PADMAVATHI DHAREPPA UPPAR,BENGALURU vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE- 6(3)(1), BENGALURU

IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH : BANGALORE BEFORE SHRI CHANDRA POOJARI , ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA No.1962/BANG/2019 Assessment Year : 2015 – 16

Padmavathi Dhareppa The Asst. Commissioner Uppar, Income Tax, 148/6-1, 5th Cross, Circle-6(3)(1), Vs. Bengaluru. RMV Extension, Sadashivnagar, Bengaluru-560 080.

PAN – AAWPU 7509 E APPELLANT RESPONDENT

: Shri Omprakash Jain, C.A Appellant by Respondent by : Shri Kannan Narayan, JCIT (DR)

Date of Hearing : 07-12-2020 Date of Pronouncement : 18-12-2020 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against order dtaed25/07/2019, passed by Ld.CIT(A)-6 for assessment year 2015-16 on following grounds of appeal: 1. The orders of the Learned Lower Authorities are bad in law and contrary to the act, rules notifications and circulars as issued from time to time. 2. The learned Assessing Officer erred in changing the head of Income without taking nature of transactions, history of assessee, treatment done by Assessee in the books. Also Ld A.0 has missed the settled

position of treatment of bi.thiness income vis a vis capital gains as explained in CBDT Circular No 6/2016, No. 1827 dated Aug 31 1989, No 4 of 2007 where a clear guidelines to follow to differentiate trader from investor. The latest been No 6/ 2016 clearly spells the treatment of portfolio for a businessman and an investor. 3. The Learned CIT(A) without prejudice to the above ground, has erred in upholding the order passed by the Ld Assessing officer without considering the written submissions and the evidences submitted therewith. 4. The Appellant craves leave to add any other ground or modify or revise the grounds taken at the time of hearing before the Hon'ble Income-tax Appellate Tribunal, Bangalore.

Brief facts of the case are as under: 2.Assessee is an individual and filed her return of income for year under consideration on 31/10/2015 declaring total income of Rs.2,99,50,400/- from other sources and capital gains. The case was selected for limited scrutiny for verification of short term capital gains. Notice under section 143 (2) and 142 (1) were served on assessee. In response to statutory notices, representative of assessee filed requisite details as called for. 2.1Ld. AO on perusal of details filed, was of the opinion that assessee was trading in shares. Ld. AO noted that there were intraday transactions, taking into account frequency of transaction and duration of holding. Ld. AO thus called upon assessee to establish why assessee should not be treated as a Trader and income from such share transaction as business income. In response to Ld. AO’s proposition, representative of assessee submitted that assessee had undertaken the transaction in her own name and that she had bought and sold the shares in BSE/NSE through a broker. It was submitted that assessee had treated all the

shares traded as investments and that she had recorded the same at cost price irrespective of the market losses. 2.2Ld.AO rejected assessee’s submission and computed net gain of Rs.1,67,96,666/- after allowing expenses of Rs.11,79,170/-and purchase price of Rs.133,17,47,947/- as appellant’s business income. 3.Aggrieved by order of Ld. AO, assessee preferred appeal before Ld. CIT (A). 3.1Ld. CIT (A) asked assessee to file details of dividend earned on shares, sale of which had raised resulted in capital gains. Assessee submitted script wise computation of short term capital gain from. From the details filed by assessee, learnt CIT (A) observed as under: “4..................... From the same it is seen that there wore in all 65 transaction, of which 8 transactions related to purchase of 3,64,053 shares of Cairn India which were held by the appellant and not sold during F. Y. 2014-15. The average period of holding of the other shares was 32 days or approximately one month. In some cases examples reliance liquid fund, ITC, Canara bank, century textiles and NCC, the period of holding ranges between one day and 7 days. This is apart from the intraday trading at NSE features as observed by the AO which resulted in losses to the appellant. The longest period of folding is 133 days and there are only 2 transactions in shares of Unitech Ltd which were held for that length of time. It was also submitted that the appellant had herself changed from an investor into a Trader from the next

financial year and w.e.f. 01/04/2015 the shares held by the appellant were converted into her stock in trade. It was start stated that the losses incurred on the purchase and sale of shares of Cairn India were treated as capital loss till the date of conversion and the losses incurred after that date were treated as business loss and the same had been accepted in the scrutiny assessment for the following assessment year that is 2016-17.” 3.2Based on the submissions made by assessee and above observations by Ld.CIT(A) assessee was considered to be a trader rather than exist due to the frequency of transactions and period of holding. Ld.CIT(A) categorically observed that certain scripts were held by assessee for quite short period of almost less than 10 days and in case of NSE futures, less than a day. Ld.CIT(A) also noted that assessee had earned dividend of Rs.1,00,400/-from IFCL Ltd. 3.3Ld.CIT(A) also noted that the shares of carry in India was held by assessee for more than one year as a dividend was declared on 23/04/2015. Subsequently assessee sold her shares in carry in India in June 2015, before the effective date of dividend distribution which was 08/07/2015. Ld.CIT(A) thus concluded that assessee had not purchased the shares with the intention of investment but for earning dividend there on. Ld. CIT (A) upheld the addition made by Ld. AO by observing as under: “7. In the appellant’s case, the value of transaction is used, up words of Rs. 1 33 crores. Per balance sheet also shows borrowings in the form of unsecured loans of Rs. 3.76 crores

from a family member D.Y.Uppar. As discussed above, the period of folding is relevant to Billy short, a month on average and in some cases less than 10 days. The appellant has also not earned significant dividend from investments. Taking the totality of facts into account, the AO’s action in treating her transaction and shares as trading and the prophets thereon as business income is upheld.” 4.Aggrieved by order of Ld.CIT(A), assessee is in appeal before us now. 4.1Ld.AR submitted that purchase and sale of shares were incidental and occasional and it was not a regular trade. He submitted that assessee so purchased and sold shares only 3 to 4 days in a month and waited for the script to appreciate and then exit. It has been submitted that assessee took delivery of stocks brought through her DPE and then sold. The average holding period is not less than 30 days which DP statement can further substantiate with. The Ld. ar placed reliance on the CBDT circular No. 6/2016, No. 1827 dated 31/08/1989, CBDT circular No. 4 of 2007 where a clear guidelines to follow to differentiate Trader from investor has been laid out. He submitted that the latest circular No. 6/2016 clearly spells the treatment of portfolio for a businessman and an investor and that assessee had invested in the stocks with the sole intent of capital appreciation and dividend income on such investments which are ascertained able by portfolio held by her. Ld. AR submitted that assessee had treated the Holdings in the books as a typical investor where irrespective of market losses she has

recorded the same at cost price. It was also submitted that assessee had followed accounting standard 13 for investments issued by ICAI. Taking support of circular No. 6/2016 para 3(a), Ld.AR stated that assessee has declared the shares as investment. He thus emphasised that assessee has to be treated as an investor and the authorities below were wrong in treating assessee as a Trader. 4.2Ld.Sr.DR on the contrary, submitted that intention of assessee was to earn profits from sale and purchase of shares. He submitted that it was involving various script, the magnitude of transaction of sale and purchase was large with turnover of Rs.133 crores. The details of purchase and sale of scripts during the relevant year is placed at page 30 of paper book. He submitted that only income generated by assessee shown in profit and loss account as income from operations, is profit from dealing in securities. He further submitted that profit and loss statement for year ended 31/03/2015 at page 27 read with page 19 of paper book, revenue recognition is categorised under 3 heads being: • sale of shares amounting to Rs.1,33,29,27,117/-; • brokerage income amounting to Rs.7,09,736/- • dividend income from IFCL • interest income from fixed deposit and SB back account amounting to Rs.1,25,54,395/-. 4.3Ld.Sr.DR submitted that the frequency and the period during which assessee purchased and sold shares, clearly leads to the intention that these were not ordinarily purchases and sales made by assessee. Instead there was an object to derive income by way of

profits. Emphasising on the basic nature of share trading activity conducted by assessee it was submitted that income derived by assessee from such huge magnitude of sale and purchase of shares cannot be considered to be capital gains merely because assessee has valued the shares at cost. 4.4He submitted that assuming assessee has invested in these shares is not supported by the account statements as there are no separate books of accounts maintained by assessee for the purposes of investment in shares as well as shares held as stock in trade. It was submitted that, what is held as closing stock during the year under consideration is only 364053 shares of Cairn India Ltd, purchased by assessee on various dates on 28/07/2014, 08/10/2014 to 11/12/2014. Even in respect of Cairn India Ltd assessee on 28/07/2014 purchased 96554 shares and 62446 shares for sum of Rs.3,04,20,916/- and Rs.1,96,74,63/-. These shares were was sold by assessee on 01/09/2014 and 02/09/2014 for sale consideration of Rs.3,19,59,374/- and Rs.2,07,94,518/-. Further on 01/12/2014 purchased 2000 shares at a price of Rs.3,76,00,000/- and sold 2000 shares on the same date at sale price of Rs.3,76,08,100/-. Ld. DR submitted that even the shares cannot be considered to have been purchased by assessee as an investment in the manner in which they have been purchased and sold. 4.5Ld.Sr.DR vehemently opposed the argument that assessee converted itself to be an investor in the subsequent financial year starting from 01/04/2015 wherein the alleged investment in carry

on India limited was converted into stock in hand which was subsequently sold by assessee immediately after the dividend was declared. 4.6He thus supported the observations of authorities below of considering the profits earned from sale purchase of shares during the year under consideration to be a business income. 5.We have perused the submissions advanced by both the sides in the light of records placed before us. 5.1Whether a person dealing with shares has made an investment or has treated them as stock-in-trade, has been the subject-matter of considerable debate. It is a matter of intention of the assessee, which has to be gathered from his conduct and surrounding circumstances. Various parameter/criteria have been elucidated and explained, however a pragmatic and common sense approach needs to be adopted, to determine keeping in mind commercial considerations. 5.2We have gone through Comparative Profit and Loss at page 19- 30 of paper book. On perusal of page 30, it is observed that assessee during the year under consideration had purchased shares amounting to Rs.1,31,49,51,280/-, which includes purchase of shares in Cairn India Ltd., As is clear from page 30 of paper book relied by Ld.DR. We note that assessee during the year under consideration has purchased shares amounting to Rs.1,33,29,27,115/-, which includes sale of shares of Cairn India Ltd. It is observed that, many shares were purchased and sold in magnitudes. Even in respect of Cairn India Ltd, we note that

assessee tried to maximise her profits by purchasing the shares on the same date it different prices which were subsequently sold on different dates thereby averaging the costs. As on 31/03/2015, assessee only had 364053 shares of Cairn India Ltd was only reflected as closing stock. None of the other scripts shown at page 30 appears in the balance sheet as on 31/03/15. The statement also reveals that assessee undertook intra-day transaction. 5.3It is observed that these scripts have not been held by assessee even for substantial period of time which is alleged to be made for investment purposes. 5.4Hon’ble Supreme Court in CIT v. Associated Industrial Development Co. (P.) Ltd. [1971] 82 ITR 586, observed that:

“Whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee who holds the shares and it should, in normal circumstances, be in a position to produce evidence from its records as to whether it has maintained any distinction between those shares which are its stock-in-trade and those which are held by way of investment.” 5.5From the chart placed at page 30, it is clear that assessee purchased and sold scripts alleged to have been held as investment within small intervals and magnitude of purchases on each date is very high resulting in huge turnover. It is also noted that assessee did not transact between April to May and August 2014, and merely because assessee did not transact during these months, does not establish that these were investments in the hands of assessee.

Ld.AR argued before us that assessee should be treated as an investor for the simple reason that she had considered the closing stock at cost. However we note that the only script that was held to be as closing stock was in case of Cairn India Ltd. 5.6In our considered opinion frequency, volume of purchase and sale of shares and the profit earned by assessee on sale of such shares within a short period of time shows, intention of assessee was to generate income through trade, rather than invest in them. 5.7Hon’ble Delhi High Court in the case of CIT vs D&M Components Ltd reported in 364 ITR 179 had observed as under: “18. We find the Hon’ble Delhi High Court in the case of D & M Components Ltd. (supra) while deciding a somewhat identical issue has held that where there was short duration of holding of shares and lack of clarity in account books, sale and purchase of shares would lead to business income and not short term capital gains. The various other decisions relied by the ld. counsel for the assessee also supports his case that the profits in the instant case of purchase and sale of shares would amount to business income and not short term capital gain as held by the Assessing Officer. In this view of the matter, we set-aside the order of the ld.CIT(A) and direct the Assessing Officer to allow the claim of business income on account of profit on sale of such shares.” 5.8Based upon the above factual observations we do not agree with Ld.AR in considering income generated from sale of these shares as “capital gain” instead of “income from business”. We therefore do

not find any infirmity in view taken by Ld.CIT(A), and the same is upheld. Accordingly grounds raised by assessee stands dismissed. In the result appeal filed by assessee stands dismisses. Order pronounced in the open court on 18th Dec, 2020 Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 18th Dec, 2020. /Vms/

Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore 6. Guard file By order

Assistant Registrar, ITAT, Bangalore

Date Initial 1. Draft dictated on On Sr.PS Dragon 2. Draft placed before author -12-2020 Sr.PS 3. Draft proposed & placed -12-2020 JM/AM before the second member 4. Draft discussed/approved by -12-2020 JM/AM Second Member. 5. Approved Draft comes to the -12-2020 Sr.PS/PS Sr.PS/PS 6. Kept for pronouncement on -12-2020 Sr.PS 7. Signed Order comes back to -12-2020 Sr.PS Sr.PS/PS 8. Date of uploading the order -12-2020 Sr.PS on Website 9. If not uploaded, furnish the -- Sr.PS reason 10. File sent to the Bench Clerk -12-2020 Sr.PS 11. Date on which file goes to the AR 12. Date on which file goes to the Head Clerk. 13. Date of dispatch of Order. 14. Draft dictation sheets are No Sr.PS attached