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Income Tax Appellate Tribunal, “A” BENCH, AHMEDABAD
Before: SHRI PRADIP KUMAR KEDIA & SHRI MAHAVIR PRASAD, JUDICIAL MEMEBR
आदेश/O R D E R
PER PRADIP KUMAR KEDIA - AM:
The captioned appeal has been filed at the instance of the Revenue against the order of the CIT(A)-9, Ahmedabad (‘CIT(A)’ in short), dated 30.12.2014 arising in the assessment order dated 13.02.2014 passed by the Assessing Officer (AO) under s. 143(3) r.w.s. 147 of the Income Tax Act, 1961 (the Act) concerning AY 2008- 09.
ITA No. 534/Ahd/15 [ITO vs. Shri Vinod V. Patel] A.Y. 2008-09 - 2 - 2. The grounds of appeal raised by the Revenue reads as under:-
“1(a). The CIT(A) has erred in directing the A.O. to treat the business income of Rs.61,46,343/- as short term capital gain and long term capital gain. 1(b). The Ld. CIT(A) has failed to appreciate that the AO has given categorical findings that the assessee has engaged in repeated buying and selling of shares and also frequency of transactions together with the obvious intention of making profits and was not submitted the evidence to prove the transactions not in the nature of business or to earn profit. 2. The Ld. CIT(A) has erred in giving relief to the assessee u/s. 22(2)(e) of Rs.24 lakhs stating that the assessee has not received the said amount directly from M/s. Prima Transformers Pvt. Ltd.”
Ground no.1 concerns characterization of income arising on sale of shares. Whereas the assessee has offered the action arising on sale of shares amounting to Rs.61,46,343/- under the head ‘capital gains’, the AO on the other hand had held the gain arising on sale of shares to be business income in the factual context.
In the course of assessment proceedings, the AO inter alia observed that having regard to the number of transactions, volume and frequency of trade and also having regard to the income also arising of speculating nature, the assessee is actually involved in the business of trading in shares with remarkable frequency. It was found that holding period is also quite low which proves the intention to engage in the activity as a business. The AO accordingly dislodged the claim of the assessee of Rs.14,19,506/- and Rs.47,26,836/- shown under the head ‘long term capital gain’ (LTCG) and ‘short term capital gain’ (STCG) respectively and realigned the gains under the head ‘business income’. Consequently, the AO denied the exemption of LTCG claimed under s.10(38) of the Act and similarly, denied the concessional tax treatment available on STCG and held that gains
ITA No. 534/Ahd/15 [ITO vs. Shri Vinod V. Patel] A.Y. 2008-09 - 3 - declared on sale of shares are susceptible to tax at normal rate of taxation.
Aggrieved, the assessee preferred appeal before the CIT(A). The CIT(A) after making elaborate note of the facts and the circumstances cancelled the action of the AO and restored the claim of the assessee towards nil taxation on LTCG and concessional taxes applicable to STCG. The relevant operative para of the order of the CIT(A) is reproduced hereunder for the sake of ready reference:
“3.2 I have carefully considered the rival submissions. I have also perused various case laws relied upon by the appellant. It is seen that appellant has treated the shares and securities as Investment in his Balance Sheet and the same is valued at cost. The appellant has also earned the dividend income of Rs.95,280/-. While treating the LTCG and STCG as business income, the AO has relied upon the assessment order of AY 2010-11. Appeal against the said Asst. Order for AY 2010- 11 has been decided by CIT(A)-VIII directing the AO to treat the short term capital gain and long term capital loss from shares as capital gain/loss as shown by the appellant and not as business income. The findings of the CIT(A)-VIII in the Appellate Order dated 27/02/2014 for AY 2010-11 allowing the appeal in favour of the appellant are as under.- Decision: "I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The AO has treated as short term capital gain and long term capital loss earned by the appellant during the year as business income. For doing so he considered that the appellant had undertaken frequent transaction. There were more than 816 transactions of buying and selling. The appellant dealt in 51 different scripts. He also noted that not only the magnitude and volume of the share transactions but also the frequency of transactions together with obvious intention of making profit was there. He further noted that repeated buying and selling of same scrip was done by the appellant for about 25 scrips during the year. He accordingly held that the appellant had wrongly classified as income from share transactions as short term capital gain and long term capital losses and has wrongly set off of brought forward capital losses against this income. The appellant on the other hand has submitted that the intention of purchase and sale was not that of business. The intention of the appellant was to make investment. The appellant submitted that it was maintaining two separate portfolios, that is investment portfolio and trading portfolio. In trading portfolio
ITA No. 534/Ahd/15 [ITO vs. Shri Vinod V. Patel] A.Y. 2008-09 - 4 - the transactions of dealing in F & O transactions and intraday transactions where no delivery of shares are affected is shown. In investment portfolio the shares purchased by the appellant each year with the intention of long-term appreciation is maintained. The appellant has shown the shares as investment in the balance sheet and the same have been valued at cost. It has further been submitted by the appellant that the shares which were purchased with the intention of treating the same as investment and earning dividend income is sold in a short span of time of its acquisition owing to steep and unanticipated rise in the stock market or if it is felt that the market value of the shares have reached the required level and further appreciation was unlikely, the appellant capitalizes on such opportunity and books short term capital gains or long term capital gains and the funds are again invested in the other shares. It has been pointed out by the appellant that it has earned dividend income of Rs. 87,658/- during the year and it has consistently been showing sufficient dividend income during the earlier years also. The appellant has also submitted that the investment in shares and mutual funds was not made out of borrowed funds but appellant's own funds were invested in shares and securities. The appellant has submitted that in the immediately previous year the appellant had incurred a short term capital loss which was accepted by the Department. The appellant has a/so pointed out that after taking into account the guidelines issued in circular number 4/2007 dated 15/06/2007 the transactions taken by the appellant falls into the investment category. The appellant has also pointed out that if the activity of purchase and sale of share by the appellant is taken as that of business there would be a net loss to the revenue if the profit shown by the appellant of earlier years is taken into account. It is pointed out that if the combined returned income from A.Y. 2007-08 to 2012-13 is taken the combined returned income would be reduced by an amount of Rs. 1.02 crores if STCG and LTCG are treated as business income.
I have carefully considered the factual matrix. It is noted that the claim of the appellant regarding investment in purchase of shares out of personal funds is correct. The capital account of the appellant show a balance of Rs. 3.74 crores. And there are small unsecured loans from family members which is about 9 Lacs. As against this the share investment is Rs. 2.43 crores. Therefore the claim,of the appellant that the investment is not out of borrowed funds is factually correct. Further the appellant has shown business income in respect of the transactions which has been done by him in F & 0 or which has been settled by him without delivery. The appellant has been similarly, showing such long term or short term capital gain from the similar activity in earlier years also. It has shown the value of shares remaining with him at const and not at market price. It has also shown the shares as investment in his balance sheet. The other important point which is also relevant for consideration is that the appellant is a whole time director in a private limited company activity of share trading is not his main occupation. The observation of the AO that frequency of transaction and the
ITA No. 534/Ahd/15 [ITO vs. Shri Vinod V. Patel] A.Y. 2008-09 - 5 - magnitude and volume of the share transactions were very high and the same was indicative of the intention of trading in shares for business purpose is not relevant as even if the frequency multitude and volume of share transaction is high the basic intention of purchase and sale is not of trading as the appellant has not used borrowed funds and also it has. not shown the stock of shares at the end of the year as business stock The appellant is not into business of purchase and sale of shares but is a whole time director in a company. Therefore this activity is one of the side activity and is obviously an activity of investment. In view of these facts and especially the fact that the appellant has not invested borrowed funds. The action of the AO treating the activity as business was not justified. The AO is accordingly directed to treat the short term capital gain and long term capital loss from shares as capital gain/loss as shown by the appellant and not as business income. The addition made is therefore, directed to be deleted."
3.3 There are some Guiding Principles to determine whether sale of shares is taxable as business income or short term capital gains which have been explained in the case of Asst. CIT v. Om Prakash Arora [2011] 16 taxmann.com 396 (ITAT-Delhi).
Following principles can be, applied on the facts of a case to find out whether transaction(s) in question are in the nature of trade or are merely for investment purposes:-
What is the intention of the assesses at the time of purchase of the shares (or any other item). This can be found out from the treatment it gives to such purchase in its books of account. Whether it is treated as stock-in-trade or investment. Whether shown in opening/closing stock or shown separately as investment or non-trading asset.
Whether assessee has borrowed money to purchase and paid interest thereon. Normally, money is borrowed to purchase goods for the purposes of trade and not for investing in an asset for retaining.
What is the frequency of such purchases and disposal in that particular item? If purchase and sale are frequent, or there are substantial transactions in that item, it would indicate trade. Habitual dealing in that particular item is indicative of intention of trade. Similarly, ratio between the purchases and sales and the holdings may show whether the assessee is trading or investing (high transactions and low holdings indicate trade whereas low transactions and high holdings indicate investment).
3.4 A close understanding of the facts of appellant also, shows that, it constitutes to be in nature of income from short term capital gain and long term gain. It is permissible as per CBDTs Circular No. 4 of 2007 of 15-6-2007 that an assessee can have both portfolios, one for trading and other for investment provided it is maintaining separate account
ITA No. 534/Ahd/15 [ITO vs. Shri Vinod V. Patel] A.Y. 2008-09 - 6 - for each type, there are distinctive features for both and there is no intermingling of holdings in the two portfolios. The A.O. has nowhere in its assessment order has indicated, that the assessee has been maintaining two different account or only one account which is a clear indicative of true nature of income of appellant. 3.5 As the facts are identical and same for this year also, as well as since the A.O. has also .relied upon the assessment order for A.Y. 2010- 11 while framing the addition for the assessment year under appeal, I am of the considered opinion that the income earned on sale of shares and securities by the appellant is of short term capital gain and long term capital gain and not in the nature of business income. Hence following my predecessors order in A.Y, 2010-11, the A.O is directed to treat the short term capital gain of Rs. 47,26,836/-and long term capital gain of Rs.14,19,506/- from purchase and sale of shares as capital gain as shown by the appellant and not as business income. Thus, this ground of appeal is allowed.”
Aggrieved by the reversal of the action of the AO by the first appellate authority, the present appeal has been referred to us by the Revenue.
We have carefully considered the rival submissions on the issue and perused the orders of the authorities below and the facts and material referred to and relied upon by the respective sides. The substantive issue for adjudication is whether gains arising on sale of shares by the assessee in the impugned assessment year is required to be taxed under the head ‘capital gains’ as offered by the assessee or is to be treated as business income of the assessee. The issue involved is essentially factual in nature. It is the case of the assessee that the number of scrips involved in share transactions are only about 52. The shares are generally held ranging between 6 to 11 months accept very few instances for a lesser period of holding. This apart, the assessee has forgone its entitlement to claim rebate under s.80E of the Act towards security transaction tax paid which is not available for income arising under the head ‘capital gains’. Significantly, the valuation of the closing investment has been made at ‘costs’ in
ITA No. 534/Ahd/15 [ITO vs. Shri Vinod V. Patel] A.Y. 2008-09 - 7 - variance to the different method of valuation of stock applicable to a business venture. A business enterprise is entitled to value closing inventory at ‘cost or market price’, whichever is lower. Thus, the income arising on sale of shares cannot be simply treated as business income without granting allowance for valuation of the closing stock in a different manner. It is the case of the assessee that once closing stock is also valued simultaneously at cost or market price, whichever is lower as applicable to business enterprise together with claim of incidental expenses (not allowable under the head ‘capital gains’), the tax liability would be, in fact, lower than what has been offered under the head ‘capital gains’. It is the case of the assessee that it has not actually benefitted from the transactions of capital nature in terms of tax benefits. Thus, no aspersions could be cast on the approach of the assessee in declaring the income under the head ‘capital gains’.
Having examined the facts and circumstances of the case, we are of the view that the plea raised on behalf of the assessee deserves acceptance in preference to the case made out by the AO. The CIT(A) has correctly taken note of various facts in perspective and restored the claim of the assessee towards capital gains. This apart, we also note that the department itself has accepted the position taken by the assessee towards certain shares hold and declared as investments of capital nature in the earlier years, which has been ultimately sold during the year giving rise to the LTCG. Thus, the admitted position in the earlier year could not have been altered cursorily and flippantly in this year. The assessee has placed on record scrip-wise details of profits and gains on sale of shares. It is seen therefrom that the period of holding is reasonably longer and indicate the intention to hold shares as capital assets more particularly in view of the fact that the assessee has generated yield in the form of dividend. In these circumstances, we endorse the action of the CIT(A) in entirety without
ITA No. 534/Ahd/15 [ITO vs. Shri Vinod V. Patel] A.Y. 2008-09 - 8 - repetition. Hence, we find that the grievance of the Revenue is bereft of any merits.
In the result, Ground No.1 of the Revenue’s appeal is dismissed.
Ground No.2 concerns applicability of Section 2(22)(e) of the Act in the facts of the case.
When the matter was called for hearing, the learned AR for the assessee submitted at the outset that the assessee in the instant case has not received any money by way of advance from the lender namely Prima Automation Pvt. Ltd. The learned AR submitted that identical issue of applicability of Section 2(22)(e) of the Act arose in the similar facts in assessee’s own case in the preceding assessment year in ITA No.576/Ahd/2016 order dated 02.04.2018 and therefore, does not require any reiteration.
We find that the identical issue has been discussed in assessee’s own case in ITA No.576/Ahd/201 (supra). The relevant operative para of the order of the co-ordinate bench is reproduced hereunder:
“14. We have carefully considered the rival submissions. The short question in controversy is whether the assessee-company, a common shareholder in the lender-company as well as the borrower-company can be said to be hit by the provisions of section 2(22)(e) of the Act for the loans/advances granted by the lender-company to the borrower- company. 14.1. The assessee has raised four defense to support the conclusion of the CIT(A), namely (i) the assessee (common shareholder in lender- company and borrower company) is not the recipient of loan and therefore not susceptible to the provisions of section 2(22)(e) of the Act in view of the decision of the Hon’ble Gujarat High Court in the case of Daisy Packers(supra) and Hon’ble High Court in the case of Anitech (P) Ltd.(supra) as approved by Hon’ble Supreme Court in Madhur Housing; (ii) the transactions between the lender-company and borrower-company are commercial in nature for facilitation of business and therefore covered by the beneficial interpretation rendered by CBDT Circular No.19/2017; (iii) the assessee has provided bank guarantee to the lender for facilitation of its business and therefore the
ITA No. 534/Ahd/15 [ITO vs. Shri Vinod V. Patel] A.Y. 2008-09 - 9 - receipt of loan/advance is an act of quid pro quo and (iv) the protective additions under s.147 of the Act in the hands of the assessee is not sustainable in law having regard to the phraseology of substantive provisions of section 147 of the Act.
14.2. On perusal of the CIT(A), we find that the CIT(A) has reversed the action of AO and granted relief to the assessee on first parameter itself i.e. the assessee not being a recipient of the loan cannot be taxed under the deeming fiction of section 2(22)(e) of the Act. The CIT(A) has not addressed the issue on other alternative grounds. We find that the first defense of the assessee is legal in nature and is supported by the decision of the Hon’ble Gujarat High Court in the case of Daisy Packers (supra) and the decision of Hon’ble Delhi Court in the case of Ankitech (P) Ltd.(supra) as approved by Hon’ble Supreme Court in Madhur Housing. The decision continues to hold the field as on date although issue has been referred to larger bench by the Hon’ble Supreme Court.
14.3. We shall now advert to the second alternative plea raised on behalf of the assessee that the transactions are open, mutual and current and are in the nature of trade advances. The plea taken in this regard before lower authorities have not been rebutted. Thus, in view of the CBDT Circular, the trade advances stand excluded from the ambit of section 2(22)(e) of the Act.
14.4. We now next turn to another plea of the assessee that the advances made by the lender-company to the borrower-company is not a loan/advance simplicitor but is beset with the character of quid pro quo owing to the personal guarantees of the shareholder for benefit of the lender-company.
14.5. We also take note of the fourth plea on behalf of the assessee that a protective assessment under s.147 of the Act to merely safe- guard the interest of the Revenue is not sustainable in re-assessment proceedings under s.147 of the Act. A protective assessment impliedly means that the AO is not sure about the escapement in the hands of this assessee but merely seeks to cover the possible revenue loss. This, in our view, is contrary to the mandate of section 147 of the Act which provides that it is incumbent upon the AO to have positive belief towards escapement (in contrast to probable escapement) based on the material available on record. Clearly, the action of the AO runs counter to the mandate of section 147 of the Act. Notably, the case of escapement of income qua assessee herein is not finally ascertained even at the assessment stage pursuant to notice for re-opening under s.147/148 of the Act.
Hence, in view of the discussion noted hereinabove, we find merit in the plea of the assessee on all counts. Therefore, we find no justifiable reason to interfere with the conclusion drawn by the CIT(A).
In the result, appeal of the Assessee in ITA No.576/Ahd/2016 for AY 2007-08 is dismissed.”
ITA No. 534/Ahd/15 [ITO vs. Shri Vinod V. Patel] A.Y. 2008-09 - 10 - 13. In parity with the view taken in AY 2007-08 in assessee’s own case, we decline to interfere with the order of the CIT(A).
In the result, Ground No.2 of the Revenue’s appeal is dismissed.
In the result, the appeal of the Revenue is dismissed.
This Order pronounced in Open Court on 25/09/2018
Sd/- Sd/- (MAHAVIR PRASAD) (PRADIP KUMAR KEDIA) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad: Dated 25/09/2018 True Copy S. K. SINHA आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. राज�व / Revenue 2. आवेदक / Assessee 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाइल / Guard file. By order/आदेश से,
उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद ।