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Income Tax Appellate Tribunal, INDORE BENCHE, INDORE
Before: SHRI KUL BHARAT & SHRI MANISH BORAD
आदेश / O R D E R
PER MANISH BORAD, A.M: These three appeals filed by two different assessee pertaining to A.Ys. 20090-10 & 2010-11 are directed against the order of Ld. Commissioner of Income Tax(Appeals)-II, Indore, (in short ‘CIT(A)’), vide appeal No. IT-779/11-12, IT-780/11-12 & IT-683/14-15 order dated 30.10.2012 & 25.11.2016 which is arising out of the order u/s 143(3) of the Income Tax Act 1961(hereinafter called as the ‘Act’) framed on 26.12.2011 & 27.02.2015. 2. As the issues raised in these three appeals are common, these were heard together and are being disposed of by this common order for sake of convenience and breavity. Out of these three appeals, one relates to Shri Sharad Agrawal for A.Y. 2009-10 and remaining two relates to Shri Rakesh Agrawal for A.Ys. 2009-10 & 2010-11. In ITA No.153/Ind/2013 in the case of Sharad Agrawal, the following grounds of appeal have been raised: “1. That impugned order passed by the Ld. Commissioner of Income Tax(A) is bad in law as well as on the facts. It is based on incorrect interpretation of law and the facts have also been incorrectly construed. 2. That on the facts and in the circumstances and in law the Ld. CIT(A) erred in upholding the AO’s action in treating the Short Term Capital Gain earned of Rs.60,86,999/- on sale of Mutual Funds/shares as business income and consequently taxed the 2
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above profit at usual rate of tax instead of 15% as per provided under section 111A of the Income Tax Act. 3. That on the facts and in the circumstances of the case the Ld. CIT(A) erred in confirming the addition of Rs.4,26,000/- towards alleged low household expenses without appreciating the facts of the case and submission made before him.”
In the case of another assesse Shri Rakesh Agrawal, the grounds of appeal have been raised for A.Y. 2009-10 in ITANo.154/Ind/2013 are as follows: “1. That impugned order passed by the Ld. Commissioner of Income Tax(A) is bad in law as well as on the facts. It is based on incorrect interpretation of law and the facts have also been incorrectly construed. 2. That on the facts and in the circumstances and in law the Ld. CIT(A) erred in upholding the AO’s action in treating the Short Term Capital Gain earned of Rs.5,65,161/- on Redemption of Mutual Funds as business income and consequently taxed the above profit at usual rate of tax instead of 15% as per provided under section 111A of the Income Tax Act. 3. That on the facts and in the circumstances of the case the Ld. CIT(A) erred in confirming the addition of Rs.3,21,850/- towards alleged low household expenses without appreciating the facts of the case and submission made before him. 4. That on the facts and in the circumstances of the case the Ld. CIT(A) erred in upholding the AO’s action in making addition of Rs.1,55,898/- in respect of alleged difference in the balance of M/s. Sanghvi Electronic (P) Ltd. without appreciating the facts of the case and submission made before him.”
In ITA No.23/Ind/2017 in the case of Shri Rakesh Agrawal for A.Y. 2010-11, the following grounds of appeal have been raised: 1. That impugned order passed by the Ld. Commissioner of Income Tax(A) is bad in law as well as on the facts. It is based
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on incorrect interpretation of law and the facts have also been incorrectly construed. 2. That on the facts and in the circumstances of the case the ld. CIT(A) erred in confirming the action of Ld. AO that case can be reopened u/s 147 of I.T. Act merely on the basis of information received from investigation wing without making any enquiry. 2.2 That on the facts and in the circumstances of the case and in law the reopening of case u/s 147 is bad in law, illegal consequent thereto notice issued u/s 148 and assessment made is liable to be quashed. 3. That on the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in confirming the action of Ld. AO that short Term capital gain of Rs.63,99,568/- earned from the redemption of STT paid mutual fund is liable to be assessed under the head income from business as against income from short term capital gain liable to be taxed @ 15% u/s 111A claimed by the assessee.
From perusal of the grounds of appeal raised in these three appeals, first common issue relates to the short term capital gain from purchase and sale of mutual funds treated as business income by the AO and thereafter confirmed by Ld. CIT(A) and other two issues are related to low household expenses and unexplained Sundry Creditor. We are first taking up common issue related to gains from purchase and sale of mutual funds. For better understanding, we take the facts of Mr. Sharad Agrawal relating to A.Y. 2009-10 in ITA NO.153/Ind/2013. As both Ld. counsel for the assessee and Ld. DR have accepted that this issue is common for both the assessee’s, the decision to be taken by us in adjudicating the issue in the case of Sharad Agrawal will be applicable to the common issue raised in the remaining two appeals of Mr. Rakesh Agrawal for A.Ys. 2009-10 & 2010-11 respectively. 4
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Briefly stated facts as culled out on the record that the assessee Mr. Sharad Agrawal is individual engaged in the business of trading of computer preripherals in the name of proprietory concern M/s. Pioneer Computer. Total income including business income and short term capital gain of Rs.69,45,610/- was declared in the return of income filed on 27.09.2009. The case was selected for scrutiny and necessary notices u/s 143(2) and 142(1)(ii) were duly served upon the assessee. Necessary submissions were filed by the Ld. Authorized Representative of the assessee. In the course of assessment proceedings the Ld. AO observed that the assessee has disclosed long term capital gain of Rs.31,36,997/- as exempted income u/s 10(38) of the Act. The short term capital gain of Rs.61,79,803/- was also shown on account of purchase and sale of mutual funds and the assessee had set off short term capital loss of Rs.92,804/- thereby showing the net short term capital gain of Rs.6086999/-. Assessee paid security transactions tax of Rs.8,51,217/- on transactions of mutual funds. The Ld. AO did not accept the assessee claim of long term capital gain. He was also not convinced with the claim of short term capital of Rs.60,86,999/- subject to special rate of tax. He was of the view that the huge amount of transactions have taken place for the purchase and sale of shares and mutual funds and in some cases these were held for short span of time i.e. holding period was very short and it seemed to him that these transactions of trading of mutual funds/shares is in the nature of trade and commerce and is therefore liable to be
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taxed as business income. The Ld. AO accordingly treated long term capital gain and short term capital gain on sale of mutual funds/shares as business income and also made addition towards low household withdrawals expenses at Rs. 6 lacs and assessed the income at Rs.1,15,39,290/-. 4. Aggrieved the assessee preferred an appeal before the Ld. CIT(A) and partly succeeded. The Ld. CIT(A) confirmed the action of the AO treating the profit from purchases and sale of mutual funds as business income. However, Ld. CIT(A) accepted the assessee’s plea of claiming the gain from sale of shares of Arvind Chemical ltd. at Rs.31,36,997/-as long term capital gain exempted u/s 10(38) of the Act and also accepted the claim of short term capital loss from equity shares of Rs.92804/-. 5. Against the finding of Ld. CIT(A), Revenue has not filed any appeal but assessee is in appeal before the Tribunal. The Ld. counsel for the assessee submitted that the assessee has consistently shown the investment in shares in mutual funds under the head investment in the balance sheet separately prepared for individual account. The assessee is also carrying business of computer items and achieved a turnover of Rs.22.81 crore (approx.). during the F.Y. 2008-09. Income from short term capital gain has been shown in the preceding years which have been duly accepted by the department. Copies of acknowledgment or filing of returns of income are duly placed in the paper book. Further Ld. counsel for the assessee referring to the judgment of Hon'ble High Court of Bombay High Court in the case of CIT V/s Gopal Purohit (2011)
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336 ITR 0287 (Bom.) submitted that Hon'ble court confirmed the decision of 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 and in such situation the Revenue authorities should have accepted the claim of the assessee for showing short term capital gain. 6. The Ld. counsel further submitted that the Ld.A.O. assessed the short term capital gain of Rs. 60,86,999 as business profit by relying on the various decisions without appreciating the fact that the law regarding the taxability of profit earned on sales of shares and redemption of mutual fund is amended / changed by the Finance Act, 2004 by inserting section 111A with the object to end the litigation. Hon’ble Finance Minister while presenting Union Budget – 2004-05, clarified the aim and object of Government for introducing the security transaction tax and exempting the long term capital gain from sale of share and levying 10% tax and on short term capital gain on sale of shares . The contents of the speech of the honorable Finance Minister on the issue is reproduced herein under :- “111. Capital Gains tax is another vexed issue, When applied to capital market transactions, the issue becomes more complex. Questions have been raised about the definitions of long term and short term, and the differential tax treatment meted to the
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two kinds of gains. There are no easy answers, but I have decided to make a beginning by revamping taxes on securities transactions. Our founding fathers had wisely included entry 90 in the Union List in the Seventh Schedule of the Constitution of India. Taking a cue from that entry, I propose to abolish the tax on long term capital gains from securities transactions altogether. Instead , I propose to levy a small tax on transactions in securities on stock exchanges. The rate will be 0.15 percent of the value of security. Thus, a transaction involving securities valued at , say, Rs. 1,00,000 will now bear a small tax of Rs. 150. The tax will be levied on the buyer. In the case of short term capital gains from securities, I propose to reduce the rate of tax to a flat rate of 10 percent. My calculation shows that the new tax regime will be a win-win situation for all concerned. “ 7. From the reading of above speech it is clear that the main reason for imposition of Security Transaction Txx is that it is very complex to determine capital gain tax particularly when applied to capital market transaction thus to revamping the same, government introduced security transaction tax. As per The Concise Oxford Dictionary of Current English, Eighth Edition the meaning of word revamp is renovate, revise, improve, patch up.
Thus the idea behind introduction of security transaction tax is to end the litigation on issue whether profit earned from delivery based sales of shares is a capital gain or business profit. The CBDT
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and the assessing officer by ignoring the speech of the Finance Minister and idea behind the imposition of security transaction tax and again started litigation. There is a very vital importance of speech of Finance Minister to ascertain intention of legislature regarding the enactment of new provision which will be clear from the followings judgments :- In Girdharilal & Sons vs. Balbir Nath AIR 1986 sc 1499,the Supreme Court observed as under: “…. The primary and foremost task of a Court in interpreting a statue is to ascertain the intention of the legislature, actual or imputed. Having ascertained the intention, the Court must then strive to so interpret the statue as to promote/advance the object and purpose of the enactment. For this purpose, where necessary, the Court may even depart from the rule that plain words should be interpreted according to their plain meaning. There must be no meek and mute submission to the plainness of the language. To avoid patent injustice, anomaly or absurdity or to avoid invalidation of a law, the Court would be well justified in departing from the so-called golden rule of construction so as to give effect to the object and purpose of the enactment by supplementing the written word if necessary.” In K.P.Varghese vs. ITO (1981) 131 ITR 597 (SC) the Supreme Court observed as follows: “The task of interpretation of a statutory enactment is not a mechanical task. It is more than a mere reading of mathematical formulae because few words possess the
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precision of mathematical symbols. It is an attempt to discover the intent of the legislature from the language used by it and it must always be remembered that language is at best an imperfect instrument for the expression of human thought and, as pointed out by Lord Denning, it would be idle to expect every statutory provision to be ‘drafted with divine prescience and perfect clarity’. We can do no better than repeat the famous words of judge Learned Hand when he said: This has been reiterated in the case of Kerala State Industrial Development Corporation Ltd. Vs. CIT (2003) 259 ITR 51 (SC) as under: ( page 54): “ That the Finance Minister’s speech can be relied upon to throw light on the object and purpose of the particular provisions introduction by the Finance Bill has been recognized by this court in K.P. Varghese Vs. ITO (1981) 131 ITR 597 (SC) , at 609.” Again in the case of R & B Falcon (A) Pty Ltd. vs. CIT (2008) 301 ITR 309 (SC) ,it was held that (page 323): “ Rules of executive construction in a situation of this nature may also be applied. Where a representation is made by the maker of legislation at the time of introduction of Bill or construction thereupon is put by the executive upon its coming into force, the carries great weight.” From the above it is clear that the honorable Union Finance Minister while enacting the security transaction tax have clear
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intention that all the transaction of delivery based shares be treated as short term capital gain and be taxed @ 10 % u/s 111 A. Relying the above speech of the Finance Minister the Hon’ble Jurisdictional High Court reported in (2012) 19 ITJ 326 (M.P.) on the similar facts approved the decision of Hon’ble ITAT , Indore Bench, Indore in the case of ACIT Vs. Omprakash Suri (2010) 16 ITJ 185. 9. The Ld. Counsel for the assessee also submitted giving reference to the written submissions wherein definition of mutual funds have been given and contended that mutual funds cannot be equated with equity shares and assessee had no control over the purchase/sale of shares and securities by mutual funds. Reliance was placed on the decision of Rajkot Bench of I.T.A.T. in the case of Smt. Bhanuben Chimanlal Malavia vs. ITO (2006) 100 TTJ (RJT) 337 as well as decision of I.T.A.T., Mumbai in the case of Bombay Gymkhana Ltd. vs. ITO (2008) 115 TTJ (Mumbai) 639 wherein it has been held that the income on sale of sale of units of mutual funds has to be assessed as capital gain. 10. The ld. counsel also referred to the decision of Coordinate Bench of Indore, I.T.A.T., in the case of Manish Karwa in ITANo.307/Ind/2009 and others dated 20.12.2013 wherein the Tribunal followed the judgment of Hon'ble Bombay High Court in the case of CIT V/s Gopal Purohit(supra) as well as the judgment of Jurisdictional High Court in the case of ACIT Vs. Omprakash Suri (2012) 19 ITJ 326 (M.P.) and also referred to various circulars
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issued by CBDT holding that the gains from purchase and sale of shares are not to be treated as business but should be treated as capital gains because the assessee has shown them in the balance sheet as investments. Further transactions are delivery based and separate portfolio has been maintained by the asseessee. Also only 50 transactions were entered during the year relating to 5 mutual funds namely Reliance MF, DSP Black Rock MF, ICICI MF, HDFC MF, LIC MF and the gain arises there from are purely short term capital gain and not business income. 11. On the other hand, Ld. DR vehemently argued and supported the orders of the authorities below and drew our attentions towards magnitude of transactions of purchase of sale of mutual funds and these been held for very short period. Ld. DR placed reliance on the judgment of Hon'ble Apex court in the case of Raja Bahadur Visheshwara Singh (Deceased) & Ors. Vs. CIT 41 ITR 685 and CIT vs. Sutlej Cotton Mills Supply Agency Ltd. 100 ITR 706. 12. We have heard the rival contention and perused the record placed before us. The common issue before us is that whether from purchase and sale of mutual funds earned by the assessee are to be taxed as short term capital gain or business income. We find that the assessee has been regularly carrying on business of trading of computer items and it is its main occupation. It achieved the turnover of approx. Rs. 22.82 core and also earned a gross profit of Rs.62,88,747/-. Apart from carrying on the business the assessee also makes investment in shares and securities since many years and is duly disclosing the gain/loss under the head of capital gain
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in the return of income. The assessee maintains separate books of accounts including balance sheet, income and expenditure account. Apart from the audited financial statement of its sole proprietorship concern M/s. Pioneer Computer, in the financial statement for the individual account the assessee is consistently showing the investments in shares and securities under the head investment only and has never shown them as stock-in-trade. In the year under appeal the assessee has earned long term capital gain as well as gain from purchase of sale of mutual funds. The Ld. CIT(A) has accepted the assessee’s claim of exempt income u/s 10(38) of the Act for long term capital gain arised from sale of equity shares of Arvind Chemical ltd. The ld. CIT(A) has also accepted the asessee’s claim for short term capital gain/loss from sale of equity shares. It is only the gain from purchase and sale of mutual funds which the Ld. CIT(A) has held to be business income. 13. We also find that the revenue is not in appeal in any of the cases dealt by us in this bunch of appeal against the relief given by Ld. CIT(A) thereby accepting the assessee’s claim of capital gain, both long term and short term from purchase and sale of equity shares. Now the only issue remains is in relation to mutual funds. Before going ahead, we will like to go through the meaning of mutual funds.
As per investopedi the definition of mutual fund is as under (i) “An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money 13
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managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus”. One of the main advantages of mutual funds is that they give small investors access to professionally managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult (if not impossible) to create with a small amount of capital. Each shareholder participates proportionally in the gain or loss of the fund. Mutual fund units, or shares, are issued and can typically be purchased or redeemed as needed at the fund's current net asset value (NAV) per share, which is sometimes expressed as NAVPS. (ii) The Economy watch define mutual fund in following words: Mutual Funds Definition refers to the meaning of Mutual Fund, which is a fund, managed by an investment company with the financial objective of generating high Rate of Returns. These asset management or investment management companies collects money from the investors and invests those money in different Stocks, Bonds and other financial securities in a diversified manner. Before investing they carry out thorough research and detailed analysis on the market conditions and market trends of stock and bond prices. These things help the fund mangers to speculate properly in the right direction. The investors who invest their money in the Mutual fund of any
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Investment Management Company, receive an Equity Position in that particular mutual fund. When after certain period of time, whether long term or short term, the investors sell the Shares of the Mutual Fund, they receive the return according to the market conditions. (iii) The U.S.Securities and Exchange Commission define mutual fund in following words:- “Mutual Fund is an instrument of investing money. Nowadays, bank rates have fallen down and are generally below the inflation rate. Therefore, keeping large amounts of money in bank is not a wise option, as in real terms the value of money decreases over a period of time. One of the options is to invest the money in stock market. But a common investor is not informed and competent enough to understand the intricacies of stock market. This is where mutual funds come to the rescue. A mutual fund is a group of investors operating through a fund manager to purchase a diverse portfolio of stocks or bonds. Mutual funds are highly cost efficient and very easy to invest in. By pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. Also, one doesn't have to figure out which stocks or bonds to buy. But the biggest advantage of mutual funds is diversification. The definition of a mutual fund is a form of collective investment that pools money from many investors and invests their money in stocks, bonds, short-term money
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market instruments, and/or other securities. In a mutual fund, the fund manager trades the fund's underlying securities, realizing capital gains or losses, and collects the dividend or interest income. The investment proceeds are then passed along to the individual investors. The value of a share of the mutual fund, known as the net asset value per share (NAV), is calculated daily based on the total value of the fund divided by the number of shares currently issued and outstanding. In Australia the term "mutual fund" is generally not used; the name "managed fund" is used instead. However, "managed fund" is somewhat generic as the definition of a managed fund in Australia is any vehicle in which investors' money is managed by a third party (NB: usually an investment professional or organization). Most managed funds are open-ended (i.e., there is no established maximum number of shares that can be issued); however, this need not be the case. Additionally the Australian government introduced a compulsory superannuation/pension scheme which, although strictly speaking a managed fund, is rarely identified by this term and is instead called a "superannuation fund" because of its special tax concessions and restrictions on when money invested in it can be accessed. This is the FT Lexicon's most viewed term of 2010. A mutual fund is an open-ended investment fund that gathers capital
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from a number of investors to create a pool of money that is then re-invested into stocks, bonds and other assets. Investors are effectively shareholders in the fund in proportion to their investment, but must normally also pay various administrative fees, including in some cases a charge to redeem their money. (iv) As per the English Collins Dictionary the meaning of word mutual fund is as under:- An investment entity that pools shareholder or unit holder funds and invests in various securities. The units or shares are redeemable by the fund on demand by the investor. The value of the underlying assets of the fund less liabilities establishes the current price of units. A professionally managed portfolio of stocks and bonds or other investments divided up into shares. A portfolio of stocks, bonds, futures, options, money market instruments, or other securities, that is created and managed as an investment company and registered with the Securities and Exchange Commission. The mutual fund sells shares to investors and pools their money to purchase its investments. (v) As per US Army Financial Disclosure Management the definition of mutual fund is as under: A mutual fund is a professionally managed investment product that sells shares to investors and pools the capital it raises to purchase investments.A fund typically buys a diversified portfolio of stock, bonds, and money market securities, or a
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combination of stock and bonds, depending on the investment objectives of the fund. Mutual funds may also hold other investments, such as derivatives. 14. A fund that makes a continuous offering of its shares to the public and will buy any shares an investor wishes to redeem, or sell back, is known as an open-end fund. An open-end fund trades at net asset value (NAV). The NAV is the value of the fund's portfolio plus money waiting to be invested, minus operating expenses, divided by the number of outstanding shares. All mutual funds charge management fees, though at different rates, and they may also levy other fees and charges, which are reported as the fund's expense ratio. These costs plus the trading costs, which aren't included in the expense ratio, reduce the return one realize from investing in the fund. From the above definitions and meaning it is clear that one can only invest in mutual fund and cannot trade. That for treating the gain earned from redemption of mutual fund is a business profit or capital gain one has to know that what is the mutual fund. It is pertinent to note that one cannot trade in the mutual fund for the simple reason that the units of mutual fund cannot be purchased from the market. It can always be bought from the company authorized for sale of units of mutual fund by the RBI/SEBI. Similarly the units of mutual fund could not be sold to any body nor it is traded on any stock exchange or any body authorized by Government. Thus it is always redeemed by the investment company who issue / sale its unit.
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There is huge difference between the Shares and Mutual Funds mainly the sale value of the equity shares depend upon the price prevailing in the market and only on those price one can purchase and sales the same while the price of units of mutual funds is dependent upon its NAV and only on that value of investment, redemption can be made in the mutual fund. Morever the investment and redemption in mutual fund can be made with the concerned mutual fund company while the shares are traded on stock exchange , thus one cannot trade in mutual fund and consequent thereto gain earned from mutual fund could not be treated as business profit in view of the following decisions:- (i)Smt.Bhanuben Chimanlal Malavia Vs. ITO (2006) 100 TTJ (RJT) 337 , in the instant case the Hon’ble ITAT ,Rajkot Bench held as under:- “There is considerable difference between the equity shares and mutual fund units. While shares of a company are traded in a stock exchange based on several factors impacting demand and supply for the stock, the units of a mutual fund are traded on the NAV of the mutual fund. When the amount of dividend declared by a company in respect of its equity shares becomes known or reasonably well anticipated, the factum and quantum of dividend is factored in by the market in the price of equity share around that time. The price of the unit of a mutual fund depends on its NAV and not the amount of dividend announced/declared. Therefore, the amount of dividend announced by the mutual fund would not affect the price at
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which the assessee purchased the units. It was another matter that the assessee’s sale price was affected because of outflow of dividend distributed by the mutual funds resulting into considerable lowering of NAV. Thus, as far as the purchase price paid by the assessee was considered, it could not be said that the assessee paid higher price because the units were pregnant with the amount of dividend announced by the mutual fund. At that point of time, the assessee would have paid the same price for those units, had there been no announcement of dividend by mutual funds. Therefore, it could not be said that the assessee paid additional purchase price because of the dividend declared by the mutual funds. Dividend as a return of investment is not regarded, as a rule, recovery of purchase price. As a corollary, dividend cannot be regarded as erosion of sale price. The receipt of income on units of mutual funds by the assessee did not represent one fixed time event. One should not reject the time-tested method of computation of the result of a transaction of purchase and sale of an income bearing asset to be computed on the basis of difference between the sale price and purchase price unaffected by the returns on investment received in the meantime”. (ii)Bombay Gymkhana Ltd Vs. Income Tax Officer (2008) 115 TTJ (Mumbai) 639 in the instant case the Hon’ble ITAT , Mumbai “B” Bench held as under:- . ”We have considered the rival submissions, perused the material on record and have gone through the orders of
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authorities below and the judgments cited by both the sides. We find that as per details appearing on pp. 8 and 9 of the 1st paper book, the units which were sold for Rs. 26,16,62,478 on account of which, income is offered by the assessee as long- term capital gain, were purchased during the period from 21st June, 2001 to 15th March, 2002 and the number of transactions are 15. The units sold for balance amount of Rs. 22,52,09,532 are for 18 transactions and income on this account is offered by assessee as short-term capital gain. Hence, there are total 33 transactions of sale of units of mutual fund during this year, whereas, it is noted by the AO himself on p. 2 of the assessment order that number of transactions of sale of mutual fund units were 60 in the immediately preceding year. The AO and the learned CIT(A) have come to the conclusion that the income arising on purchase and sale of mutual fund units in the present year is taxable under the head income from business mainly on the basis that principle of mutuality is not applicable with regard to these transactions and for the reason that magnitude and frequency of transactions suggest that these transactions were in the nature of adventure in the nature of trade and hence taxable under the head business income and not capital gain. In the light of these facts, we have to decide as to whether merely because there are 33 number of transactions of sale of mutual fund units, it can be held that income on this account is taxable under the head income from business. We first consider the judgment of the Hon’ble apex Court rendered
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in the case of CIT vs. H. Holck Larsen (supra), wherein it was held by the Hon’ble apex Court that it was not in the hand of the Department as to whether one was dealer in shares or investor. The real question was as to whether the first step i.e. purchase of shares was in course of a trading transaction or in course of investment. In the present case, the purchase of units was made as investment and the same was shown by the assessee in its books of account as investment and in earlier years, this stand of the assessee was accepted by the Department. Admittedly, the units of mutual fund on sale of which long-term capital gain has arisen to the assessee were purchased during the period from 21st June, 2001 to 15th March, 2002 i.e. during asst. yr. 2002-03 and in that year, it is not disputed by the Department that these are investments. If the purchase of units is accepted as purchase in course of investment, at the time of sale thereof, income arising on sale has to be assessed as capital gain and it cannot be assessed as business income merely for the reason that quantum is high or the number of transactions are high. In the case of Investment Ltd. vs. CIT (supra) it was held by the Hon’ble apex Court that though, it is true that an order made in assessing the income of one year regarding nature of transaction or income received therefrom is not conclusive in another year, but that finding is a good and cogent evidence of the nature of transactions in shares and securities in the asst. yr. 1952-53 and of the receipts therefrom. Facts of that case are that the
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assessee was showing in its balance sheet shares as investments and the securities were valued by assessee at cost and in spite of this, it was held that loss on sale of such securities was revenue loss and not capital loss because of the fact that in asst. yrs. 1952-53 and 1955-56 it was accepted and held that the shares and securities were stock-in-trade. On the same analogy, we are of the considered opinion that in the present case, gain on sale of mutual fund units has to be accepted as capital gain and it cannot be assessed as business income because in all other years, these transactions were accepted by Department as investment. Reliance was also placed by the learned counsel for the assessee on the Tribunal judgment in the case of Janak S. Rangwalla vs. Asstt. CIT (supra) in support of his contention that rule of consistency has to be followed. We find that in that case also, it is noted by the Tribunal that the investment in shares is of large magnitude but same shall not decide the nature of transaction. It is also decided that similar transactions of sale and purchase of shares in the preceding years have been held to be income from capital gain on both long-term and short-term. And similar transactions were there in the year which was before the Tribunal and under these facts, its was held by the Tribunal that there is no basis to treat the assessee as trader in shares when his intention was to hold the shares as an investment and not as stock-in-trade. It was also held that magnitude does not change nature of transaction. Reliance was placed in that
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case on the judgment of the Hon’ble apex Court rendered in the case of Radhasoami Satsang vs. CIT (supra) and part of the relevant para was reproduced by the Tribunal in that order which is reproduced below : "....strictly speaking, res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year." Since, facts in the present case are similar to the facts in the case of Janak S. Rangwalla (supra), we decide this issue in favour of the assessee by respectfully following this Tribunal judgment and the judgment of the Hon’ble apex Court relied upon by the learned counsel. Regarding the contention of the learned Departmental Representative of the Revenue that entries in books are not conclusive, we would like to mention that there is no dispute on this count. It is a settled legal position by now that entries in books are not conclusive but there should be a firm basis to take a different view from entries in books of account. In the present case, the AO has taken a different view contrary to books of account on the basis of magnitude and number of transactions without bringing anything else on record that purchases of units of mutual fund
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were made on account of dealing in shares and not on account of investments. We, therefore, are of the considered opinion that in the present case, the income on sale of units of mutual funds has to be assessed as capital gain as declared by assessee and set off of brought forward capital loss has to be allowed against long-term capital gain as claimed by the assessee in return of income. This ground of the assessee is allowed.
From above discussion as well as the decisions by Coordinate Bench it can be construed that a person can invest on mutual fund but cannot trade in mutual funds. It is amply clear that the person investing in mutual funds has no control over the purchase and sales of the shares and securities held by the particular mutual funds company. It is also well evident that mutual funds are of various categories for example midcap funds, infrastructure funds, mixed funds, small cap funds and many more. In all such mutual fund companies, investors have no direct control over the business affairs as well as investing and withdrawing pattern of the mutual funds companies. 17. In the instant bunch of appeals, assessee’s have only carried out the transactions of the investment in mutual funds. Undoubtedly some of the amounts of the mutual funds purchase and sale are of higher amount but that cannot be a basis to classify them under the category of business income because by no cannon the investment in mutual funds can be construed as adventure in the nature of trade and commerce.
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We also find that the Ld. CIT(A) in his finding has mentioned that the assessee has alleged to have made purchase and sale of mutual funds on the very same date. However, from going through the records placed before us we find that the fact is there is a gap of 3 to 4 days between the switching over of the amount of the mutual funds and more so. In fact it is not allowed to switch in and switch out of the mutual funds units on the very same date. Further we also find that one cannot trade in mutual funds because the unit of mutual funds cannot be purchased from the market rather they have to be bought from the mutual funds company authorized to sale units of mutual funds by the Security Exchange Board of India. Similarly units of mutual funds cannot be traded on any stock exchange but they always have to be redeemed by the particular mutual funds company. 19. We further observe that Hon'ble Jurisdictional High Court in the case of ACIT vs. Omprakash Suri (Supra) the decision of the coordinate bench of I.T.A.T., Indore was confirmed wherein it was held that: “3. We have considered the submissions put forth by the Ld. Senior DR and also perused the material available on record. Brief facts are that in the past the assessee was engaged in road building contractor and was deriving income from contract receipts as well as from sale of gitti and during the impugned year, ventured into investment in share market. The income arising from F&O transactions and daily trading in shares ( without physical delivery) reflected as speculative business
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whereas the income on delivery based transaction of sale and purchase of shares, income was shown from capital gains. The Ld.A.O.considered the income which was based on purchase and sale of shares as business income on the grounds as narrated in the assessment order as well as at page 3 and 4 of the appellate order. Broadly, the Ld.A.O. was of the view that the intention of the assessee since beginning was sale of shares as trading activities , as evident from audited profit and loss account by not showing the same as short term capital gain and also in Form 3CD he assessee has mentioned the nature of business as trading / dealing in shares /securities and mutual funds. The frequency of transactions was also considered , consequently he treated the amount of Rs. 49,81,915/- as business income from share trading. However , before the Ld.CIT(A) the basis of additions was explained as evident from para 3.1.1 onwards. The crux of claim of the assessee is that in the audited accounts, the sale of shares amounting to Rs. 9.43 crores in which delivery had been taken, STT was paid and the shares were sold after holding for a few days/few weeks. The mutual funds of Rs.2.91 lacs were sold and were treated as income from short terms capital gains. Before the Ld.CIT(A) the assessee also filed dividend received on the basis of relevant statements by placing reliance on the decision of the Mumbai Bench of the Tribunal in the case of JM Shares & Stock Brokers Vs JCIT dated January, 2009. Briefly , the claim of the assessee before the Ld. CIT(A) was that the delivery based
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transaction were made with an investment motive and as such the income therefrom was in the nature of Short Term Capital Gains whereas the income arose from F & O transactions and daily trading in shares were with the business motive which were showed as business income only which was mainly through stock broker, Arihant Capital Markets Limited, registered with NSC, NSE and BSE. It is also seen that in the impugned order the board circular No. 4/2007 dated 15.06.2007. Wherein it was emphasized that it is possible for a tax payer to have two port folios i.e. an investment port folio comprising of securities which are to be treated as capital asset and trading port folio comprising stock in trade which are to be treated as trading asset, was considered. The Board further clarifies that no single principle would be decisive and the total proposition needs to be considered . The assessee has maintained only one port folio and claimed that to be an investment folio. Undisputedly , the period of holding is less than one year, consequently , there is no infirmity in holding that these transactions would be treated as short term capital gain on which the applicable tax is @ 10 % only. In view of this uncontroverted fact, there is no merit in the appeal of the revenue and the same is dismissed.
It is clear from the above discussion that investment in mutual funds cannot be equated to trading of equity shares, we further find that the assessee has consistently shown the
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application of funds in mutual funds under the head investments and no where it has been observed by the revenue authorities that the assessee has shown any intent of doing business of trading in equity shares and mutual funds. Same set of facts came up before coordinate bench of Indore in the case of Manish Karwa vs. ACIT in ITANo.307/Ind/2009 and others wherein the coordinate bench followed various judgments including the judgment of Hon'ble Jurisdictional High Court in the case of Omprakash Suri (Supra) observing as follows:
The aforesaid decision was affirmed by the Hon'ble Jurisdictional High Court reported in (2012) 19 ITJ 326 M.P). The Mumbai Bench of the Tribunal in the case of Shantilal M Jain vs ACIT vide order dated 27-04-2011 (ITA No. 269/Mum/2010) held that despite large volume of shares transactions, the Assessing Officer cannot ignore the rule of consistency to treat the gains on sale of shares as STCG. In that case, the assessee was engaged in the business of trading of investment in shares and securities offered Rs. 1.54 crores as short term capital gain and Rs. 2.91 crores from long term capital gain. The long term capital gain was accepted whereas short term capital gain was held to be business profit. Since in earlier assessment years the claim of the assessee was consistently accepted as short term capital gain, it was held that the rule of consistency as propounded by Hon'ble Bombay Manish Karwa, Sushil Karwa, Smt. Sudha Karwa,Vishnu Karwa, Subhash Chand Karwa, Sushil J. 29
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Karwa, Mukund Karwa, Anoop Karwa,Ashish Karwa, Smt. Arti Karwa, Smt. Survarna Karwa, Smt. Mathura Devi Karwa 63 I.T.A.Nos. 307 to 315/Ind/2009 and 346 to 348/Ind/2009 ASSESSMENT YEAR : 2006-07 High Court in the case of Gopal Purohit (supra), it is fairly applicable and the income has to be treated as short term capital gain. Identically in the case of Nagindas P Seth (ITA No.961/Mum/2010) it was held that despite large number of transactions in shares, the profit can be assessed as capital gains under the facts of the case. The case of the assessee is further fortified by these decisions more specifically when the assessee was hold the shares in his books as investor, was not having office or administrative set up, no interest was paid on the funds and there was not a single instance where the assessee squared up the transactions on the same without taking the delivery of shares. The decision in the case of Janak S Ranawala, 11 SOT 627 (Mum.) further supports the case of the assessee. Likewise, the decision from Hon'ble Madras High Court in CIT vs N.S.S. Investment Pvt Ltd. 227 ITR 149 (Mad), CIT vs Associated Industrial Development Company, 82 ITR 526 (SC) supports the case of the assessee. In the present appeal, we note that the assessee made investment in shares with intention to earn dividend income on appreciation of price Manish Karwa, Sushil Karwa, Smt. Sudha Karwa,Vishnu Karwa, Subhash Chand Karwa, Sushil J. Karwa, Mukund Karwa, Anoop Karwa,Ashish Karwa, Smt. Arti Karwa, Smt. Survarna Karwa, Smt. Mathura Devi Karwa 64
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I.T.A.Nos. 307 to 315/Ind/2009 and 346 to 348/Ind/2009 ASSESSMENT YEAR : 2006-07 of shares. Therefore, it cannot be said that the assessee was doing business. More specifically when, the assessee either utilised his own funds/ family funds or did not pay any interest and depicted the transactions in shares under investment portfolio. During hearing, it was also explained by the learned Counsel for the assessee that accounts were maintained by the assessee in two separate capacities i.e. trader and investor and never treated the same as holdings of shares as stock in trade which clarifies the intention of the assessee. This assertion was not controverted by the Revenue.
The ld. Sr. DR placed reliance upon the decision of this Tribunal in ACIT vs Shri Naveet Kumar (ITA No.346/IND/2013) order dated 30-08-2013. We have perused this order and found that it has been clarified that ''if the shares are shown as investment and not as stock in trade, profit arriving from such shares will be capital gains and not business profit''. The matter was restored to the Assessing Officer to examine the facts and then decide accordingly. Therefore, this judicial pronouncement may not help the Manish Karwa, Sushil Karwa, Smt. Sudha Karwa,Vishnu Karwa, Subhash Chand Karwa, Sushil J. Karwa, Mukund Karwa, Anoop Karwa,Ashish Karwa, Smt. Arti Karwa, Smt. Survarna Karwa, Smt. Mathura Devi Karwa 65 I.T.A.Nos. 307 to 315/Ind/2009 and 346 to 348/Ind/2009 ASSESSMENT YEAR : 2006-07 Revenue. The other cases relied 31
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upon by the Revenue have also been perused and are of the view that the facts are not identical, therefore, these may no help the Revenue. The Board Circular No. 4.2007 dated 15-06- 207 also emphasizes that it is possible for a tax payer to have two portfolios namely, an Investment Portfolio, comprising of Securities, which are to be treated as capital assets and 'Trading Portfolio' comprising of stock in trade which are to be treated as trade assets. No single principle would be decisive and the fact has to be considered in entirety. This proposition has been confirmed by the Hon'ble Jurisdictional High Court in the case of Shri Om Prakash Suri (supra). The totality of facts plainly indicate that the ld. first appellate authority rightly directed the Assessing Officer to treat the short term capital gain as earned from investment in shares. Instruction No.1827 dated 31st August, 1989 was supplemented by CBDT circular no. F.No.149/287/2005-TPL [reported in 210 CTR 29 (St.)], advising the Assessing Officers that the principles contained in the circular should guide them in determining whether, in Manish Karwa, Sushil Karwa, Smt. Sudha Karwa,Vishnu Karwa, Subhash Chand Karwa, Sushil J. Karwa, Mukund Karwa, Anoop Karwa,Ashish Karwa, Smt. Arti Karwa, Smt. Survarna Karwa, Smt. Mathura Devi Karwa 66 I.T.A.Nos. 307 to 315/Ind/2009 and 346 to 348/Ind/2009 ASSESSMENT YEAR : 2006-07 given cases, the shares are held by the assessee as investment (and therefore, giving rise to capital gains) or stock-in-trade (and therefore, giving rise to business
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profit) by further opining that no single principle would be decisive and total effect of all the principles should be considered. If the number of transactions are analysed, we note that, in a computer based trading system/ e-filing, the figures, being split up, give misleading high figures, reflecting the individual component of the transaction but really, if these figures are synchronised then clear picture oozes out. Since the gain has been earned from the delivery based transactions, therefore, respectfully following the decision from Hon'ble Jurisdictional High Court in the case of Shri Om Prakash Suri (supra), we do not find any merit in the conclusion drawn by the lower authorities for treating the gains arising out of sale of shares as business income rather than capital gain. Accordingly, we direct the Assessing Officer to treat the gain arising out of sale of shares as capital gains . We direct accordingly.
During the course of hearing Ld. DR referred to two judgments of Hon'ble Apex Court in the case of Raja Bahadur Visheshwara Singh (Deceased) & ors. Vs. CIT (supra) and CIT vs. Sutlej Cotton Mills Supply Agency Ltd. (supra). From perusal of these two orders, we observe that the facts of these cases relates to transactions of purchase of sale of equity of shares, whereas in the instant appeal the impugned transactions are of mutual funds. As we have already made detailed discussion which makes clear that mutual funds and equity shares are on totally different footing so they cannot be
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equated for this purpose, therefore, these two judgments will not be of any help to the Revenue. 22. Further during the course of hearing Ld. counsel for the assessee placed on record, the Copy of the order passed by the Ld. CIT(A)-II Indore dated 30.09.2016 in assessee’s own case for A.Y. 2010-11 i.e. subsequent year and from going through the order of Ld. CIT(A), we find that the Ld. CIT(A) brushed aside, the Ld. AO’s finding and accepted the assessee’s contentions, thereby giving a finding that profit from purchase and sale of mutual funds is to be taxed under the head of capital gain and not to be treated as business income. 23. We therefore in the totality of facts as well as respectively following the judgment of Hon'ble Jurisdictional High Court are of the considered view that the profits earned by the assessee from purchase and sale of mutual funds. Units are to be taxed as income from short term capital gain and not as business income. 24. We further find that similar issue has been raised in the case of another assessee Mr. Rakesh Agrawal for A.Ys. 2009-10 & 2010-11. No distinguished facts has been brought on record by the revenue authorities. We therefore, applying our decision mentioned above in relation to assessee, Shri Sharad Agrawal in ITANo.153/Ind/2013, similarly hold in the case of Rakesh Agrawal for A.Y. 2009-10 & 2010-11 that income from purchase and sale of mutual funds is to be taxed as capital gain and not business income. We accordingly allow this common issue in all these three appeals and direct the AO to tax the profit/gain earned from purchase and sale of mutual
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funds/shares of Rs.60,86,999/- in the case of Sharad Agrawal and Rs.5,65,161/- & Rs. 63,99,568/- in the case of Rakesh Agrawal for A.Y. 2009-10 & 2010-11 as Short term capital gain and not as business income. This first common issue raised by two assesseew in Ground No.2 in I.T.A. No.153/Ind/2013 & I.T.A. No.154/Ind/2013 and Ground No. 3 in I.T.A. No.23/Ind/2017 is allowed. Now we take up ground no.3 of ITANO.153/Ind/2013 & Ground No.3 of ITANo.154/Ind/2013 25. In both these grounds the issue relates to the addition towards low household expenses. In the case of Sharad Agrawal, the Ld. CIT(A) has confirmed the addition of Rs.4,26,000/- and in the case of Rakesh Agrawal addition of Rs.3,21,850/- has been confirmed. 26. We have heard the rival contentions and perused material on record placed before us. We find that in both these case of assessee has shown household withdrawal as well as withdrawals towards school fees and LIC policy and separate household drawing are also made by other family members. Further addition made by the AO as well as the addition sustained by the Ld. CIT(A) are merely on estimate basis without having any concrete evidence. We, therefore, looking to the totality of facts find it justified to confirm the addition of Rs.2 lacs in the case of Sharad Agrawal and Rs.1,25,000/- in the case of Rakesh Agrawal for A.Y. 2009-10. We accordingly do so and partly allow the ground no.3 of ITANo.153/Ind/2013 & ITANo.154/Ind/2013.
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Apropos to Ground No.4 of ITANo.154/Ind/2013 in the case of Rakesh Agrawal for A.Y. 2009-10 which relates to addition of Rs.1,55,898/- on account of alleged difference in the balance of Sundry Creditor M/s. Sanghvi Electronic (P) Ltd. From perusal of the orders of lower authorities we observe that the assessee miserably failed to place any documentary evidence except ledger account to prove the credit balance. The assessee has also been unable to file detail of PAN, address and confirmation. In these circumstances, we find no error in the finding of lower authorities confirming the addition of Rs.1,55,898/-. We accordingly dismiss ground no.4 of assessee’s appeal in ITANO.154/Ind/2013. 28. Apropos ground No.1 & 2 of ITANo.23/Ind/2017 in the case of Rakesh Agrawal for A.Y. 2010-11. The assessee has challenged the reopening of assessment. However during the course of hearing Ld. counsel did not press these grounds and straight away argued on merits. We accordingly dismiss ground No. 1 & 2 of ITANo.23/Ind/2017. 29. In the result, all these three appeals of the Assessees are partly allowed. Order was pronounced in the open Court on 31.05.2018.
Sd/- Sd/- (KUL BHARAT) (MANISH BORAD) JUDICIAL MEMBER ACCOUNTANT MEMBER Indore; �दनांक Dated : 31/ 05/2018 ctàxÄ? P.S/.�न.स. Copy to: Assessee/AO/Pr. CIT/ CIT (A)/ITAT (DR)/Guard file.
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By order Private Secretary/DDO, Indore