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Income Tax Appellate Tribunal, MUMBAI BENCH “H” MUMBAI
ORDER PER RAVISH SOOD, J.M: The present appeal filed by the revenue is directed against the order passed by the CIT(A)-49, Mumbai, dated 06.05.2019, which in turn arises from the order passed by the A.O u/s 143(3) of the Income Tax Act, 1961 (for short „Act‟), dated 24.03.2015 for A.Y. 2012-13. The revenue has assailed the impugned order on the following grounds before us: “1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in treating the short term capital loss of Rs.6.18,51,987/- as income under the head 'capital gains‟ instead of treating it as "business income/loss", ignoring the fact of the high volume traded and the fact of the short length of holding of these shares.
2. The appellant prays that the order of The Ld. ClT(A) on the above grounds be set aside and that on the AO be restored.”
2 ACIT 32(3) Vs. M/s Sagar Construction 2. Briefly stated, the assessee firm had e-filed its return of income for A.Y. 2012-13 on 29.09.2012, declaring an income of Rs.nil (after claiming carry forward of business loss of Rs.8,08,58,145/-). The return of income filed by the assessee firm was initially processed as such u/s 143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment u/s 143(2) of the Act.
During the course of the assessment proceedings, it was observed by the A.O that the assessee had declared loss from share transactions amounting to Rs.6,18,51,987/- under the head Short Term Capital Loss (STCL). Also, it was noticed by him that the assessee had carried out trading in shares and had declared a net business loss of Rs.1,90,06,158/-. On a perusal of the records, it was observed by the A.O that the assessee had carried out purchase and sale transactions of shares on a large scale. It was noticed by the A.O that while for the loss from F&O transactions was declared by the assessee as a business loss, the transactions in shares where the average period of holding of the shares was less than one year was however declared as STCL. Observing, that the average period of holding of the shares was very less, the A.O called upon the assessee to explain as to why the STCL declared by it may not be treated under the head „business income‟. In reply, the assessee tried to impress upon the A.O that the loss from the share transactions was rightly reflected under the head STCL. However, the A.O did not find favor with the aforesaid claim of the assessee. It was observed by the A.O that the volume and nature of transactions in shares clearly indicated and established that the delivery based transactions of shares was nothing but a trading activity of the assessee in line with that of derivatives carried out by the assessee during the year under consideration. Accordingly, the A.O was of the view that the income declared by the assessee under the head capital gain in respect of certain transactions of shares unlike the other transactions of a similar nature i.e derivatives transaction and speculative 3 ACIT 32(3) Vs. M/s Sagar Construction transactions were clearly in the nature of trading in shares and liable to be considered under the head „business income‟ and not under the head „capital gains‟. Backed by his aforesaid view the STCL of Rs.6,18,51,987/- declared by the assessee was considered by the A.O under the head „business income‟.
Aggrieved, the assessee carried the matter in appeal before the CIT(A). It was the claim of the assessee before the CIT(A) that the A.O had erred in law and the facts of the case in re-characterizing the STCL of Rs.6,18,51,987/- as a business loss. Before the CIT(A) the assessee relied on the order passed by the ITAT in its own case for A.Y. 2007-08 and A.Y. 2008-09, wherein in the backdrop of identical facts that were involved in the case of the assessee for the aforementioned years the Tribunal had vide its respective orders passed in dated 03.05.2013 for A.Y 2007-08 and ITA No. 5595/Mum/2010, dated 11.03.2015 for A.Y. 2008-09, had decided the issue in favor of the assessee and held that there was no justification on the part of the A.O in treating the Short term capital gain/loss as income from business or profession. Also, reliance was placed by the assessee on the order passed by the CIT(A) in its own case for A.Y 2009-10 and A.Y. 2010-11, wherein too the issue was decided in its favor. Backed by the aforesaid facts, the CIT(A) following the view taken by the Tribunal in the assessee‟s own case for the preceding years, viz. A.Y.2007-08 and A.Y. 2008-09 as well as that arrived at by his predecessor in the case of the assessee for A.Y. 2010-11 in appeal No. CIT(A)-44/ACIT 32(2)/ITA-18/2012/13, therein decided the issue in favor of the assessee and concluded that the gain/loss arising on sale of shares during the year under consideration was assessable under the head „Short Term Capital Gain‟.
The revenue being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. Authorized Representative (for short „A.R‟) for the assessee at the very outset submitted that the issue was squarely covered by 4 ACIT 32(3) Vs. M/s Sagar Construction the orders of the Tribunal in the assessee‟s own case for the preceding years i.e A.Y. 2007-08 and A.Y. 2008-09.
Per contra, the ld. Departmental Representative (for short „D.R‟) candidly admitted that the issue involved in the present appeal was squarely covered by the orders of the Tribunal in the assessee‟s own case for the aforementioned years.
We have heard the ld. Authorized Representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by the ld. A.R to drive home his aforesaid contentions. As observed by us hereinabove, it is claimed by the ld. Authorized Representatives for both the parties that the issue involved in the present appeal i.e as to whether the profit/loss from the share transactions was rightly offered by the assessee under the head „Capital gain‟ or was to be considered under the head „business income‟ as claimed by the A.O is squarely covered by the orders of the Tribunal in the assessee‟s own case for the preceding years i.e A.Y. 2007-08 and A.Y. 2008-09. Backed by the aforesaid facts, we find that the CIT(A) following the view taken by the Tribunal in the assessee‟s own case for A.Y 2007-08 and A.Y 2008-09, as well as that taken by his predecessor in A.Y. 2009-10 and A.Y. 2010-11 had decided the issue in favor of the assessee by observing as under:
“6.4.1 I have considered the submissions of the appellant and have perused the material available on records. The appellant has requested to hold that the Ld. AO was not justified in treating the Short Term Capital Gain/Loss as income from business or profession. The appellant has made elaborate submission as above and the same have been considered carefully. The appellant has explained that similar issue has been decided in its favour in earlier years by the Hon'ble ITAT and Ld. CIT(A). From perusal of records, it is observed that the Ld. ClT(A)-44. Mumbai vide order dated 12.12,2014 in Appeal No. CIT(A)-44/ACIT.32(2)/ITA- 181/2012-13, in appellant's own case for AY 2010-11 after following the decision of the Hon'ble ITAT in appellant's own case for earlier year, has allowed the appeal of the appellant on this issue and has held as under:
5 ACIT 32(3) Vs. M/s Sagar Construction “I have through the facts of the present year and also the decision of the Hon'ble Mumbai Tribunal in above referred case in & 5625/Mum/2010 dated 3.5.2013 and I find that the facts and circumstances are identical. Therefore, respectfully following the decisions of the Hon'ble Mumbai Tribunal, it is decided that the sale and purchase of shares is gain assessable under the head Short Term Capital Gain. The ground of appeal is decided in favour of the assessee.” The facts and circumstances of the issue under consideration remain similar as that in AY 2010-11 and hence respectfully following the above referred decision of my Ld. Predecessor in appellant's own case for AY 2010-11, it is decided the gain/loss arising on sale and purchase of shares under consideration is assessable under the head 'Short Term Capital Gain' and the Ld. AO is directed accordingly. Therefore, the Ground No. 1 raised in appeal is ALLOWED.” As observed by us hereinabove, involving identical facts the issue in question in the present appeal before us i.e as to whether the profit/loss arising from the share transactions carried out by the assessee firm was to be considered under the head „Çapital gain‟ as claimed by the assessee or was to be brought to tax under the head „business income‟, had been adjudicated by the Tribunal in the assessee‟s own case for A.Y 2008-09 in ITA No. 4646/Mum/2011, dated 11.03.2015, wherein after exhaustive deliberations the Tribunal had observed as under :
5. We have considered rival contentions and found that the AO has treated capital gains as business income on the plea of frequency, regularity and volume of transaction. By the impugned order, the CIT(A) confirmed the action of the AO. From the record we found that assessee has dealt in following three types of share transaction during the year :- i) Share Trading on Future & Option basis. ii) Share Trading on Speculation business i.e. selling & buying of same script on same day. iii) Share trading on Short Term Capital Gain. The dispute in the present appeal relates only to third type of transaction, profit on which was offered under the head capital gains. In support of the proposition that investment can be liable to tax only under the head capital gains, reliance was placed in the case of CIT Vs. S. Ramaamirtham, (2008) 306 ITR 239 (Mad). Reliance was also placed on the decision of Mumbai Bench of the Tribunal in the case of Gopal Purohit, 122 TTJ 87 (Mum), wherein it was held that profit arising from such transaction should not be treated as income from business and profession. It was further submitted by ld.AR that the Tribunal has dealt with each and every aspect of transaction in the immediately preceding assessment year 2007-08 and held as under :- “7. We have carefully considered the rival submissions in the light of the material placed before us. Undisputedly, the assessee in its books of account has shown the investment in the shares under the head “investment . This activity of the assessee has been started in the present year only. Initially the assessee had purchased certain shares and sold them 6 ACIT 32(3) Vs. M/s Sagar Construction within a short span. The reason for the same has been stated to be fall in the stock market. For proving so a chart has been filed, according to which there was a fall in the BSE index. It is for that reason the assessee has suffered loss in the initial transactions. From the sale and purchase entered into by the assessee it has been described that on three days assessee has purchased those shares and on 10 days those shares were sold. A substantial portion of the shares purchased are unsold and are outstanding in the balance sheet under the head “investment”. From the transactions entered into by the assessee it cannot be said there was a frequent sale and purchase of shares. The reason of sale is supported by fall of BSE index. Thus according to facts and circumstances of the case, it cannot be said that assessee has entered into activity of sale and purchase of shares with a view to trade. 7.1 Though the AO in the assessment order has mentioned that assessee has utilized borrowed funds, but during the course of hearing reference was made to P&L account to show that assessee does not bear any interest liability except a paltry sum debited to P&L account which is an amount of Rs.18,541/-, and represents interest on cash/credit account. So far as it relates to amount borrowed by the partners it was shown by Ld. AR that assessee firm has charged interest of Rs.3,10,215/- from Mr. Binal S. Koradia and Rs.65,429/- from Mrs. Amisha Vinal Koradia At the same time interest of Rs. 2,13,318/- has been paid by assessee firm to Mr. Binal S. Koradia(HUF). Thus it is seen from the accounts of the partners that interest has been charged by the assessee where the partners were utilizing capital of the firm. Similarly interest is paid to the partner where firm has utilized capital of the partner. Thus, there is no impact on the activity of the assessee regarding sale and purchase of shares so far as it relates to amount borrowed by partners. It is also observed by the A.O that partners have borrowed huge capital but he has not brought on record any single instance to substantiate such observation. On the contrary from the accounts it is seen that the interest has been charged and paid to the partners on their capital and thus the assessee firm has not paid any interest which can be said to be incurred for the purpose of investing in the activity of sale and purchase of shares. 7.2 Moreover, as per judicial decisions a discretion has been provided to the assessee to divide its activity of sale and purchase of shares into two categories i.e. one for “investment” in the shares giving rise to income from capital gain and the second is to deal in the sale and purchase of shares as a trader. Such discretion of the assessee has been recognized in various judicial pronouncements which have been relied upon by Ld. AR and have been discussed in the above part of this order. According to such discretion assessee has expressed its intention to assign such activity in the nature of “investment”. Merely some entries of sale of immediate shares after purchase thereof cannot turn down that activity from “investment” into “trade” particularly when assessee has reason to sell the shares on account of fall in the B.S.E index. This position also has been recognized in the decisions relied upon by Ld. AR, wherein it has been held that no prudent person whether he is a trader or investor would like to see that such activity will turn out as an activity of loss or erosion in investment.
7 ACIT 32(3) Vs. M/s Sagar Construction 7.3 Keeping in view the above discussions and factual position, we are of the opinion that the activity of sale and purchase of shares entered into by the assessee during the year under consideration cannot be held to be an activity giving rise to an income assessable under the head income from business or profession. The investment was made by the assessee in the activity of sale and purchase of share was with an intention to invest and shares unsold have been shown under the head “investment”. The sale at the short period was supported by just cause i.e. fall in price of shares. Therefore, we reverse the finding recorded by Ld. CIT(A) and hold that the gain earned by the assessee was from sale and purchase of shares is gain assessable under the head “short term capital gain”. The grounds of appeal filed by the assessee is allowed.”
6. On the other hand, Ld. DR relied on the decision of Hon‟ble Bombay High Court in the case of Gopal Purohit, 188 Taxman 140 (Bom); Wallfort Financial Services Ltd., 41 SOT 200; Manmohak Properties P. Ltd., 39 taxmann.com 105; Koradia Construction P. Ltd., 39 taxmann.com; Circular No.4/2007, dated 15-6-2007; Karan R Bahl, 37 taxmann.com 29; Rajan R Bahl, 12 taxmann.com 447; Nashik Capital Financial Services Ltd., 33 taxmann.com 190, Shah-La Investment & Financial Consultants P. Ltd., 2 SOT 371; Mafatlal Fabrics Ltd., 17 taxmann.com 50; Devji Nenshi Palani, 28 taxmann.com 209; Veena Karla 37 taxmann.com 208 and Manoj Kumar Samdaria, 52 taxmann.com 247 (SC), and contended that in view of these decisions, the AO was justified in treating the gains offered on sale of shares as business income. It was argued by ld. CITDR that the dominant judicial, administrative opinion and legal position is that although there is no bar on an assessee for maintaining two portfolios, viz., an investment portfolio and a trading portfolio. However, while accounts in respect of the said activities/portfolios should not only be separately maintained, but, in addition a systematic criteria needs to be adopted and consistently applied or followed to bifurcate the various transactions into each of the portfolios, at the very beginning of entering of these transactions and not in the case of the assessee when the sales statements are received. Further, the very basis of these transaction entered for profit motive, its conduct to carry out such transactions, systematic, consistent, frequent, voluminous and repetitive nature of these transactions coupled with speculative and derivative transactions in similar shares with same brokers under same demat accounts funded out of borrowed and margin funding; all shows that these are business transactions and not investment transactions. In the case of an investment activity the intention to acquire and hold the underlying securities should be evident from the underlying facts from the very beginning of the entry of such transactions and the same should be accordingly brought on records. These transactions need to be separately conducted or carried out in its separate demat accounts, trading accounts, not out of same margin funding availed with same broker using the same pool account etc. etc. The transactions should invariably be backed by actual/constructive delivery of shares, but the same is missing in the case of the assessee so far as shares traded through pool accounts of the various brokers financed out of margin funding; in fact no such demat accounts of the brokers with the shares belonging to the assessee credited therein was ever produced by the assessee either before the AO or before the CIT(A). And lastly, the very fact that the assessee is in the business of speculation and trading in similar shares with same demat account, broker, mixed funds, having maintained no separate accounts prove that it is only in share trading business during the year under consideration.
8 ACIT 32(3) Vs. M/s Sagar Construction
7. Ld. AR submitted that most of cases cited above by ld. DR favours the plea taken by the assessee, which have also been upheld by the Tribunal in assessee‟s own case in the immediately preceding assessment year. In respect of decision in the case of Gopal Purohit, ld. AR submitted that the ratio laid down by the jurisdictional High Court squarely applies in assessee‟s case insofar as assessee has two separate portfolios maintained and only delivery based transaction were offered for Taxation under the Head “Income from Capital Gains”. The same are reflected in books of account under the head „investment‟ only. In respect of Wallfort Financial Services Ltd. (supra), ld. AR contended that facts are totally different insofar as shares were held by assessee as investment whereas in the aforesaid case, shares were shown as stockin-trade, moreover, assessee itself has offered gain as business income in the preceding year. As per ld. AR the case law relied by the ld. DR in case of Manmohak Properties P. Ltd. (supra), the issue was related to validity of order passed by CIT(A) u/s.263. However, no finding was given relating to assessment of capital gain on sale of shares, hence, such case cannot be relied in assessee‟s case. With respect to Koradia Construction Pvt. Ltd. (supra), ld. AR submitted that this decision of Mumbai Bench supports the case of the assessee insofar as the findings given in the aforesaid case equally applicable to the assessee since the gain on sale of shares reflected as investment was held to be liable to be assessed under the head „income from capital gains‟. As per ld. AR even the Circular No.4/2007 dated 15-6-2007 also supports the case of the assessee since the assessee has offered income under the head „income from capital gains‟ on shares which are held as “investment‟. In case of Karan R Bahl (supra), ld. AR contended that no finding was given and simply the case was remitted back to the file of AO, hence, has no relevance in the present appeal. In case of Rajan R Bahl, the matter was remanded back to the file of the AO as the assessee had not filed any details, whereas in the instant case, the assessee has filed all the details, therefore, reliance of aforesaid case has no relevance in the case of assessee. With regard to the case of Nashik Capital Financial Services P. Ltd., the ld. AR submitted that this case is related to applicability of Section 73. However, the assessee is a partnership firm, therefore, the aforesaid case has no relevance with the present appeal. In case of Shah-La Investment & Financial Consultants P. Ltd. (supra), the ld. AR submitted that this case is exclusively supports the case of the assessee, therefore, applying the same, the gain is liable to be assessed under the head „capital gain‟. In regard to decision in the case of Mafatlal Fabrics P Ltd., the ld. AR submitted that the facts in the aforesaid case are totally different to the present case, therefore the findings given in the aforesaid case are not applicable to the instant case. Ld. AR submitted that in case of Devji Nenshi Palani (supra); Veena S.Karla (supra) and in the case of Manoj Kumar Samdaria, the facts and circumstances were totally different to the facts of the present appeal, therefore, the findings given in the aforesaid appeals have no relevance to the appeal of the assessee.
8. It was further contended by ld. AR that merely because assessee liquidates its investment within short span of time which had given better overall earning to assessee. It would not lead to conclusion that assessee had no intention to keep on funds as investor in equity shares, but was actually intended to trade in share. For this purpose reliance was placed the decision of Tribunal in the case of DCIT V /s E-Cap Partners [2014] 45 taxmann.com 342 (Mumbai-Trib) and Manish Karwa V /s ACIT [2014] 45 taxmann.com 351 (Ind. Trib). As per ld. AR the Tribunal held assessee as investor in earlier year, therefore, assessee has to be considered as investor in subsequent year, for this purpose reliance was placed on the decision of DCIT Vs. KRA Holding & Trading P. Ltd. {2012} 26 taxmann.com 48(Pune Trib.). In view of the above discussion and after going through the order of the Tribunal in assessee‟s own case for the immediately preceding assessment year, wherein facts and circumstances were the same, we direct the AO to 9 ACIT 32(3) Vs. M/s Sagar Construction treat the profit on sale of shares as short term and long term capital gains depending on the period of holding of shares. We direct accordingly.” As the facts and the issue involved in the case of the assessee for the year under consideration remains the same as were there before the Tribunal in the assessee‟s own case for A.Y. 2007-08 and A.Y. 22008-09, which as observed by us hereinabove had fairly been admitted by the ld. D.R, we, therefore, finding no reason to take a different view therein respectfully follow the same. Accordingly, finding no infirmity in the view taken by the CIT(A), who as observed by us hereinabove had held that the gain/loss arising on sale of purchase of shares under consideration was rightly reflected by the assessee under the head „Short Term Capital Gain‟, thus, uphold the same. The Ground of appeal No. 1 raised by the revenue is dismissed.
The Ground of appeal no.2 being general is dismissed as not pressed.
Resultantly, the appeal filed by the revenue is dismissed.