THE ITO, VIJAYAWADA vs. PEDARLA SRINIVASA MURTHY, VIJAYAWADA

आदेश / O R D E R

PER D.S. SUNDER SINGH, Accountant Member:

These appeals filed by the revenue are directed against

order of the Commissioner of Income Tax (Appeals) {CIT(A)},

Vijayawada vide ITA No.168&170/CIT(A)/VJA/2014-15 dated 30.12.2015

for the assessment years 2007-08 & 2008-09. Since, the facts are

identical and issues are common, they are clubbed, heard together and

disposed-off by way of this common order for the sake of convenience.

143(3) r.w.s. 147 of the Income Tax Act, 1961 (hereinafter called as 'the

Act') by an order dated 28.3.2014 on total income of ` 40,87,610/- and

for the assessment year 2008-09, the assessment was completed u/s

143(3) r.w.s. 263 of the Act by an order dated 28.3.2014 on total

income of ` 1,20,96,380/-. The assessee is engaged in the activity of

purchase and sale of shares of different companies through Kotak

Securities Ltd and Zen Securities Ltd and has admitted the income under

the head “Capital gains”, whereas the A.O. is under the impression that

the income should be assessed as “business income”. The only issue

involved in this appeal is whether the income derived from purchase and

sale of shares is to be taxed under the head “business income” or under

the head “capital gains”. The A.O. observed that the assessee had

purchased the shares of ` 19,31,76,052/- and sold the shares of `

19,25,14,414/- for the A.Y. 2007-08 thus involving huge transactions in

purchase and sale of shares. The assessee admitted the resultant

profit/loss under the head short term capital gain (loss) and long term

capital gains depending on the holding period. The income on account

of long term capital gains was claimed as exempt u/s 10(38) of the Act.

The A.O. called for the explanation of the assessee as to why the

resultant profit on purchase and sale of shares should not be assessed

as business income. The assessee submitted his reply stating that the

assessee is engaged in purchase and sale of shares and claimed long

term capital gains in respect of shares held for a period of more than 6

months and shares sold less than the period of 6 months were admitted

as short term capital gains. The assessee further stated that assessee

has purchased the shares from recognised stock exchange and paid the

Security Transaction Tax (STT) taken the delivery of the shares and

deposited in DEMAT account. The assessee declared the shares as

investment and continued to be held as investment till the shares were

sold. The intention of the assessee was investment but not trading. As

and when the shares were sold, they were sold from the DEMAT account

and gave delivery through recognized stock exchange and the

recognised stock broker. When stocks are sold and delivered and STT is

paid and the transactions were done through recognised stock

exchange, thus argued that the same amounts to capital gains. The

assessee further submitted that the assessee declared shares in the

balance sheet as investments and treated the asset as capital assets and

not as stock in trade. The assessee also valued the assets as capital

assets and repeatedly told the A.O. that his only intention was buying in

shares was to investment and not to trade in shares. However, the A.O.

was not convinced with the explanation of the assessee and observed

that by going substantial nature of transactions, the magnitude of

purchase and sales the nature of transaction is certainly trade

transaction but not the capital gains. Accordingly, assessed the entire

capital gains claimed by the assessee as business income and disallowed

the expenses claimed by the assessee in respect of DP charges, interest

charges, service tax brokerage and brought to tax the net profit of `

40,63,301/- to tax.

before the CIT(A). During the appeal hearing, the assessee filed written

submissions before the Ld.CIT(A), which the CIT(A) has forwarded to

the A.O. for his remand report. The A.O. submitted the remand report

stating that right from the commencement of the activity, the assessee

has treated the activity as investment and the same was reflected in the

balance sheet for the earlier years and declared the value of shares as

investment in the balance sheets in the impugned A.Y also. The A.O.

further stated that during the remand proceedings, he has verified the

contract notes with reference to the statements filed by the assessee for

day to day transactions, and the bifurcations for Intra-day transactions,

short term capital gains and long term capital gains. However the AO in 4

the remand report viewed that in view of magnitude of transactions the

same should be held as business activity. The Ld. CIT(A) given the copy

of the remand report to the assessee and called for his counter

comments. In reply to the remand report, the assessee reiterated the

submissions made before the A.O. contending that the assessee had

regularly admitted the income under the head capital gains. The CIT(A)

after considering remand report and the submissions made by the

assessee held that the income derived by the assessee from purchase

and sale of shares required to be taxed as capital gains but not under

the head “business income” and accordingly deleted the addition.

before us. During the appeal hearing, the Ld. D.R. argued that the A.O.

made the addition after detailed examination of the nature of

transactions and concluded that the assessee has done trading activity

and held that the intention of the assessee was to gain profits by dealing

in share transactions. The Ld. D.R. also further argued that the

magnitude of transactions dealt with by the assessee establishes that

the assessee is engaged in share trading and intention of the assessee is

not investment. Further, Ld. D.R. argued that the assessee also dealt in

Futures and options, intra-day trading, therefore, the entire activity of

the assessee in the nature of business but not in the nature of 5

investment. Hence, argued that the A.O. has rightly assessed the

income under the head “business income” which required to be upheld.

Ld.CIT(A).

on record and gone through the orders of the authorities below. The

assessee is engaged in the activity of making investment in shares,

apart from Intra day trading and dealing in futures and options.

Separate portfolio is maintained by the assessee for each type of

transaction. The investments are separately bifurcated and shown as

the investments in the balance sheet. Merely because the assessee has

made huge transactions in purchase and sale of shares, the same

cannot be held to be business activity. The intention of the assessee

has to be verified and it is observed from the financial statements that

the assessee has declared the assets as capital assets in the balance

sheet but not as stock in trade. This fact was not disputed by the A.O.,

rather the A.O. has confirmed the fact in his remand report also. The

assessee also did not claim any benefit of increase or decrease of the

value of shares by declaring the same in closing stock, no other business

expenditure was claimed by the assessee on the shares. The CIT(A) has

elaborately discussed the issues and held that all aspects such as the

facts and circumstances of the case, receipt of dividend, volume and

frequency of transaction shows the investment but not trading. The

same facts were discussed in detail in the Ld. CIT(A)’s order which is

made available in para Nos.5.3 to 5.4 of the Ld. CIT(A) order, and the

same is extracted as under:

5.3 I have perused the reply of appellant, remand report of Assessing Officer and Income Tax records and other submissions of appellant.

Present Assessing Officer during remand proceedings had the advantage of complete break up of details of share transactions with supporting evidence indicating period of holding (i.e.) retention period of shares, etc. and these details were not made available to the predecessor Assessing Officer while concluding the assessment order dated 28.03.2014. Hence present Assessing Officer's reliance on his predecessor's stand (even after verification of all relevant details) appears to me to be contradictory to his own observation in para (1) and (2) of remand report dated 09.12.2015

5.4 I fail to persuade myself to agree with the remarks of Assessing Officer that appellant had done trading activity under the heed business for the following reasons:

treated as business income.

“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"

The appellant admitted his share transactions as investment in his capital account consistently ever since he started dealing in shares in all the Returns of Income filed by him. The stand of appellant was accepted by the Department upto Asst. Year 2005-06. For Asst. Years 2006-07, 07-08 and 08-09, the Assessing Officer took a different stand though facts remained the same even during the relevant asst. years.

also taken the shares at cost of acquisition thus given a particular treatment to the shares held as investment, therefore, without bringing on record any contrary material the Assessing Officer cannot change the intention and manner of investment made by the appellant. Had the appellant valued the shares at cost or market price whichever is lower, the gain arising out of sale of shares could be treated as business income. Appellant had not valued the shares as stock but valued the same as investment.

Thus, what was a capital asset will remain a capital asset unless the person holding the asset himself changes the nature by a specific action like conversion of capital asset into stock-in-trade. In the appellant's case, he has not treated the investment in equity shares as stock-in-trade. In view of the decision of Hon'ble Supreme Court in the case of Ram Kumar Agarwal & Brothers 205 ITR 251, Assessing Officer was not justified in treating the capital gain earned from sale of those shares as business profits, which were entered by appellant as investment in books of account.

With effect from 01.10.2004, on the share transactions subjected to STT, concessional tax rate @10% (which has been increased to 15% from Asst. Year 2009-10) is applicable in respect of STCG whereas no tax is chargeable in respect of LTCG.

Appellant paid a sum of Rs.3,78.6251- during the Asst. Year 2007-08 as STT indicates that the income on account of sale of such shares should be treated as only 'capital gains' arid not business income.

Asst. Year Amount LTCG STCG/STCL of exempt u/s dividend 10(38) (Rs.) 2005-06 1,89,080 10,33,691 9,05,824 2006-07 3,61,275 26,22,175 (-) 2,43,010 2007-08 8,95,840 1,55,20,412 (-) 1,26,94,353 2008-09 7,58,588 Nil 71,99,080 The very fact of earning dividend for different Asst. years stands to testify that the appellant undertook ‘investment activity’ and not ‘trading activity’ and such dividend was claimed as exempt u/s 10(38) of the Act in view of the fulfillment of the conditions laid therein. The above share transactions were done through stock brokers (registered brokers) and appellant paid STT and deliveries were taken to the DEMAT account held by appellant. The shares held as investment activity and those covered by Futures and options are distinguished by appellant that the shares held as ‘investment’ were recorded in the financial statements as Capital Assets only as could be seen from the statements forming part of the Return of income for relevant Asst. year. The income derived by appellant from ‘Futures & Options’ was accounted for by him under the head ‘business’ only and it is explicit from the assessment record itself. 11. Appellant reported loss of ` 26,578.70 on account of intra-day transactions. In respect of trading in Futures and Options (F&O), appellant admitted loss of ` 8,81,601/- under the head “Business loss” in respect of Asst. year 2007-08. 12. Hence, in my view, the decision of ITAT, Mumbai in the case of Hema Hiren Dand Vs. JCIT dated 18.2.2015 is squarely applicable to facts of the appellant’s case. Therefore, profits on account of sale of shares of appellant, in my view, are to be treated as capital gains only and not as business profit as held by Assessing Officer.” 7. It is settled issue that if the shares are held by the assessee as

stock-in-trade, profit on sale of such shares would

constitute business income, and be subject to tax at a higher rate. In

order to ascertain as to whether the shares were purchased by the

assessee as investment or stock-in-trade, the most relevant aspect

which is to be seen is the intention of the assessee behind

the purchase of shares and such intention has to be gathered from the

facts of the case including the conduct of the assessee. In the instant

case, the assessee has declared the purchase and sale of shares as

capital gains. The assessee has purchased the shares through

recognised stock exchange taken delivery of shares and passed through

DEMAT account and sale also made through recognised stock exchange

and through DEMAT account. The assessee also paid service

transaction tax on the purchase and sale of shares. The assessee

declared the value of shares as at the end of the year in the balance

sheet as capital asset but not stock in trade. The assessee is permitted

to maintain separate portfolios, one for investment portfolio and the

other for training portfolio as noted from the CBDT circular No.4 of 2007

dated 15.6.2007. This view is supported by Hon’ble Madras High Court

decision in the case of CIT Vs NSS Investments(P) Ltd, [2005] 277 ITR

149 (Madras). The capital asset would be remained as capital asset

unless the person holding the asset himself changes the nature by

specific action like conversion of capital asset into stock in trade. Except

stating that the assessee had involved in large number of transactions, no evidence was brought on record by the A.O. to hold that subject

income is a business income. Hon’ble Gujatat High court in the case of

Principal Commissioner of Income-tax-1.v.Ramniwas Ramjivan Kasat, 2017] 82 taxmann.com 458 (Gujarat) held that

"2. Over the years, the courts have laid down different parameters to distinguish the shares held as investments from the shares held as stock-in-trade. The Central Board of Direct Taxes ('CBDT') has also, through Instruction No. 1827, dated August 31, 1989 and Circular No. 4 of 2007 dated June 15, 2007, summarized the said principles for guidance of the field formations. 3. Disputes, however, continue to exist on the application of these principles to the facts of an individual case since the taxpayers find it difficult to prove the intention in acquiring such shares/securities. In this background, while recognizing that no universal principal in absolute terms can be laid down to decide the character of income from sale of shares and securities (i.e. whether the same is in the nature of capital gain or business income), CBDT realizing that major part of shares/securities transactions takes place in respect of the listed ones and with a view to reduce litigation and uncertainty in the matter, in partial modification to the aforesaid circulars, further instructs that the Assessing Officers in holding whether the surplus generated from sale of listed shares or other securities would be treated as Capital Gain or Business Income, shall take into account the following- (a) Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in- trade, the income arising from transfer of such shares/securities would be treated as its business income, (b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years; (c) In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT. 5. It is reiterated that the above principles have been formulated with the sole objective of reducing litigation and maintaining consistency in approach on the issue of treatment of income derived from transfer of shares and securities. All the relevant provisions of the Act shall continue to apply on the transactions involving transfer of shares and securities." 7. Two things emerge from this circular. One is that the CBDT desires to obviate the difficulties of the assessees and simultaneously to reduce the litigation. In paragraph 3 of the circular, certain parameters have been laid down. Clause (b) thereof in particular provides that in respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. In other words, the Revenue would not pursue this issue if the necessary ingredients are satisfied, only rider being the stand taken by the assessee in a particular year would be followed in the subsequent years also and the assessee would not be allowed to adopt a contrary stand in such subsequent years. ITAT MUMBAI BENCH 'D' in Dharmesh R. Shah. vJoint

Commissioner of Income-tax, Range No. 19(2)* [2013] 36 taxmann.com

588 (Mumbai - Trib.) held that IT: Where assessee had consistently

held shares as investments and valued them at

cost, gain from sale of shares could not be held as business income.

Hon’ble High Court of Delhi, in Commissioner of Income-tax, Delhi-II v.Jubilant Securities (P.) Ltd.* [2011] 11 taxmann.com 88 (Delhi) that held

Findings of facts were recorded by the two authorities below that the assessee was maintaining two portfolios and insofar as shares in question were concerned, they were taken as investment from the date of purchase itself and shown in investment portfolio. The profits resulted therefrom was capitalgain. The revenue could not show any perversity in those findings. Those were pure findings of facts. Therefore, the appeal was to be dismissed. Further, in the assessee’s own case for the earlier assessment

year, the income was assessed as capital gains but not as business

income. Though rule of res judicata does not apply to Income tax

proceedings, rule of consistency does applicable in income tax

proceedings. Therefore, we do not see any reason to interfere with the

order of the CIT(A), and accordingly, we uphold the order and dismiss

the appeal of the revenue.

08 and 2008-09 are dismissed.

The above order was pronounced in the open court on 9th May’18.

Sd/- Sd/- (वी. दुगा�राव) ( ड.एस. . . . सु�दर "संह) (V. DURGA RAO) (D.S. SUNDER SINGH) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER #वशाखापटणम /Visakhapatnam: 'दनांक /Dated : 09.05.2018 VG/SPS

आदेश क� ��त)ल#प अ*े#षत/Copy of the order forwarded to:-