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Income Tax Appellate Tribunal, MUMBAI BENCHES “A”, MUMBAI
Before: SHRI G.S. PANNU (VP) & SHRI RAM LAL NEGI (JM)
O R D E R
PER RAM LAL NEGI, JM
This appeal has been filed by the assessee against order dated 06/08/2012 passed by the Ld. Commissioner of Income Tax (Appeals)-35, Mumbai, for the assessment year 2006-07, whereby the Ld. CIT (A) has dismissed the appeal filed by the assessee against assessment order passed u/s 143 (3) of the Income Tax Act, 1961 (for short ‘the Act’).
Brief facts of the case are that the assessee engaged in the business of dealing in futures and options, filed its return of income for the assessment year under consideration declaring total income of Rs. 28,18,861/-. Since, the case was selected for scrutiny, the AO issued notice u/s 143 (2) and 142 (1) of the Act. In response to the said notices, the authorized representative (AR) of the assessee appeared before the AO and furnished the details called for. Since, 2 Assessment Year: 2006-07 the assessee has inter alia had declared short term capital gain of Rs. 26,27,114/- from sale of shares after deducting expenses, the assessee was asked to furnish explanation as to why the profits out of such transactions of purchase and sale of shares should not be treated as business income. The assessee furnished the details and also submitted that all delivery based transactions were entered with the intention to hold the investment for long term and earn dividend from the investments, however subsequently the investments were sold and earned profit, which is reflected in the books of account as capital gain. However, the AO rejecting the contention of the assessee treated the gains from sale of the said sales as business income against the claim of the assessee as income from capital gains. The assessee challenged the assessment order inter alia on the ground that the AO has wrongly treated the gain in question as business income of the assessee. The Ld. CIT (A) after hearing the assessee dismissed this ground of appeal
and confirmed the findings of the AO.
3. Aggrieved by the order of Ld. CIT (Appeals), the assessee has preferred this appeal before the Tribunal on the following effective grounds:-
1. “On the facts and in the circumstances of the case as well as in law Learned CIT (A) has erred in upholding the action of the A.O. for treating “Short Capital Gain” on purchase and sale of shares as “Business Income”. Reasons assigned by him for doing the same are wrong and insufficient.
2. On the facts and in the circumstance of the case as well as in Law Learned CIT (A) has erred in rejecting the claim of the appellant in respect of rebate U/s 88E the I T Act against the tax liability arising, when the short term capital gain is computed under the head business income. 3. Without prejudice on the facts and in the circumstances of the case as well as in law Learned CIT (A) has erred in ignoring the submission of the appellant with regard to allowing the closing stock valuation loss, when the short term capital gain is stated as business income.
3 Assessment Year: 2006-07
4. On the facts and in the circumstances of the case as well as in law Learned CIT (A) has erred in rejecting the claim of the appellant for set off brought forward business loss of Rs. 3,66,837/- against the income computed as business income instead of short term capital gain.
That the order of the Ld. C.I.T. (Appeals) being arbitrary and bad in law, the same should be quashed and your appellant be given such relief as prayed for.”
Before us, the Ld. counsel for the assessee submitted that the assessee is a dealer as well as investor in shares and the stand of the assessee has been accepted by the Department in the earlier years. The assessee has shown two types of shares in the balance sheet. The Ld. counsel further submitted that in the assessment year 2005-06, the amount of short term capital gain was Rs. 17,35,419/- and in the AY 2006-07 the amount was Rs. 26,27,114/-, the number of scripts was 107 in the AY 2005-06 and 120 in the AY 2006-07. The assessee purchased the shares worth Rs. 3,24,97,999/- during the AY 2005-06 and Rs. 4,31,27,164/- during the AY 2006-07. The assessee sold the shares amounting to Rs. 3,42,33,418/- in the AY 2005-06 and Rs. 4,57,54,213/- in the AY 2006-07. So far as the holding period is concerned, the Ld. counsel pointed out that in only 158 transactions the holding period was less than 30 days. The department accepted the claim of short term capital gain and the long term capital gain in the earlier assessment years including 2005-06. Even in the subsequent assessment year 2008-09, the department accepted the claim of short term capital gain of Rs. 15,90,129/- and long term capital gain of Rs. 5,21,753/-. In AY 2007-08, short term capital gain of Rs. 8,27,442/- was assessed as business income, however the assessee did not challenge the assessment order in view of the smallness of the amount. Placing reliance on the judgment of the Hon’ble Bombay High Court in the case of CIT vs. Gopal Purohit 336 ITR 287 (Bom) the Ld. counsel for the assessee submitted that it was open to the assessee to maintain two separate portfolios, one relating to 4 Assessment Year: 2006-07 investment and another relating to business of dealing in shares. The Ld. counsel further pointed out that the Mumbai Bench of the Tribunal in the case of Hema Hiren Dand vs. JCIT , has decided the identical issue in favour of the assessee inter alia holding that the CBDT vide circular number 4/2007 dated 15. 06. 2007 has recognized possibility of two portfolios i.e., one investment portfolio comprising of securities which are to be treated as capital assets and the other trading portfolio comprising of stock in trade which are to be treated as trading assets. Accordingly, profit arising in respect of delivery based transactions is liable to be taxed as capital gain and not as business income. The Ld. counsel further relied on the decision of the Mumbai Tribunal in the case of Rikeen P. Dalal versus DCIT 41 taxman.com 326 (Mumbai-Trib.), in which it has been held that where income from similar transactions of sale and purchases of shares had been accepted as short-term capital gain in earlier as well as in subsequent years, such gain could not be assessed as business income for relevant assessment year. The Ld. counsel further demonstrated on the basis of a chart that increasing tax liability due to treating the short-term capital gain as business income is only Rs. 33, 313/– only. In the light of the facts of the case and the cases relied upon, the Ld. counsel submitted that the findings of the Ld. CIT(A) are liable to be set aside.
5. On the other hand the Ld. departmental representative (DR) relying on the concurrent findings of the authorities below the Ld. DR submitted that the Ld. CIT(A) has upheld the findings of the AO keeping in view the volume and frequency of purchases and sale of the shares, scale of activities, time devoted by the assessee, holding period of the shares and the CBDT Circular No. 4/2007 the judgments of the various courts, there is no infirmity in the impugned order to interfere with. The Ld. DR further submitted that the assessee cannot take the plea that in the earlier assessment years the claim of the appellant was allowed by the appellate authority because every assessment is independent and separate proceeding and is to be decided from the facts of 5 Assessment Year: 2006-07 each case. Moreover principle of res judicata does not apply to the income tax proceedings 6. We have heard the rival submissions of the parties and carefully perused the material on record including the cases relied upon in the light of the rival contentions of the parties. Vide ground No.1, the assessee has challenged the action of the Ld. CIT(A) in upholding the action of AO in treating the short-term capital gain on purchases and sale of shares as business income. We notice that the Ld. CIT(A) has upheld the findings of the AO by discussing the principles/parameters laid down by the various courts, which are to be followed while deciding the issue as to whether the gain from sale of shares are to be treated as capital gain or business income. As pointed out by the Ld. counsel for the assessee the coordinate Bench of the Mumbai Tribunal in the case of Hema Hiren Dand vs. JCIT (supra) has decided the similar issue in favour of the assessee. The relevant Paras of the order read as under:-
“9. Here, it is pertinent to mention the intention of Government for introducing the security transaction tax and exempt the long term capital gain earned from sale of shares and levying 10 % tax on short term capital gain and earned on sale of shares. It is noted that under the old provisions of the Income-tax Act, profits or gains arising to an investor from the transfer of securities were charged to tax either as long term capital gains or short term capital gains depending on the period of holding of the said securities; Short- term capital gains arising from transfer of securities were taxed at the applicable rates (normal rate) and Long-term capital gains were taxed @ 20%, after adjusting for inflation by indexing the cost of acquisition. For listed securities, the taxpayer had an option to pay tax on long-term capital gains @ 10% but without indexation. For Foreign Institutional Investors (FIIs), the long-term capital gains and short-term capital gains were taxed at the rate of 10% (without indexation) and 30% respectively. In case of a trader in securities, 7 however, the gains were taxed as any other normal business income. Thus tax liability on the income from purchase & sale of shares as regards to the STCG 6 Assessment Year: 2006-07 & business income was at par. However, the issue of treatment of income from share transaction as capital gain or business income has in-fact arisen after the amendment brought with Finance Act - 2004 by insertion of provisions of section 111A and 10(38) as regards to levy of Transaction tax and exemption / concession on capital gain arising from securities entered in a recognized stock exchange. With a view to simplify the tax regime on securities transactions, a tax at the rate of 0.015 per cent. (see: change in rates on securities transactions, by Finance Acts, at appropriate head) is levied on the value of all the transactions of purchase of securities that take place in a recognized stock exchange in India. This tax is collected by the stock exchange from the purchaser of such securities and paid to the exchequer. The provisions relating to the securities transactions tax are contained in Chapter VII of the Finance (No.2) Bill, 2004, and came into effect from 01.10.2004. Further, clause (38) has been inserted in section 10 of the Income-tax Act, so as to provide exemption from long-term capital gains arising out of securities sold on the stock exchange. A new section 111A has also been inserted and section l15AD is amended, so as to provide that short-term capital gains arising from sale of such securities to an investor including FIIs shall be charged at the rate of ten per cent. These amendments apply to assessment year 2005-2006 and subsequent years. Through Finance Act, 2008, sections 111A and 115AD have further been amended whereby the rate of tax on such short-term capital gain 8 has been raised to fifteen percent. Thus, w.e.f. 01.10.2004; on the share transactions subjected to STT; concessional tax rate of 10% (which has been increased to 15% from AY 2009-10) are applicable in respect of STCG whereas no tax is chargeable in respect of LTCG. It is also noted that the CBDT vide its Circular no.4/2007, dated 15.06.2007 has also recognized possibility of two portfolios, i.e. one 'Investment portfolio' comprising of securities which are to be treated as capital assets and the other 'Trading portfolio' comprising of stock in trade which are to be treated as trading assets. In view of these facts, profit arose on shares in respect of delivery based transaction are liable to be taxed as capital gain and not as business income.”
7 Assessment Year: 2006-07
Further in the case of CIT versus Gopal Purohit (supra) the Hon’ble jurisdictional High Court has confirmed the findings of the Tribunal on the similar issue. In the said case the question before the Hon’ble High Court was that whether on the facts and circumstances of the case and in law the ITAT was justified in holding that the principle of consistency must be applied and since, the authorities did not treat the assessee as a share trader in the preceding year in spite of existence of similar transaction, which cannot in any way operate res judicata to preclude the authorities from holding such projection as business activities in the current year. The Hon’ble Court upheld the findings of the tribunal holding as under:- “The Tribunal has entered a pure finding of fact that the assessee was engaged in two different types of transactions. The first set of transactions involved investment in shares. The second set of transactions involved dealing in shares for the purpose of business (described in paragraph 8.3 of the judgment of the Tribunal as transactions purely of jobbing without delivery). The Tribunal has correctly applied the principle of law in accepting the position that it is open to an assessee to maintain two separate portfolios, one relating to investment in shares and another relating to business activities involving dealing in shares. The Tribunals held that the delivery based transactions in the present case, should be treated as those in the nature of investment transactions and the profit received there from should be treated either is short-term or as the case may be long term capital gain, depending upon the period of holding. A finding of fact has been arrived at by the Tribunals as regards the existence of two distinct type of projections, namely those by way of investment on the one hand and those for the purpose of business on the other hand.” 8.In the case of Rikeen P. Desai vs. DCIT, Mumbai (supra) the coordinate Bench has held that where income from similar transaction in sale and purchase of shares had been accepted as short-term capital gain in earlier as well as in the subsequent years, such gain could not be assessed as business income for relevant assessment year. In the said case also since the assessee had claimed the income from sale of shares as short-term capital gain, the AO asked the 8 Assessment Year: 2006-07 assessee to explain as to why such short-term capital gain should not be treated as income from business. The assessee contended that the shares were shown as investment in the books of account and such income was being offered and accepted as short-term capital gain in the earlier years also. The AO did not accept the submissions of the assessee. In the first appeal the Commissioner Appeals upheld the order of the assessing officer. However, in the second appeal, the coordinate Bench following the judgment of the Hon’ble Bombay High Court in the case of Gopal Purohit (supra) held that since in the earlier years and the subsequent years similar claims were accepted by the revenue, the revenue cannot deny the similar claim of assessee in the assessment year under consideration.
We further noticed that in the present case the authorities below have not denied the fact that the assessee was maintaining two portfolios and the assessee has claimed the income from sale and purchase of shares from the transactions relating to investment in shares as short-term capital gain. Further, as pointed out by the Ld. counsel, the department has allowed the identical claims in the assessment year 2002-03, 2003-04, 2004-05, 2005-06 and 2008-09. In the assessment year 2007-08 similar income was treated as business income by the revenue, however, the assessee did not challenge the assessment keeping in view the smallness of amount. Under these circumstances, we are of the considered view that the decisions relied upon by the assessee, discussed above are applicable in the present case. Hence, following the decisions of the Hon’ble High Court and the coordinate Benches of the Tribunal, we allow this ground of appeal of the assessee and set aside the findings of the Ld. CIT(A). Hence, we direct the AO to compute the income of the assessee from purchase and sale of shares as short term capital Gain instead of income from business.
9 Assessment Year: 2006-07