INCOME TAX OFFICER 25(2)(3), MUMBAI vs. DAMYANTI ASHWIN PATEL, MUMBAI

O R D E R

PER AMARJIT SINGH, JM:

2. The revenue has raised the following grounds: -

A.Y.2012-13 "1. On the facts and circumstances of the case and in law, the ld. CIT(A) erred in directing to treat the profit on sale of shares as short term capital gain and long term capital gain instead of business income held by the Assessing Officer, ignoring that the AO detailed finding that there is a discrepancy between purchases and sales that of corresponding movements in the assessee’s demat account.

2. On the facts and circumstances of the case and in law, the ld. CIT(A) erred in directing to treat the profit on sale of shares as short term capital gain and long term capital gain instead of business income held by the Assessing Officer, ignoring that the mismatch in demat account is new point which is not involved either in any of the referred case laws or in Circular No.06/2016 dated 29.02.2016 issued by CBDT.

3. The appellant prays that the order of CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored.

4. The appellant craves leave to amend or to alter any ground or add a new ground, which may be necessary.”

3. The brief facts of the case are that the assessee filed his return of income on 30.08.2012 declaring total income to the tune of Rs.11,41,484/- for the A.Y.2012-13. Thereafter, the return was processed u/s 143(1) of the I.T. Act, 1961. The case was selected for scrutiny under CASS and notices u/s 143(2) & 142(1) of the Act were issued and served upon the assessee. The assessee is engaged in the business of Trading in Shares & Securities & F & O. The assessee claimed income of share equity and investment income as capital gain. The Assessing Officer has issued the notice in this regard and after going through the reply, treated the income were sale of share as business income. The total income of the assessee was assessed in sum of Rs.1,07,67,190/-. Feeling aggrieved, the assessee filed an appeal before the CIT(A) who treated the income from sale of share as long/short 2 A.Y.2012-13 term capital gain but the revenue was not satisfied, therefore, the revenue has filed the present appeal before us.

ISSUE NOs.1 & 2

4. Under these issues the revenue has challenged the treatment of the income of share as long term capital gain. The Ld. Representative of the revenue has argued that the Assessing Officer has rightly treated the gain from shares as business income but the CIT(A) has wrongly treated the income from sale of shares as long term capital gain/short term capital gain, therefore, in the said circumstances, the finding of the CIT(A) is not justifiable and is liable to be set aside. However, on the other hand, the Ld. Representative of the assessee has strongly relied upon the order passed by the CIT(A) in question. Before going further we deem it necessary to advert the finding of the CIT(A) on record.:-

“5. I have considered the facts, oral contentions and written submissions of the appellant as against the observation/findings of the AO in assessment order. The submissions and contentions of the appellant are being discussed and decided as under:- 5.1 During the course of the scrutiny proceedings, the A.O. observed that has shown long term capital gains of Rs.95,96,054/- and short term capital gain on Rs.6,86,067/-. The appellant has claimed exemption u/s.10(38) of the Act for the entire LTCG. The A.O. treated STCG and LTCG as business income in the assessment order. The most relevant aspect is the intention of the assessee behind purchasing and holding the shares and such intention has to be gathered from the facts and the conduct of the assessee. The A.O. referred to the decision in case of Sarnath Infrastructure (P) Ltd. Vs. ACIT reported in 120 TTJ (Lucknow) 216 and Circular No.4/2007 dated 15/06/2007 issued by the CBDT for the guidelines to decide the issue. The A.O. has observed massive transactions giving obvious character of trading than investment. The holding period of majority of scripts is less than 360 days. The appellant has tendency to book profit/loss even on slight movement of the prices of shares.

3 A.Y.2012-13 5.2 During the appellant proceedings appellant has stated the appellant is high net worth individual having his own capital of Rs.9.41crores as at 31.3.2012 and investment in shares of Rs.16.38crores on that date. The appellant has borrowed funds only from the family members, no interest has either been paid or debited to the capital account of the appellant for the relevant financial Year. For this size of portfolio, it is obvious that investment will be spread over a number of scripts to diversify the risk. The quantity of shares will depend upon the face value of shares. In Janak S. Rangwala Vs. ACIT (11 SOT 627) (Mum), it was held that mere volume or magnitude of transactions would not alter its nature. There is difference between a trade and a transaction because in screen-based trading a single transaction may lead to several trades. There are frequent transactions of Buy-Sell-Buy in a scrip in short time span, it may indicate trading feature. In Koradia Construction P. Ltd/s case (supra) the Tribunal held that a prudent investor always keeps a watch on volatility of the market and makes sound decisions in accordance with such market fluctuations and has the liberty to liquidate his investments in shares as and when necessary. The law itself has recognized this fact by treating the same as short term capital gains for shares held less than 12 months and long term capital gains where the shares are held for more than 12 months. The fact that the law recognizes such ,volatility and has specifically provided a separate holding period in reseat shares makes it clear that gains on such shares having a holding period of less than I Ord held as investment would be considered as short term capital gains has pointed out trend of Buy-Sell-Buy in only 10 scrips out of a variety of scripts held by the appellant. The appellant has declared substantial LTCG of over Rs.95.56 lakhs, some of which has been earned on sale of shares held for about 2 - 3 years. The appellant has earned dividend income of Rs.22.22 lakhs. All these facts clearly show the appellant holds shares for long time. The return on investment in LTCG which shows that the appellant has waited for capital appreciation over a longer period. In Smt. Sujata Kapadia Vs. 3CIT (2015) 55 taxmann.com 474 (Mumbai Tribunal) and ACIT Vs. Smt. Kinnary Sanghvi (2015) 56 taxmann.com 288 (Mumbai Tribunal), the Tribunal has held that merely because the assessee liquidates its investment within a short span of time, which had given better overall earning to the assessee, would not lead to the conclusion that the assessee had no intention to keep on the funds as investor in equity shares, but was actually intended to trade in shares. It is noted that the appellant has earned high return in case of some of the shares sold within 12 months. When such a high return is made in short span, there is no reason why any prudent investor should not sell those shares in less 4 A.Y.2012-13 than 12 months resulting in STCG. The early sale in such circumstances would not alter the investment to trading. 5.4 The entries in the books of account and balance sheet of the appellant show the shares are held as investment only. The appellant has valued the shares at 'cost' and not at lower of 'cost or market value'. In Gopal Purohit's case (supra) Tribunal held that presentation in the books of account is the most crucial source of gathering intention of the assessee as regard to the nature of transaction and it reflects, prima facie, a view of the assessee on a particular subject. In Karamchand Thapar & Bros. (P) Ltd. Vs. CIT (82 FR 899), the Hon'ble Supreme Court held that the treatment given by the assessee in books of account may not be conclusive but it is a vital piece of evidence. This decision was relied upon by the Tribunal in Gopal Purohit's case (supra) which has been confirmed by the Bombay High Court. Thus, the entries made by the appellant in books of account show his intention to hold these shares as investment and not a trading stock. In H. Hoick Larsen's case (supra), the Hon'ble Supreme Court held that it is the intention of the assessee at the time of purchase of shares that is important to decide if those shares were acquired by him for investment or trading. Therefore, intention of the appellant gathered from presentation of entries in books of account shows that the shares are held as investment and not a trading stock. The appellant's intention is also noted from the consistent stand taken by him in his income-tax returns filed year after the reference to which has been made earlier. 5.5 From perusal of the appellant's balance sheet, It is seen that no interest n paid or claimed by the appellant. All the transactions are delivery-based. The appellant does not use any infrastructure or office set up for carrying out the re activity. There is no organized share trading activity as no expenses are aimed by the appellant. In Circular No.6/2016, dated 29.02.2016 issued by the CBDT, wherein it has been provided 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. 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 stand/contrary stand in this regard in subsequent years. This Circular shows that the choice rests with the assessee to treat the income from sale of listed shares as capital gain if the same is held for period of more than 12 months. In other words, in case of LTCG, once the assessee makes choice of treating it as capital gain, the Assessing 5 A.Y.2012-13 Officer should accept the same. The Circular also underlies the importance of consistency in the approach of the taxpayer in this regard. This Circular, though issued now, supports the appellant's stand at least in so far as LTCG on shares is concerned. It further reiterates the principle of consistency, which the appellant has been following in this regard in earlier years. 5.6 I have considered the argument of appellant, perused the assessment order, material placed on record, the appellant's written submissions and the relevant case laws on the subject. The A.O. has treated the capital gains earned by the appellant on sale of shares as business income. I find that in the A.Y. 2010-11 the A.O. had treated profit on sale of shares as business income whereas the appellant had shown the same as STCG and LTCG. Vide order dated 23.03.2016 in Appeal No. CIT (A)-37/IT-56/ACIT-25(3)/13-14, passed by me in the appellant's case for A.Y.2010-11, I decided this issue in favour of the appellant. The relevant portion of my order of A.Y.2010-11 is reproduced below: - In Circular No.6/20I6, dated 29.02.2016 issued by the CBDT, wherein it has been provided that in respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, ([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 stand/contrary stand in this regard in subsequent years. This Circular shows that the choice rests with the assessee to treat the income from sale of listed shares as capital gain the same is held for period of more than 12 months. In other words, in case of LTCG, once the assessee makes choice of treating it as capital gain. the Assessing officer should accept the same The Circular also underlies the importance of consistency in the approach of the taxpayer in this regard. This Circular though issued now, supports the appellant’s stand at least in so far as LTCG on shares is concerned. It further, reiterates the principle of consistency, which the appellant has been following in this regard in earlier years. The appellant has relied upon past history of the appellant's case citing the Hon 'ble Bombay High Court’s judgments in Gopal Purohit (supra), where it was held that though the principle of res 6 A.Y.2012-13 judicata not applicable to tax proceedings, there ought to be uniformity in treatment and consistency when the facts and circumstances are identical. The appellant filed a chart showing the factual position of the past assessments from A. Y. 2001-02 to A.Y. 2009-10 along with copies of return of income, computation statements and intimations u/s.143(1) for A.1'. 2006-07. This chart shows that the appellant's status of investor in shares was accepted at the assessment stage in the past. Principle of consistency has to be applied where facts are identical. The A. 0. has not brought on record any material to show that the facts in the year under appeal were different compared to the earlier year identically in the case of Pan/ca] Patel, relative of appellant, in the assessment year 2003-04, 2004-05 the Bombay High Court has held in favour of the Pankaj Patel and treated profit on sale of shares as capital gains. The investment activity in the appellant's case is also similar in the year of the consideration, therefore, the judgment in the case of the Pankaj Patel is also applicable to him. The relevant portion of the judgment dated 23/01/2013 in Income Tax Appeal No. 953 & 954 of 2011 is reproduced below: "I. In these appeals by the revenue for the assessment years 2003-2004 and 2004-05, the basic question is whether the Tribunal was correct in directing the assessing officer to assess the income of the respondent assessee on sale of shares as capital gain rather than as business income as sought by the revenue.