, then it will be treated as business income. As such, in the case of the assessee, mostly shares were held for less than 30 days, therefore, it will be treated as business income.
3.6 The Ld. CIT (A) accordingly upheld the order of the AO. Being aggrieved by the order of the Ld. CIT (A), the assessee is in appeal before us.
The Ld. AR before us filed a paper book containing pages from 1 to 57 and submitted that the assessee has been showing income on the sale and purchase of the shares under the head capital gain consistently which was also Page 5 of 14
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accepted by the Revenue. The learned AR also submitted that there was no borrowed fund utilised in the investment of such shares. The learned AR reiterated the submission made before the authorities below.
On the other hand, the Ld. DR before us submitted that the assessee in respect in certain shares have not taken the delivery. As such, there was no entry in the Demat account of the assessee for certain shares. There is no balance sheet filed by the assessee demonstrating that the shares were classified as investment.
The learned DR vehemently supported the order of the authorities below.
The learned AR, in his rejoinder submitted that all the purchases and sales of share were reflecting in the Demat account of the assessee.
We have heard the rival contentions and perused the materials available on record. The assessee in the instant case has generated profit from the purchase and sale of shares, which was shown under the head capital gain. However, the AO was of the view that it should be taxable as business income after considering the circular no. 4/2007 dated 15-06-2007 issued by CBDT. Therefore the AO treated the profit under the head business income instead of capital gain. Subsequently, the Ld. CIT (A) upholds the order of the AO.
8.1 Now, the issue before us emerges for our consideration whether the profit arises on buying and selling of shares will be treated as business income or capital gain in the given facts & circumstances. At this juncture, we are
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inclined to refer to the Circular issued by the CBDT vide No.6/2016 dated 29.02.2016. The relevant extract reads as under: "In this background, while recognizing that no universal principal in absolute terms can be laid down to decide the character of income from sale of shares and securities (i.e. whether the same is in the nature of capital gain or business income), CBDT realizing that major part of shares/securities transactions takes place in respect of the listed ones and with a view to reduce litigation and uncertainty in the matter, in partial modification to the aforesaid Circulars, further instructs that the Assessing Officers in holding whether the surplus generated from sale of listed shares or other securities would be treated as Capital Gain or Business Income, shall take into account the following— (a) Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income, (b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years; (c) In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT." As per the above circular, the case on hand falls under the clause 'c' and it is pertinent to take guidance from the CBDT Circular No. 4/2007 dated 15.06.2007. The relevant extract reads as under: 1. The Income-tax Act, 1961 makes a distinction between a "capital asset" and a "trading asset". 2. Capital asset is defined in section 2(14) of the Act. Long-term capital assets and gains are dealt with under section 2(29A) and section 2(29B). Short-term capital assets and gains are dealt with under section 2(42A) and section 2(42B). 3. Trading asset is dealt with under section 28 of the Act. 4. The Central Board of Direct Taxes (CBDT) through Instruction No. 1827, dated August 31, 1989 had brought to the notice of the Assessing Officers that there is a distinction between shares held as investment (capital asset) and shares held as stock-in-trade (trading asset). In the light of a number of judicial decisions pronounced after the issue of the above instructions, it is proposed to update the above instructions for the information of assessees as well as for guidance of the Page 7 of 14
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Assessing Officers. 5. In the case of Commissioner of Income-tax (Central), Calcutta v. Associated Industrial Development Co. (P.) Ltd. [1971] 82 ITR 586, the Supreme Court observed that : "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 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." 6. In the case of Commissioner of Income-tax, Bombay v. H. Holck Larsen [1986] 160 ITR 67, the Supreme Court observed : "The High Court, in our opinion, made a mistake in observing whether transactions of sale and purchase of shares were trading transactions or whether these were in the nature of investment was a question of law. This was a mixed question of law and fact." 7. The principles laid down by the Supreme Court in the above two cases afford adequate guidance to the Assessing Officers.'
8.2 On perusal of the above Circulars it is clear that the assessee can maintain two portfolios one for trading in the shares, and the other one is for the investment in shares. The only requirement of the circular is that both the activities of the assessee should be demarcated in the books of account. As the assessee has not shown any activity from the trading of shares and there was also no closing stock shown in the financial statement, therefore, we are of the view that the assessee is dealing only in the investment activity as evident from the classification shown by the assessee under the head investments. In this regard, we refer to the balance sheet of the assessee which is placed on record and reproduced as under: MR. HARISHBHAI K. PATEL 2005-06 27/B, SUDERSHAN SOC, NARANPURA AHMEDABAD BALANCE SHEET AS ON : PAGE NO. 1 31.03.06 LIABILITY AMOUNT ASSETS AMOUNT (RS.) (RS.) UNSECURED LOAN CASH & BANK BALANCE
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TOTAL : UNSECURED LOAN 0.00 KALUPUR CO-OP BANK A/C NO: 513 243070.42 STANDARD CHARTERED - 23310044914 754013.72 TOTAL : CASH & BANK BALANCE 997084.14 SUNDRY CREDITORS TOTAL : SUNDRY CREDITORS 0.00 LOANS & ADVANCES HARIKESH AGENCIES (PROPRIETOR) 17404888.53 PROPRIETOR CAPITAL PROP. HARISHBHAI K PATEL 35157949.96 HARIKESH SALES AGENCIES 4286912.00 TOTAL : PROPRIETOR CAPITAL 35157949.96 HARIKESH SALES P. LTD (DIRECTORS) 534850.00 HARIKESH TRADING CO (PARTNER) 10312385.32 TOAL : LOANS & ADVANCES 32539035.85 SECURED LOAN SUNDRY DEBTORS TOTAL: SECURED LOAN 0.00 MAGNUM EQUITY BROKING LTD 205304.09 TOTAL : SUNDRY DEBTORS 205304.09 TOTAL : LIABILITY 35157949.96 INVESTMENT SHARE INVESTMENT SWASTIK SECS. (20000) 1083346.05 TALENT INFOWAYS (86000) 133179.83 TOTAL : SHARE INVESTMENT 1216525.88 HARIKESH SALES PVT. LTD. (SHARE) 200000.00 TOTAL : INVESTMENT 1416525.88
TOTAL : ASSETS 35157949.96
GRAND TOAL 35157949.96 GRAND TOTAL 35157949.96
From the above balance sheet, it is clear that the assessee has demarcated its shares under the head investment. Therefore the Circular issued by the CBDT applies to the instant facts of the case. Therefore, keeping in view the provision of the Circular issued by the CBDT we are inclined to hold that the income from the investment of share on account of sale/purchase should be liable to tax under the head capital gain.
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8.3 We also note that the circulars issued by the CBDT which are beneficial to the assessee are binding on the Tribunal as held by the judgment of Hon'ble Supreme Court in the case of Keshavji Ravji & Co.v. CIT [1990] 183 ITR 1/49 Taxman 87 wherein it was observed as under: “The task of interpretation of the laws is the exclusive domain of the courts. However, - this is what Shri Ramachandran really has in mind -circulars beneficial to the assessees and which tone down the rigour of the law issued in exercise of the statutory power under section 119 of the Act or under corresponding provisions of the predecessor Act are binding on the authorities in the administration of the Act. The Tribunal, much less the High Court, is an authority under the Act. The circulars do not bind them. But the benefits of such circulars to the assessees have been held to be permissible even though the circulars might have departed from the strict tenor of the statutory provision and mitigated the rigour of the law. But that is not the same thing as saying that such circulars would either have a binding effect in the interpretation of the provision itself or that the Tribunal and the High Court are supposed to interpret the law in the light of the circular. There is, however, support of certain judicial observations for the view that such circulars constitute external aids to construction.” 8.4 We also note that the Revenue has accepted the activity of investment in the shares in earlier years as well as subsequent years, which was also not disturbed/ disputed by the Revenue. Therefore, the principles of consistency need to be followed without any deviation when there is no change in the facts and circumstances of the case from the earlier years. Reliance in this regard is placed on the judgment of the Hon'ble Supreme Court in the case of Radhasaomi Satsang v. CIT [1992] 193 ITR 321/60 Taxman 248 (SC) wherein it was held as under: "On these reasonings in the absence of any material change justifying the revenue to take a different view of the matter—and if there was no change it was in support of the assessee—we do not think the question should have been reopened and contrary to what had been decided by the Commissioner in the earlier proceedings, a different and contradictory stand should have been taken. We are, therefore, of the view that these appeals should be allowed and the question should be answered in the affirmative, namely, that the Tribunal was justified in holding that the income derived by the Radhasoami Satsang was entitled to exemption under sections 11 and 12."
8.5 We also note that the ITAT, Ahmedabad in the case of ACIT v. Bhanuprasad T. Trivedi HUF [IT (SS) Appeal No.460 (Ahd) of Page 10 of 14
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2010 pertaining to the A.Y. 2005-06 vide order dated 11.07.2016 has decided the issue in favor of the assessee by observing as under: "10. The dispute is regarding the nature of income on sale and purchase of shares by the assessee. The issue, whether the income from sale and purchase of shares in a particular case should be treated as capital gain or as business income has been a debatable issue and there are conflicting decisions of the Tribunal on this issue. Each case is therefore, to be based on its own factual situation. In the balance sheet, the assessee has shown shares under the head 'investment'. These investment shares have been valued at cost. The Hon'ble Supreme Court in the case of CIT Associated Industrial DevelopmentCo Pvt. Ltd. 82 ITR 586, which decision has also been considered by the CBDT in its Circular No. 4/2007 dt. 15.6.2007, has observed that:- "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 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"
8.6 The Hon'ble High Court of Gujarat subsequently confirmed the view taken by the Tribunal in the above case Pr. CIT v. Bhanuprasad D Trivedi (HUF) [2017] 87 taxmann.com 137 wherein it was held as under: "4. The CIT (Appeals) and the Tribunal having applied such parameters on the facts of the case and having come to the conclusion that the assessee's stand that the shares were held by way of investment and therefore the sale thereof should result in long term capital gain instead of business income, calls for no interference."
We also note that the Revenue against the order of Hon'ble Gujarat High Court in the above case had filed a petition before the Hon'ble Supreme Court which was dismissed by the Hon'ble Supreme Court Pr. CIT v. Bhanuprasad D. Trivedi [2018] 95 taxmann.com 19/256 Taxman 292.
8.7 The CBDT has further thrown light on this controversial issue in its Circular No. 6/2016 dated 29.02.2016 and the same reads as under:— Sub: Issue of taxability of surplus on sale of shares and securities - Capital Gains or Business Income -- Instructions in order to reduce litigation - reg.-Sub-section
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(14) of Section 2 of the income-tax Act, 1961 ('Act') defines the term "capital asset" to include property of any kind held by an assessee, whether or not connected with his business or profession, but does not include any stock-in-trade or personal assets subject to certain exceptions. As regards shares and other securities, the same can be held either as capita! assets or stock-in-trade/trading assets or both. Determination of the character of a particular investment in shares or other securities, whether the same is in the nature of a capital asset or stock-in- trade, is essentially a fact-specific determination and has led to a lot of uncertainty and litigation in the past. Over the years, the courts have laid down different parameters to distinguish the shares held as investments from the shares held as stock- in-trade. The Central Board of Direct Taxes ('CBDT') has also, through Instruction No. 1827, dated August 31, 1989 and Circular No. 4 of 2007 dated June 15, 2007, summarized the said principles for guidance of the field formations. Disputes, however, continue to exist on the application of these principles to the facts of an individual case since the taxpayers find it difficult to prove the intention in acquiring such shares/securities. In this background, while recognizing that no universal principal in absolute terms can be laid down to decide the character of income from sale of shares and securities (i.e. whether the same is in the nature of capital gain or business income), CBDT realizing that major part of shares/securities transactions takes place in respect of the listed ones and with a view to reduce litigation and uncertainty in the matter, in partial modification to the aforesaid Circulars, further instructs that the Assessing Officers in holding whether the surplus generated from sale of listed shares or other securities would be treated as Capital Gain or Business Income, shall take into account the following— (a) Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income, (b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years; (c) In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT. It is, however, clarified that the above shall not apply in respect of such transactions in shares/securities where the genuineness of the transaction itself is questionable, such as bogus claims of Long Term Capital Gain/Short Term Capital Loss or any other sham transactions.
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It is reiterated that the above principles have been formulated with the sole objective of reducing litigation and maintaining consistency in approach on the issue of treatment of income derived from transfer of shares and securities. All the relevant provisions of the Act shall continue to apply on the transactions involving transfer of shares and securities.
8.8 Considering the facts in hand in the light of the circular mentioned above of the Board, in our considered opinion, the intention of the assessee at the time of the purchase of shares is paramount. If the assessee has the clear intention of being an investor and showing the shares as an investment, we do not find any reason to disturb the intention of the assessee. The assessee in the year under consideration is an investor and, therefore, any gain arising out the transfer of shares should be treated as capital gains be it short term or long term. 8.9 We also note that the case law relied on by the authorities below has not considered the CBDT Circular No.6/2016 dated 29.02.2016. Therefore we are reluctant to rely on the said judgment as relied upon by the authorities below. 8.10 Similarly, we further note that the assessee in the case of Sugamchand C. Shah v. Asstt. CIT [2011] 6 taxmann.com 204/48 SOT 189 (AHD) (URO) was unable to show any demarcation between shares held as stock-in-trade and investment. Therefore the income from the shares held for less than one month was treated as income from the business and profession. However, in the case on hand, there is a clear demarcation by the assessee in its books of accounts. Therefore we are of the view that the principle laid down by the ITAT does not apply to the facts on hand.
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8.11 In view of the above, we hold that the frequency, magnitude of the transaction in a systematic manner cannot be the criteria to hold that the assessee is engaged in the business activity of shares. Therefore, we are inclined to set aside the order of the Ld. CIT (A) and direct the AO to treat the income from investment activity under the head capital gain. Hence, the ground of appeal of the assessee is allowed.
In the result, the appeal of the assessee is allowed.
Order pronounced in the Court on 29/05/2019 at Ahmedabad.
-Sd- -Sd- (Ms MADHUMITA ROY) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 29/05/2019 Manish आदेश क� ��त�ल�प �े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण / DR, ITAT, 6. गाड� फाईल / Guard file. आदेशानुसार/BY ORDER, उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad
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