ASSISTANT COMMISSIONER OF INCOME-TAX vs. SHRI RANJIT HANMANTRAO MOHITE,, PUNE

आदेश / ORDER

PER ANIL CHATURVEDI, AM :

This appeal filed by the Revenue is emanating out of the order 1. of Commissioner of Income Tax (A) – 3, Pune – dt.12.05.2015 for the assessment year 2011-12.

Assessee is an individual stated to be having income from salary, capital gains and other sources. Assessee filed his return of

income for A.Y. 2011-12 on 28.07.2011 declaring total income of

Rs.63,50,270/-. The case was selected for scrutiny and thereafter

assessment was framed u/s 143(3) of the Act vide order

dt.12.03.2014 and the total income was determined at

Rs.1,88,81,892/-. Aggrieved by the order of AO, assessee carried the

matter before Ld.CIT(A), who vide order dt.12.05.2015 (in appeal

PN/CIT(A)-3/Cir-7/666/2014-15) granted partial relief to the

assessee. Aggrieved by the order of Ld.CIT(A), Revenue is now in

appeal before us and has raised the following grounds :

“1. Whether on the facts and in the circumstances of the case and in Law, the Ld.CIT(A) was right in treating the loss on share trading as business loss instead of short term capital loss as returned by the assessee. 2. The order of the Ld.CIT(A) be vacated on this issue and that of AO to be restored.”

details furnished by the assessee, AO noticed that assessee had

incurred short term capital loss of Rs.1,24,80,837/- and had earned

speculation gain of Rs.1,23,99,314/-. He noticed that assessee had

adjusted short term capital loss against the capital gains. The

assessee was asked to show cause as to why the set off of short term

capital loss against the speculation gain not be disallowed. The

assessee made submissions which were not found acceptable to the

AO. The assessee further submitted that though in the return of

income, the loss was stated as short term capital loss but in fact it

was a business loss and that he may be allowed its set off against

the speculative gain. AO noticed that assessee had purchased and

sold commodities / scrips on the same day and had earned gains of

Rs.1,25,31,622/- on such transactions, the details of which are

listed at page 4 of the assessment order. AO held the profits earned

on such transactions to be ‘speculative gain’. AO further noted that

assessee’s argument of treating the short term capital loss as

business loss cannot be accepted because assessee himself had

treated the transactions as investments and in the return of income

assessee had treated it as short term capital loss. He also noted that

assessee had done share trading activity only on 6 days and therefore

the assessee’s submission of the activity cannot be treated as

“adventure in the nature of trade”. He therefore held that the short

term capital loss cannot be adjusted against the speculative gain and

accordingly added back Rs.1,25,31,622/- to the total income of the

assessee. Aggrieved by the order of AO, assessee carried the matter

before Ld.CIT(A), who decided the issue in favour of the assessee by

observing as under :

“3.4 I have considered the submission made by the appellant and perused material on record. The only issue contested relates to the treatment of the loss on shares trading as short term capital loss as against business loss claimed by the appellant and thereby denying set off of loss incurred on shares trading activity against profit from trading on commodity exchange and F & O transaction. The material brought on record indicates the appellant to have earned income from commodity trading and F & O transactions of Rs.1,25,31,622/- and in the shares trading activity carried out during the year resulted into a loss of Rs.1,24,80,837/-. The aforesaid loss on shares trading has been incurred by the appellant on the shares of only one company viz Core Project Ltd., It is noticed that nearly 3 lac shares of the said company has been purchased on 22/23/24th December 2010 and sold on 20/21/24th Jan 2011 i.e., within a period of nearly 1 month. The appellant, however, treated the said loss as short term capital loss and had set it off against the speculation income from the commodity and F & O transactions in the return of income. The appellant’s contention raised before the AO that the aforesaid loss incurred on the transaction in shares trading to be an adventure in the nature of trade though reflected under wrong head of income i.e., short term capital loss as against business loss did not find favour with the AO who treated the same as short term capital loss and denied the set off against the income earned in commodity and F & O transactions. The AO observed that as the appellant had himself treated the transactions as an investment in the return of income hence held it as short term capital loss. However, the contention raised by the appellant that it was always intended to set off the loss in shares trading against the business income of F & O transactions and commodity exchange cannot be totally overlooked just because the

appellant had shown the said loss in the return of income under a wrong head of income. It is true that the return of income of the appellant was filed by its consultant and the computation of income also done by him and apparently the manner and presentation being incorrect resulted in the disallowance of set off of loss. It is true that the appellant being a technical person and not fully conversant with the laws certainly relied in good faith upon its consultant who was a qualified professional. The AO in the given facts of the case ought to have considered the contentions raised by the appellant regarding taxation of correct income.

3.5 The appellant has raised the ground with regard to the claim of capital loss which had been erroneously worked out as per law laid down and not considered by the Assessing Officer. The ground raised by the appellant relates to the issue at hand and in this regard it is relevant to discuss the judicial view in the matter. The Bombay High Court in the case of Pruthvi Brokers and Shareholders Ltd (2012) 349 ITR 336 (Bom) has held that the appellate authorities have the jurisdiction to consider additional grounds/claim which were available at the time of filing returns but were not claimed in the return filed by the assessee. The Hon’ble Court after referring to the various decisions has held that the assessee can make a new claim before the appellate authority. Moreover, in particular the court has relied upon the decisions of the Hon’ble Supreme Court in the case of Jute Corporation of India Ltd., 187 ITR 688 also relied upon by the appellant wherein it was held that the CIT(A) can admit a new/fresh claim which was not made by the assessee in the return of income or in the assessment proceedings and that the power of the AAC is co- terminus with that of the ITO. The Apex Court in the case of CIT Vs. Nirbheram Daluram 224 ITR 610 (SC) relying on the decision of the Jute Corporation of India Ltd., Vs. CIT, 187 ITR 688 (SC), held that the first appellate authority has plenary powers in disposing an appeal and the scope of his power is co-terminus with that of ITO. He can do what the ITO can do and also direct him to do what he has failed to do. In the case of Chicago Pneumatic India Ltd., Vs. DCIT (2007) 15 SOT 252 (Mum), the ITAT after considering circular dated 11.04.1955 held that the Assessing Officer is bound to compute the correct income only. Thus, in view of the above facts, the claim raised is being considered. However, before determining the aforesaid issue it is relevant to look into the merits of the contention raised regarding the activity being an adventure in the nature of trade and loss on sale of shares as business loss. The material fact clearly indicate the appellant to have traded in the shares of only one company and for that purpose the appellant is seen to have borrowed funds to the extent of Rs.10 crores in the form of short term loan carrying interest @ 13% from Suraksha Reality Ltd., and on which a sum of Rs.15,58,932/- has been paid as interest as is evident from the ledger account extract. The AO it appears has not considered the aforesaid fact while deciding the issue at hand. The material on record also indicates that the appellant expecting substantial rise in the price of shares within a short period took the risk and borrowed funds with interest and purchased nearly 3 lacs shares with a span of 3-4 days, however, as the prices started going down the appellant having no option but to sell them in order to reduce further loss so as to repay the short term loan taken for the purpose. The total holding period of the shares itself was less than 2 months which indicate the purchase / sale and such an isolated transaction to do nothing with the investment activity of the appellant rather the intention appears to be of earning profit.

3.5.1 The judicial authorities in such situation have decided the character of the asset on the basis of the fact of the case and while doing so they have considered and taken into account the background of the assessee, period of holding, surrounding circumstances and also the nature and source of funds & capital as to whether own funds or borrowed money etc as decisive factors. The Assessing Officer has not evaluated the aforesaid factors before arriving at the conclusion and also not considered the contention raised by the appellant. The mention of the appellant as is evident from the material fact brought on record establish that the trading of shares had been undertaken only with the intention of making profit in the short term and the same had never been done with a view to make an investment Further, the period of holding and the funds utilized in the said shares by the appellant is also an indication of the intention of the appellant to trade in them and not make any investment for earning long term gains or earn divided income, The heads of income are specified u/s.14. The scheme of head of income is statutory. It is not optional. For e.g. if shares are held as stock in trade the profit have to the taxed as 'business income'. On the other hand if shares are held as investments their profits have to taxed as 'capital gains'. There is no option. Thus, from t e material on record it is apparent that the shares have been acquired with the intention to exploit the same for the purpose of earning quick profit hence in the Instant case the objective prima facie is exploitation for making substantial profit and it is accepted proposition that intention at the time of acquisition is important and intention behind the transaction decides character of the assets In the case of Dalmia Cements Vs CIT. 105 ITR 633 (SC), the assessee knew from the beginning that he cannot use the machinery as a capital asset and he acquired the machinery only with the intention to resell at a profit. Hence it was held that looking at the intention, even though it was an isolated transaction it was in nature of adventure of trade and could be taxed as business Income. In the case of CIT Vs Anandlal Bechartal & Co.107 ITR 677 (Bom.) land was purchased to construct houses for the partners which were the original intention thereafter, due to adverse circumstances the land was sole on profit. The assessee claimed it to be 'adventure in the nature of trade.The assessee’s claim was rejected holding that initially the land was not acquired for 'business' but, was acquired for construction for houses, Later, even if intention is changed because of adverse factors, according to the original intention. It should be taxed as capital gain. Similar view has also been held by the Pune ITAT in the decisions in the case of ITO Vs. Baguio Investment (p) Ltd. 127 TTJ 423 (Pune) and Shant Builders Vs. JCIT, 88 TTJ 519 (Pune). Thus, character of the asset is governed by the motive behind the transaction and in the instant case the facts brought on record never indicated the intention behind the share trading transaction to be for the purpose of investment by the appellant.

3.6 Mere holding of property or investments does not amount to a business. A person, who merely invests in shares for the purpose of earning dividends, does not carry on business. However, it is important to remember that the definition of ‘business’ in section 2(13) is inclusive and includes ‘adventure or concern in the nature of trade, commerce or manufacture’. Though a single sparrow may not make a manner, a single activity of purchase and sale may still be treated as business if the purchase was intended for resale and not as an investment. If the gain under section 45 realised on sale is part of an operation of profit making, it represents business gain liable to be charged to tax under section 28. Investment postulates employment of money in some of wealth or security, usually of a somewhat permanent nature, so as to ensure safety of money and a reasonable

yield. If the money is invested in shares with a view to earn dividend, it will be in the nature of investment. However, if the money is invested in shares with a view to earn profits by selling them as part of profit making activity; the resultant gain would be in the nature of business profits. Likewise, if a person deals with the commodity purchased by him in the same way as a dealer in it would ordinarily do, such dealing would be a trading adventure. The appellant is a technical person and has purchased the shares only with the intention of earning maximum profit out of the transactions and hence not purchased for the sake of earning dividends or to hold them as investments but for selling them to earn substantial profit.

3.6.1. In the case of Smt. Neerja Birla Vs. ACIT (supra) relied upon by the appellant the Mumbai ITAT has held that –

“When a big block of share was purchased with borrowed funds on which substantial interest liability was incurred. It was indicative of a trading transaction profits were taxable as business income and not as capital gains….”

3.6.2. Further in the decision of the ITAT, Munmbai in the case of Immortal Financial Services (I) Ltd., Vs. DCIT (cited supra) also relied upon by the appellant it has been held that -

“The submission of the council for the assessee that in the preceding year the AO has accepted tile short term and long term capital gain on sale of shares and therefore, the same should be followed this year is also without much force since the principle of res judicata does not apply to income tax proceedings and every assessment is independent. in this view of the matter, the activity of frequent buying and selling of shares over a short span of period during the impugned year has to be treated as business being adventure m the nature of trade and the income has to be treated as business income and not as capital gain as claimed by the council for the assessee. Therefore there is no infirmity in the order of the CIT(A) holding the profit from purchase and sale of shares as business income as against capital gain treated by the assessee. The same is accordingly upheld ... ".

3.6.3. Moreover, in the other decision relied by the appellant in the case of Harsh N. Mehta Vs. DCIT, the Tribunal concluded that-

“....where shares were purchased and sold within a short period of a few days, the profit on account of purchase and sale of shares by the assessee In the facts and Circumstances of the case has to be treated as 'Income from business' and not as 'Income from snort term capital gains' as claimed by the assessee "

In another decision of ITAT Mumbai bench in the case of ACIT Vs. Vinod K. Nevatia (2011) 49 DTR 16 (Mum.) (Trib.), it was held that no single factor can be said to be decisive and further held-

“If the assessee purchases the shares from its own funds, with a view to keep the funds in equity shares to earn considerable return on account of enhancement in the value of shares over a period, then merely because the assessee liquidates its investments within six months or eight months would not lead to the conclusion that the assessee had no intention to keep the funds as invested in equity

shares but was actually intended to trade in shares. Mere intention to liquidate the investment at higher value does not imply that the intention was only to trade in security. However, if the assessee, on the other hand, borrows funds for making investment in shares then definitely it is a very important indicator of its intention to trade in shares.

3.6.4. Thus, the cumulative effect of the facts brought on record and the judicial view in the matter clearly establish that the shareholding was not in the nature of investment but in the nature of business or adventure in the nature of trade. The mere fact that the appellant has shown the loss on shares in short term capital loss is not at all decisive of the transactions and it is not the form but the substance which is decisive in ascertaining the true nature of transaction. Thus, on fact the activity carried out by the appellant during the year was an adventure in the nature of trade and hence the loss suffered was a business loss and accordingly liable to be set off against income from commodity trading and F & O transactions.

3.6.5. Now coming to the issue regarding the claim of loss wrongly reflected under the head capital gains while filing the return of income on account of incorrect and wrong presentation made in the computation of income by its consultant, it is noticed that the said presentation made in the computation of income by its consultant, it is noticed that the said presentation was indeed not correct hence resulted into the disallowances made by the AO, however, the appellant’s contention that lack of proper advice and guidance and also not being fully conversant with the taxation laws and thereby misunderstanding of the provisions of law and wrong presentation of fact also cannot be overlooked while deciding the issue. Moreover, the contention of the appellant regarding the correct working of capital gain is concerned, it is seen that the appellant has worked out loss on trading of shares and shown it as short term capital loss though actually as discussed above the said transaction is an adventure in nature of trade and therefore is purely a case of incorrect and wrong presentation made in the computation of total income. It is true that the return of income has been filed by the appellant’s consultant who also prepared the computation of income which is now apparently found to be incorrect and wrongly presented and the appellant’s contention that lack of proper advice and guidance and not being fully conversant with the taxation laws and thereby misunderstanding of the provisions of law cannot be overlooked while deciding the issue. Moreover, the contention of the appellant that the manner of the presentation of the computation of income was wrong and definitely incorrect and the issue raised in this regard during assessment proceedings the Assessing Officer ought to have made corrections and taxed the correct income certainly deserves merit in view of the CBDT circular No.14 dated 11-4-1955 relied by the appellant and which reads as under :

“Officers of the Department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the Officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the Department for it would inspire confidence in him that he may be sure of getting a square deal from the Department. Although, therefore, the

responsibility for claiming refunds and reliefs rests with assessees on whom it is imposed by law, officers should :—

(a) draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other; (b) …………………..”

3.6.6. The Bombay High Court in the case of Nirmala Mehta Vs. CIT (2004) 269 ITR 1 (Bom) has held that there cannot be any estoppels against the statute. Article 265 of the Constitution of India in unmistakable terms provide that no tax shall be levied or collected except by authority of law. The apex court and various High Courts have ruled that the authorities under the Act are under an obligation to act in accordance with law. Tax can be collected only as provided under the Act. If any assessee under a mistake, misconception or on not being properly instructed is over assessed, the authorities under the Act are required to assist him and ensure that only legitimate tax dues are collected under the I.T. Act., real income is charged to tax and not notional income. The Courts have used this concept for ensuring that what is taxed is as nearly real as possible within the of constraint of statutory limitation. The apex court in the case of Ajmera Housing Corporation & ANR etc., Vs. CIT (2010) 326 ITR 642 (SC) considered the scope of interpretation of taxing statutes and has observed that a taxing statute is to be construe strictly and in a taxing Act one has to look merely at what is said in the relevant provision. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. There is no room for any intendment. There is no equity about a tax”. Thus, the Assessing Officer ought to have considered the contention raised by the appellant of wrongly reflecting of loss on share trading under the wrong head of income i.e., short term capital loss as against business income.

3.7 In view of the above facts, the CBDT Circular and the judicial decisions on the subject as discussed above, the appellant is liable to set off loss incurred in shares trading against the income from commodity trading and F & O transactions. Accordingly.”

Aggrieved by the order of Ld.CIT(A), Revenue is now in appeal before

us.

submitted that in the return of income the assessee had shown the

loss as short term capital loss and assessee changed his stance of

the loss being a business loss and not capital gains only when

confronted by the AO. He submitted that it was never the intention

of the assessee to be in the business of shares and the AO has also

pointed out that only in 6 instances, the assessee traded the shares.

In such a situation, it cannot be said that the activity of the assessee

was adventure in the nature of trade. He further submitted that

once assessee has decided the asset to be as investment or a

property, he cannot go back and change his stance. He further

submitted that the stance of the assessee of income being a

business loss cannot be accepted in view of the fact that assessee

has also not get the books of accounts audited. He thus supported

the order of AO.

before AO and Ld.CIT(A) and submitted that assessee being a

technical person did not have knowledge about the accountancy and

he was fully dependent on Tax Consultant. He submitted that Tax

Consultant wrongly considered the loss to be short term capital loss.

He further submitted that assessee had purchased the shares and

sold it and no dividend was earned which also prove that the activity

was in the nature of trade. He further submitted that the assessee

has borrowed funds of around Rs.10 crores for making investments

and had paid interest of around Rs.15,58,000/- which also goes to

proves that the activity of purchase and sale of shares by assessee

was a business activity. He also relied on the decision of Hon’ble

Supreme Court in the case of CIT Vs. Sutlej Cotton Mills reported in

1975 100 ITR 706, decision of Bangalore Tribunal in the case of C.

Niranjan and another Vs. ITO reported in (1994) 49 TTJ (Bang) 1. He

further submitted that entries in the books of accounts are not

determinative and for this proposition, he relied on the decision of

Hon’ble Apex Court in the case of Kedarnath Jute Manufacturing &

Co., Vs. CIT reported in (1971) 82 ITR 363. He thus supported the

order of lower authorities.

on record. The issue in the present case is the treatment of loss

incurred on sale of shares. It is Revenue’s contention that the loss is

short term capital loss as against assessee’s stand that the loss is

business loss. It is an undisputed fact that in the return of income

assessee had shown it as short term capital loss. But subsequently

before the AO, assessee corrected himself and submitted that it is in

the nature of business loss. We find that Ld.CIT(A) while deciding

the issue in favour of assessee has given a finding that the loss has

been incurred on sale and purchase of only one company i.e., Core

Projects Ltd., the shares were sold within one month of its purchase,

assessee had borrowed funds to the extent of Rs.10 crore and on

which he had paid interest of Rs.15.58 lacs (rounded off), the

borrowing was from an unrelated party. He has further, after

considering the totality of facts, held that the shares were acquired

with the intention of earning quick profits and not for the purpose of

investments. He has held the activity of the purchase / sale of shares

to be an “adventure in the nature of trade” and therefore the

resultant loss had to be set off against income from commodity

trading and F & O transactions. With respect to assessee suo moto

disclosure of loss in the return of income as capital loss and

subsequently before AO contending it to be business loss, he did not

find the submission of the assessee that due to improper advice and

misunderstanding of provisions assessee had wrongly shown the

amount as capital loss in the return of income to be wrong. He also

relied on various decisions of High Courts and Tribunals to decide

the issue in assessee’s favour. Before us, Ld.D.R. submitted that

only in six instances, assessee had traded in shares and therefore the

activity of the assessee cannot be considered to be “adventure in

nature of trade”. We find that Hon’ble Apex Court in the case of G.

Venkataswami Naidu & Co., (1959) 35 ITR 594 (SC) has held that

even on isolated transaction can satisfy the description of an

‘adventure in the nature of trade’ provided at least some of the

essential features of trade are present in the isolated or single

transaction. Before us, Revenue has not pointed out any fallacy in

the findings of Ld.CIT(A). We therefore find no reason to interfere

with the order of Ld.CIT(A) and thus, the grounds of Revenue are

dismissed.

Order pronounced on 26th day of November, 2018.

Sd/- Sd/- (SUSHMA CHOWLA) (ANIL CHATURVEDI) �या�यक सद�य / JUDICIAL MEMBER लेखा सद�य / ACCOUNTANT MEMBER

पुणे Pune; �दनांक Dated : 26th November, 2018. Yamini

आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent 3. The CIT(Appeals)-3, Pune. . The Pr.CIT-2, Pune. 4 �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, “बी” / DR, 5. ITAT, “B” Pune; 6. गाड� फाईल / Guard file.

आदेशानुसार/ BY ORDER

// True Copy //

व�र�ठ �नजी स�चव / Sr. Private Secretary आयकर अपील�य अ�धकरण ,पुणे / ITAT, Pune.