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Income Tax Appellate Tribunal, MUMBAI BENCH “B”, MUMBAI
Before: Shri Sandeep Gosain & Shri G ManjunathaShri Manish P Gandhi
O R D E R Per G Manjunatha, AM : This appeal filed by the revenue is directed against order of the CIT(A)- 35, Mumbai dated 26-09-2014 and it pertains to AY 2006-07. The revenue has raised the following grounds of appeal:-
“1. "On the facts and circumstances of the case the Ld.CIT(A) erred in fact & law by treating "Business Income" as "Capital Gain". TheCIT(A) has failed to appreciate that: (a) 46% of the total shares were held for less than 30 days (Page No.9 of CIT(A) order). Frequency/Turnover of the Scripts within short span reflect nothing but intention of the assessee was to engage in business. Analysis of Short Term Capital Gain-
2 ITA 7474/Mum/2014
No. of Scripts No, of Shares Holding Period Profit/(Loss) (Amount in Rs.) 385691 21 Upto30days (4,80,662) 92792 9 Over 30 days but less than 60 days 55,47,485 57448 8 Over 60 days but less than 90 days 26,57,535 57631 9 Over 90 days but less than 120 days 56,72,877 48000 5 Over 120 days but less than 150 days 61,90,992 5442 2 Over 150 days but less than 180 days 41,683 88864 10 Over 180 days but less than 365 days 33,32,109 Short Term Capital Gain: 2,29,62,019 Demat Charge (2,20,019) Net Short term capital gain 2,27,42,000 Total 45 Scripts sold during the year under consideration.
Analysis of Long Term Capital Gain-
No, of Shares No. of Holding Period Profit/(Loss) Scripts (Amount in Rs.) 52927 1,33,49,868 8 Between 1 year to 11/2 year 79,67,471 25234 8 Between 1 and X> year to 2 and % year 9455 2 Between 21/2 year to 4 year 9,34,061 Long Term Capital Gain 2,22,51,400
Demat Charges (76,216) 2,21,75,184 Net term capital gain: Total 11 scripts sold during the year under consideration.
(b) The grouping/accounting entries are not conclusive one as held in the case of Tuticorin Alkali Chemical & Fertilizers Ltd. and M/s Chowringhee Sales Bureau (P) ltd. (c) The C1T(A) has failed to observe the findings of Hon'ble High Court in the case of CIT Vs Storewell Credits & Capital P. Ltd. 1TXA.1408 of 2012 while admitting the appeal observed that the ratio of Gopal Purohit requires reconsideration: (i) Assessee was dealing in shares both as trader as well as holding share in investment (ii) The stocks held as investment are valued at cost and stock in trade at cost on market price whichever is low.
3 ITA 7474/Mum/2014
(iii) No Deduction u/s88E claimed in respect of sales held as investment. (iv) CBDT circular no.4 of 2007 dated-15.06.2007. 2. "The appellant prays that the order of the Ld. CIT(A) on the above grounds be set aside and that of the AO be restored."
The brief facts of the case are that the assessee is an individual engaged in the business of trading in shares as well as investment in share market. The assessee has filed his return of income for AY 2006-07 on 24-01-2006 declaring total income of Rs.2,25,83,776. The assessee entered into transactions in share market in three different categories, i.e. (a) transactions in futures & options (F&O); (b) intra date settlement without delivery of share; and (c) buying shares on delivery and selling in another settlement by giving delivery of shares. The assessee has consistently been showing income from shares where delivery has been taken as its investment from year to year and the same has been accepted by the department. The case has been selected for scrutiny and the assessment has been completed u/s 143(3) on 22-12-2018 where the AO has assessed income derived from share transactions including short term capital gain as well as long term capital gain under the head ‘Income from business or profession’ as against assessee’s admission under the head ‘Income from capital gains’.
The assessee carried the matter in appeal before the CIT(A). The Ld.CIT(A), for the reasons recorded in his appellate order, allowed the appeal in part and directed the AO to accept the claim of short term and long term
4 ITA 7474/Mum/2014 capital gains as claimed by the assessee; however, directed the AO to withdraw rebate claimed u/s 88E of the Income-tax Act, 1961. The department preferred appeal against order of the CIT(A) before the ITAT and the ITAT has disposed of appeal filed by the department and set aside the issue regarding treatment of income from share to the file of the AO to decide afresh in the light of the findings of the AO in original assessment proceedings and pleading of the assessee before the Tribunal.
Consequent to set aside proceedings, the AO called upon the assessee to furnish complete set of documents including scrip-wise sale and purchases of shares with holding period. In response, the assessee had filed detailed submission which has been reproduced at para 9 on pages 4 to 20 of assessment order. The AO, after considering submissions of the assessee and also by relying upon certain judicial precedents held that the assessee is involved in systematic activity of trading in shares in order to maximise profit.
Therefore, profit derived from such activity should be considered as adventure in the nature of trade and accordingly any income from such activity shall be assessable under the head ‘Income from business or profession’. The AO further observed that the assessee has borrowed funds and also a member of Jagruti Gandhi group which is engaged in the business of trading in shares.
Though, assessee states that shares are shown as investments in books of 5 ITA 7474/Mum/2014 account, but entries in books of account are not determinative in order to determine true nature of income. The assessee derives most of his income from transacting in stock market in the form of F&O profit or delivery based transactions. The holding period of shares in some cases is less than 30 days.
The assessee’s contention that he has two portfolios is not entirely correct, because although he claims to have shown investment in shares of Kirloskar Pneumatic as investment in his books of account, but the said shares are neither appearing in balance-sheet or profit on sale of said shares is shown as capital gain. Accordingly, he came to the conclusion that the claim of the assessee that income from sale of shares, where delivery has been taken is assessable under the head ‘Income from capital gains’ is incorrect, because to decide the head of income under which a particular income is assessable, the whole circumstances has to be looked into in toto without considering a single item in isolation manner. Therefore, when you considered overall facts and circumstances of the assessee, it is very clear that the assessee is involved in systematic activity of trading in shares and hence, any income derived from such activity is to be assessed under the head ‘Income from business or profession’. The AO has also distinguished various case laws relied upon by the assessee, including the decision of Hon’ble Bombay High Court in the case of CIT vs Gopal Purohit 222 CTR 582 (Bom).
6 ITA 7474/Mum/2014
Aggrieved by the assessment order, assessee preferred appeal before the CIT(A). Before the CIT(A), assessee has filed elaborate written submissions on each and every observations made by the AO in order to assess income derived from purchase and sale of shares under the head ‘Income from business or profession’ and the written submission filed by the assessee has been reproduced at para 2 on pages 2 to 8 of the order of Ld.CIT(A). The sum and substance of arguments of the assessee before the CIT(A) were that the AO was erred in assessing income from share transactions under the head ‘income from business or profession’ without appreciating the fact that the assessee is consistently declaring profit from sale of shares where delivery has been taken under the head ‘Income from capital gains’ and also treated said investments under the head ‘investments’ in his books of account. The assessee neither utilised borrowed funds nor involved in repetitive trading of shares in order to maximise profit. Merely because the holding period of shares is less than 365 days, no adverse inference could be drawn against the assessee when the legislature itself has provided for holding period of less than 365 days in case of short term capital gain and more than 365 days in case of long term capital gain. The assessee further contended that the CBDT itself has clarified the position of assessment of income from share market by its circular No.4 of 2007 where it emphasise on the point of maintenance of two
7 ITA 7474/Mum/2014 portfolios by a taxpayer. Therefore, the AO was erred in not considering all these aspects including the decision of Hon’ble Bombay High Court in the case of CIT vs Gopal Purohit (supra) where the Hon’ble Court has settled the legal position of dispute between the parties in respect of income from share market.
The Ld.CIT(A) after considering facts and also by following certain judicial precedents including the decision of Hon’ble Bombay High Court in the case of CIT vs Gopal Purohit (supra) held that in order to determine the nature of income under which it is assessable, any one factor cannot be considered especially in the cases where the assessee is involved in investment as well as trading activity. In the present case, the assessee has maintained two portfolios and accordingly, treated investments in shares under the head ‘investments’ in his books of account whereas shares were held for trading, the same have been treated as stock in trade and valued accordingly by following the accounting standards prescribed for valuation of inventories. The assessee also proved other aspects including borrowed funds and frequency where it was categorically proved that no borrowed funds have been used for making investment in shares and also the frequency of buying and selling is very minimum. Although certain scrips were held for lesser period, i.e. less than 30 days, but that by itself would not give rise to an occasion to hold that the 8 ITA 7474/Mum/2014 assessee is in the business of trading activities, that results into income assessable under the head ‘income from business or profession’. The relevant findings of the Ld.CIT(A) are as under:-
“I have gone through the facts of the case, contention of the AO and submissions of the appellant. It is an undisputed fact that the assessee was dealing in shares both at trader5 as well as holding share in investment. It is also undisputed that the assessee had kept both portfolios separately and the mode of valuation of stock held as investment and stock held as stock in trade has been treated differently. The investment was valued at cost and it is shown in the balance sheet whereas the stock in trade was valued at cost or market price which ever was lower and the loss was accordingly claimed in the P&L account. Further it is also not disputed in respect of shares held as investment of shares sold by it and was not claimed u/s.88E of the I.T. Act. While no doubt the_ sequence of trade in shares is high however the fact of the quantum being high in absolute term also cannot be the factors to treat the portfolio as business income..The CBDT circular No.4 of 2007 dated 15- 06-2007 in fact also provides for a situation wherein tax payer may hold both portfolios, trading in investment in shares at the same time. Para 10 of CBDT circlular No.4 which reads as under: "CBDT also wishes to emphasis that it is possible for a tax payer to have two portfolio i.e. an investment portfolio comprising of securities which are to be treated as capital assets and trading portfolio comprises of stock in trade which are to be treated as trading assets. Where an assessee has two portfolio the assessee may have income under both heads i.e. capital gain as well as business income." The Hon'ble Supreme Court in the case of CIT vs Madan Gopal Radhyalal 73 ITR 62 has held that there cannot be a presumption th^t every acquisition by a dealer in a particular commodity is an acquisition for the purpose of his business. In each case the intention )s to be seen from the facts of the case and also from the conduct of acquiring the commodity and its dealings in the same. As can be seen from the table drawn on pages 02 to 07of this order,- it cannot be said that the appellant had borrowed funds for trading in shares. The appellant has been treating the said shares as investment. As regards the holding period, it is seen that no doubt 46%. of the total shares were held for less than 30 days, however, I find merit in the arguments advanced by the appellant that this fact is not sufficient to classify this segment of trading as business since buying and selling at short intervals is also a prudent decision depending on the performance of the market. In the present case, the appellant is maintaining two portfolios and is giving separate treatment to both the portfolios in his books of accounts. Therefore, the intention that emerges is at the outset in terms of whether a particular share is to be classified as stock-in-trade or as an investment option. The facts of the case vis-a-vis reference raised by the CBDT's Circular referred to above, clearly bring the fact that in the case of the appellant, there are two distinct incomes - income from trading in shares which is classified as business income and other which 9 ITA 7474/Mum/2014 would be classified as capital gains. The analysis of the table of the Short Term Capital Gains infact shows that a holding period of upto 30 days is high in terms of the number of scripts percentage wise. However, the quantum traded is very small- The major component is falling between 30 days to 150 days. Therefore, it cannot be said that in light of the facts of the present case, the same should be treated as business income.. I have gone through the facts in the case of brother of the appellant wherein the Hon'ble Bombay High Court have already held that the same should be classified as capital gains and found that the facts in this case are similar. Taking guidance from the said decision in the present case also, it is held that the income of the appellant should be treated as income from capital gains and not business income.”
Aggrieved by the order of Ld.CIT(A), the revenue is in appeal before us.
The Ld.DR submitted that the Ld.CIT(A) was erred in directing the AO to assess profit derived from sale of shares under the head ‘capital gains’ as against ‘income from business or profession’ assessed by the AO without appreciating the fact that out of total transactions carried out by the assessee, 46% of transactions were held for less than 30 days and such frequency / turnover within short span reflects nothing but intention of the assessee to engage in business. The Ld.DR further submitted that the grouping / accounting entries are not conclusive one as held in the case of Tuticorin Alkalies Chemical Ltd vs CIT 141 CTR 387(SC) and that what is relevant is the nature of income which is to decide the head of income under which it is taxable. The Ld.CIT(A) has failed to observe the findings of Hon’ble High Court in the case of CIT vs Storewell Credits and Capital Pvt Ltd in Income Tax Appeal No.1048 of 2012 where it was observed that while admitting the appeal, the Court observed that the ratio of judgement of Gopal Purohit (supra) needs
10 ITA 7474/Mum/2014 reconsideration. The Ld.CIT(A), without appreciating these facts, simply directed the AO to accept income under the head ‘capital gains’ as claimed by the assessee.
The Ld.AR for the assessee, on the other hand, submitted that the Ld.CIT(A) has rightly apprised the facts in light of various evidences filed by the assessee as per which, the assessee has categorically proved that neither borrowed funds have been used for making investment in shares nor involved in any repetitive trading of shares without taking delivery. The Ld.AR further submitted that the assessee has consistently declared profit under the head ‘capital gain’ where shares are taken delivery. The accounting entries passed by the assessee is also determinative to decide the nature of income because the assessee has consistently been showing investments in shares under the head, ‘investments’ and this has been accepted by the department in earlier years. The Ld.AR further submitted that the Board vide its circular No.4 of 2007 dated 15-06-2007 reiterated the legal position where it has been clarified that a taxpayer can maintain two portfolios depending upon the nature of activities carried out in share market and resultant income from activity can be shown in respective head of income. The Ld.AR further submitted that the Board vide its circular No.6 of 2016 dated 29-02-2016 clarified that long term capital gain should not be disturbed by the department where the assessee is 11 ITA 7474/Mum/2014 declaring income under the head ‘capital gains’ merely for the reason that there is borrowed funds and also repetitive transactions. In this regard, the assessee has relied upon the decision of Hon’ble Bombay High Court in the case of CIT vs Gopal Purohit (supra) and other case laws to justify the claim of income under the head ‘capital gains’. The Ld.AR further submitted that when the department has accepted the declaration of income under the head ‘long term capital gain’ / short term capital gain without any change in law, different view cannot be taken for subsequent year. Although, the principle of res judicata is not applicable to tax proceedings, but when consistent view is followed, the same should not be disturbed or deviated. In this regard, he relied upon the decision of Hon’ble Supreme Court in the case of Radhasoamy Satsang vs CIT (1992) 193 ITR 321 (SC).
We have heard both the parties, perused the material available on record and gone through the orders of authorities below. The fact with regard to the investment in shares as well as trading in shares by maintaining two separate portfolios is not disputed by the AO. The assessee is maintaining two portfolios, one investment portfolio and another is trading portfolio. The assessee has consistently followed this method of accounting and declared income accordingly under respective head of income. The assessee has considered shares as investments where the delivery has been taken on each
12 ITA 7474/Mum/2014 settlement, whereas where there is no delivery of shares and the settlement has been done on the same day, the same has been considered as futures and options and resultant income has been treated either as speculation profit or loss or income from business or profession. The AO disturbed income declared under the head capital gains for three reasons, i.e. (i) the assessee has utilised borrowed funds for investment in shares; (ii) the holding period of scrips in some cases is less than 30 days and also in majority of cases, it is less than six months, and (iii) the assessee is involved in repetitive trading of shares and frequency of trading is more. Therefore, he opined that the arguments of the assessee that the principles of consistency as well as maintenance of two separate portfolios is not correct and hence, the resultant income from the share trading activity needs to be assessed under the head ‘income from b1
It is the contention of the assessee that in this case there is no change in facts or law. Therefore, consistent method of accounting followed by the assessee in order to determine income from share trading activity cannot be disturbed. We find that the assessee is in the business of share trading activity for quite some years. All along, the assessee has followed a method of accounting, where the share transactions with delivery of shares have been treated as investments in its books of account and accordingly valued at cost, whereas buying and selling of shares without actual delivery has been treated
13 ITA 7474/Mum/2014 as trading activity and accordingly, the closing stock has been valued at cost or market rate, whichever is less by following accounting standard issued by ICAI.
This method of accounting has been consistently followed by the assessee and the department has accepted the same in the earlier years. Where department has accepted a particular method of accounting and assessed the income as such for earlier year, unless there is no change in facts and law, the same cannot be disturbed. This legal proposition is supported by the decision of the Hon’ble Supreme Court in the case of CIT vs Radhasaomy Satsang (supra) where it was held that when there is no change in facts or law, the method of accounting followed by the assessee cannot be disturbed even though the principles of res judicata has no applicability to income-tax proceedings.
Coming to the other issues questioned by the AO. The AO has brought out various reasons to assess income under the head ‘income from business or profession’. We find that the AO has brought out various reasons including period of holding, frequency of transactions, volume of business and source of investment, in order to decide the head of income. We find that this issue has been settled by the judgement of Hon’ble Bombay High Court in the case of CIT vs Gopal Purohit (supra), where the Court held that in order to determine the head of income, the overall facts and circumstances of the case needs to 14 ITA 7474/Mum/2014 be considered instead of considering one isolated instance of frequency or volume of transactions. We further note that the co-ordinate bench of ITAT, Mumbai bench in assessee’s brother’s case in Jagruti Gandhi has considered identical issue in the light of decision of Bombay High Court in the case of CIT vs Gopal Purohit (supra) and held that the period of holding, frequency of transactions and volume alone will not decide the head of income and what is relevant is the intention of the assessee to buy and sell shares. In this case, the assessee has made out a case with necessary evidence that it has acquired shares with an intention to maximise its investments and accordingly disclosed such shares under the head investments in its financial statements. The assessee has also proved the fact that no borrowed funds have been used for making investment. Therefore, we are of the considered view that the assessee’s case is squarely covered by the decision of Hon’ble Bombay High Court in the case of CIT vs Gopal Purohit (supra) and also assessee’s brother’s case in the case of Jagruti P Gandhi. Further, this is supported by the circular issued by the Board vide its circulars No.4 of 2007 and 6 of 2016 where the Board clarified the position of assessment of income derived from share transaction activity and directed the field officers with certain guidelines as per which a taxpayer can have two portfolios. The Board further clarified that in case of long term capital gain, once the assessee wished to declared income
15 ITA 7474/Mum/2014 under the head capital gains and such declaration has been accepted in earlier years, the department cannot disturb in subsequent years unless there is change in facts or law. The Ld.CIT(A), after considering relevant facts, has rightly directed the AO to assess income derived from share transaction activity under the head ‘capital gains’ as declared by the assessee. Hence, we are inclined to uphold the findings of Ld.CIT(A) and dismiss appeal filed by the revenue.
In the result, appeal filed by the revenue is dismissed.
Order pronounced in the open court on 24-05-2019.