C I T vs. M/S COMPUCOM TECHNOLOGY

Order 01/08/2017 In these appeals identical questions of law and facts are (2 of 12) [ITA-234/2009]

involved, therefore, they are decided by this common judgment.

By way of these appeals, the appellant has assailed the judgment and order of the Tribunal whereby the Tribunal has allowed the appeal preferred by the assessee and dismissed the appeal of the department. This Court while admitting the matter framed the following questions of law:- “Whether in the facts and circumstances of the case and in law the ITAT was justified in holding that the profit earned from the transactions of shares and mutual funds as capital gain and not a business income without considering the volume and frequency of the transaction.?” Counsel for the appellant has invited our attention to the judgment of the CIT(A) in para 2.3 wherein it has been held as under:- “2. 3. I have considered facts of the case and arguments taken by Sh. Mishra quite carefully. Now it is a settled legal position that in the assessment the income has to be assessed under correct and appropriate head of income irrespective of its accounting treatment shown in the balance sheet and P & L account of the company and therefore the arguments taken by Sh. Mishra that since it has been shown as investment in the balance sheet any gain on the sale of shares/units be treated as capital gain only is not acceptable. Further it is also settled legal position that the principle of “res- judicata” is not applicable to the income tax proceedings which means that whatever treatment given in one particular assessment year in respect of any particular income it is not necessary and mandatory to give same treatment in all subsequent years to come. Depending on facts and circumstances of the case as prevailing in the particular assessment year such issue has to be decided on its own merits in each of the A.Y. Therefore, the arguments taken by Sh. Mishra that (3 of 12) [ITA-234/2009]

department in past has always accepted the profit arisen on the sale of shares/units as short terms/long term capital gain and not as a business income is not acceptable.” The Tribunal while considering the matter in para 10 has observed as under:- “10. In view of CBDT Circular No. 4/2007 dated 15.6.2007 and the above referred decisions, the broad principle arises that where shares are recorded in separate investment portfolio, it would give rise to capital gain, merely because investment in shares was of large magnitude would not make the assessee trader in shares, more so when past several years income has been assessed as capital gains, where investment in shares is not converted into stock in trade, profit on sale of shares has to be assessed as capital gain; the problem must have been approved in the light of the intention of the assessee and intention has to be seen at the time of purchase of shares which is within the knowledge of the assessee and for that he should produce the evidence that it has maintained distinction between the shares which are stock in trade and which are held by way of investment. We are of the view that volume of investment is a relative term hence can not be a deciding factor to infer the intention of an assessee behind the share transaction. We also agree with the contention of the ld. D/R to some extent that regularity in transactions and frequency in purchases and sales is also an important factor to examine the very intention of the transactions. Thus in our view, guided by the above discussion, it is ultimately the very intention of the assessee at the time of purchase of share which is the deciding factor as to whether the transaction was for the purpose of investment. And to drawn an inference on the intention an assistance of regularity in transaction and frequency in purchases in shares also can be taken to some extent but not as an absolute factor. Because even an investor adjudging the current circumstance/development may decide to sell those shares to product himself from expected loss in future instead of holding those share as initially intended to, and to invest in other shares. We, however, find from the facts of the present case

(4 of 12) [ITA-234/2009]

that in comparison to the number of transactions having holding period six months to 3 years, such transaction are very few where holding period is less than six months. These few transactions thus cannot be a deciding factor in the present case that the initiation was not to invest but to trade especially when the assessee had been earning dividends on those shares in earlier years. Under these circumstances we are of the view that the assessee as an investor is very much entitled to claim capital gains on the shares sold during the year. We thus while setting aside the orders of the lower authorities in this regard, direct the AO to allow the claim of capital gain of assessee accordingly.”

The finding which has been arrived by the AO reads as under:- “In the submission field on 07.12.2006 the ld. AR of the assessee has contended that most of capital gains on shares and mutual funds is long term and most of these cases the holding period of shares is one year to 3-4 years. The contention is factually incorrect as is evident from the computation of income itself. In the said computation the short term capital gains on shares has been shown at Rs. 23,12,502/- and long term capital gain on shares has been shown at Rs. 17,73,373/-. the contention is incorrect is also evident from the chart submitted on 26.09.2006.” Income Tax (Central), Calcutta reported in [1968] 68 ITR 486 (SC) wherein it has been held as under:- “6. It appears to us that the facts and circumstances in this case an lead to no other

conclusion except that these shares were (5 of 12) [ITA-234/2009]

purchased and sold by the assessee with the motive of earning a profit by such purchased and sales and not with the object of investing its capital in these shares in order to derive income from that investment. It is true that the principal business of the assessee was to invest capital and to derive income from dividends on shares and interest on other investments; but, at the same time, the object contained in the memorandum of association of the assessee company clearly showed that one of the object was also to deal in shares, stocks, debentures, etc., by acquiring, holding, selling and transferring them. In the years prior to the assessment year, the case put forward by the assessee that the various acquisitions and sales of shares were in the nature of investments was accepted by the department, but such a decision given in the earlier years is not binding in the proceedings for assessment during subsequent years. The particular shares now in question, in appears, were purchased between 31st March, 1948, and 31st March, 1952. The earliest purchases in March, 1948, were at an average price of Rs. 267-13-0 per share. In the next two years ended 31 March, 1949, and 31st March, 1950, the average purchase price was Rs. 201-8-0 and Rs. 182-10-0, and the last purchase in the year ended 31st March, 1952, was at the rate of Rs. 128-14-0. On 1st April, 1952, the assessees total holding of shares in McLeod and Co. Ltd. was 6,977 at a total cost of Rs. 14,29,587-4-0 out of the total holding of shares, including shares in other companies, of the value of Rs. 17,58,741-4-

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after taking into account the interest paid and super-tax to be paid, came to very small percentage, being less then 1 per cent. This circumstances that the shares were purchased at a time when their prices were falling and the return on investment was not at all substantial while loans had been taken to purchase these shares strongly points to a conclusion that the shares could not have been purchased as an investment to earn income from dividends and that the purchases of these shares were with the object of selling them subsequently at a profit. The shares were, in fact, sold at considerable profit subsequently and that is how the question of charging that profits to tax as revenue receipt has arisen. The explanation sought to be given by the assessee that the shares were, in fact, being held as investment and were sold simply because the control of McLeod & Co. Ltd went out of the hand of the directors of the assessee has not been proved, according to the supplementary statement of the case submitted by the Tribunal. In fact, the Tribunal was not satisfied that even the purchasers, viz., the Bajoria group, on buying these shares from the assessee acquired a controlling interest in McLeod & Co. Ltd. or in the companies managed by that company. The object of the sale as given by the assessee has, therefore, remained unproved, whereas the fact that the purchases of the shares were made at a time when they not expected to give good return as investment and were actually sold at a very good profits leads to the reverse inference that the purchases and sales of these shares were an adventure in the nature of trade. Even the sequence of events does not bear out the contention of the assessee. Sri C. L. Kanoria first resigned on 17th March, 1952, and he sold his shares while his resignation was still pending for approval by the Government. The sale took place on 27th May, 1952, at a time when the resignation not having received the approval of the Government, the control of McLeod & Co. Ltd. group of companies was still with the Kanoria Group. The resignation was accepted on 16th October, 1952, about five months after the sale of the shares. There is no evidence to show that, as a result of this sale, the control in the McLeod & Co. group of companies passed to the Bajoria group, though M/s. C. L. Bajoria and Baijnath Jalan did subsequently join the directorate of McLeod & Co. Ltd. On these facts, it is not possible to hold that the Tribunal was incorrect in recording it conclusion

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that the sale of these shares by the assessee was not the result of control of the McLeod & Co. Ltd. passing from the hands of Kanoria group to the Bajoria group. In fact, the Kanoria group was holding a majority of 21,046 shares out of 40,000 shares in McLeod & Co. Ltd. even at the time when these shares were sold on 27th May, 1952. The assessee thus having failed to prove the objects of the sale of these shares, the inference that the shares were sold with the sole objects of earning profits is justified.

(8 of 12) [ITA-234/2009] 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 paragraph 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 port folios, 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 there from 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.

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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.

Agro

Mills

Ltd.

reported

in MANU/SC/8566/2008MANU/SC/8566/2008

: [2009] 313 ITR 24 (SC) allowed the appeal by giving a factual finding that the assessee has declared purchases/holding of shares as investment for the past several years and surplus has been claimed as capital gains before the assessing authority and said facts are evident from the reply of the assessee dated November 21, 2008 and the appellate authority also has mentioned about the claim of the assessee with (10 of 12) [ITA-234/2009]

reference to purchases/holding of shares being shown as investment in past, valuation being done at cost and the assessee has never treated such holdings in the past as stock-in-trade. It is also stated in the order that the claim of the Revenue that the assessee is doing stock-in-trade is without any basis and no material was brought on record to show that the assessee had been valuing the holding of shares as at the end of each year on first-in, first-out (FIFO) method and the assessee had valued investment at cost and declared the same as investment as per the balance-sheet as on March 31, 2006. It is also stated in the order that the shares have been held for more than 30 number of days which is evident from the holding period shown by the assessee in more than 92 per cent of the transactions and the assessee retained the shares for appreciation in value and not with an intension of commercial motive. The assessee is not registered with any authority or body such as the Security Exchange Board of India (SEBI), etc., to do trading in shares. The entire investment has been made out of own funds and not out of borrowed funds and no contra material has been placed on record by the Revenue to come to a different conclusion. Thus, a factual finding has been given by the Tribunal stating that the Department cannot change the stand in subsequent years without any changing material. The said factual finding having been recorded based on appreciation of documents, which were not considered by the assessing authority as well as the appellate authority, the contention of the Revenue that the assessee is doing stock-in-trade and not investments cannot be accepted and no substantial question of law arises for determination in these income-tax appeals. Learned counsel appearing for the Revenue forcefully argued that the factual findings recorded by the Tribunal are without any basis and same can be interfered based on no evidence. We are unable to appreciate the said contention as the Tribunal has recorded reasons and on perusing meticulously the materials placed before it and recorded the factual findings. The judgment of the Bombay High Court reported in CIT

v.

Gopal

Purohit MANU/MH/0026/2010MANU/MH/0026/2010

: [2011] 336 ITR 287 (Bom) held that consistent

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practice of treating transactions in shares as investment, different view should not be taken for year under consideration. Learned counsel also submitted that the special leave petition filed against the said judgment was also dismissed by the hon'ble Supreme Court (see [2011] 334 ITR (St.) 308). The Bombay High Court held that the Revenue did not furnish any material to justify to adopt a divergent approach for the assessment under consideration, therefore, no substantial question of law arose for consideration and the appeal of the Revenue was dismissed. The Delhi High Court in its decision dated December 2, 2009 made in I.T.A. No. 1271 of 2009 titled CIT v. Jindal Photo Investment Ltd. also dismissed similar appeal and held that share sold by the assessee in the year under consideration has been held by the assessee for a considerable long time, which was shown as investment in the books of account and balance sheet for all these years and circumstances remained the same and had remained unchallenged by the Department, it was erroneous to hold that the assessee kept the shares for trading purposes. The Delhi High Court dismissed the appeal on the ground that no question of law arises. In the decision reported in CIT

v.

Jubilant

Securities

P.

Ltd. MANU/DE/1303/2011MANU/DE/1303/2011

: [2011] 333 ITR 445 (Delhi), the Delhi High Court again held the same view and in the decision reported

in CIT

v.

Amit

Modi MANU/PH/4007/2010MANU/PH/4007/2010

: [2011] 334 ITR 192 (P&H), the Punjab and Haryana High Court also held the same view.”

We have heard counsel for both the sides. Taking into account, the Tribunal while considering the matter has rightly observed that the amount which has been claimed and investment is a capital gain in view of circular, the view taken by the Tribunal is correct. We are in complete agreement with the view taken by the Tribunal. No interference is called for.

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The issue is answered in favour of the assessee against the department. The appeals stand dismissed. (INDERJEET SINGH),J. (K.S. JHAVERI),J. A.Sharma/10-12