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Income Tax Appellate Tribunal, DELHI ‘A’ BENCH,
Before: SHRI B.P. JAIN, & SHRI SUDHANSHU SRIVASTAVA
PER B.P. JAIN, ACCOUNTANT MEMBER,
The above two appeals of the Revenue are directed against the separate order of the ld. CIT(A), New Delhi vide orders dated 16.05.2008 for assessment year 2005-06 and 21.06.2010 for A.Y. 2006- 07 respectively. Since the appeals pertain to same assessee and were heard together involving common issues the appeals are being disposed off by this common order for the sake of convenience and brevity.
ITA No. 2727/DEL/2008 [A.Y. 2005-06]
The Grounds of appeals raised by the Revenue are as under:
“1. The ld. CIT(A) erred in law and facts in directing the Assessing Officer to treat the sum of Rs. 2,60,49,678/- as a capital gain instead of treating it as business income.
2. The ld. CIT(A) erred in law and facts in directing the Assessing Officer to allow the payment of registration fees of Rs. 27.30 lakhs to SEBI even when such ‘fee’ is not covered by the provisions of section 43B and also as such liability pertained to earlier years.
3. The ld. CIT(A) erred in deleting the addition of Rs. 1.95 lakhs made by the Assessing Officer by invoking the provisions of section 14A”
First we take up the appeal in assessment year 2005-06. Briefly stated, the facts of the case are that the assessee is engaged in the business of stock broking services and was also engaged in investment in shares and stocks. In the return for AY 2005-06 it has declared returned income of 2,65,91,812 which also included short term capital gain of Rs 2,60,49,812. Similarly for AY 2006-07 it filed the return of 3,45,41,714 which included short term capital gain of Rs 1,96,75,256. For both the years the Assessing officer treated the short term capital gain as Business income. The assessee succeeded in appeal before the ld. CIT(A) and the Revenue had challenged the order of CIT(A) before us. The appeals of the Revenue were dismissed by the Tribunal. Aggrieved, the Revenue filed appeals before the Hon’ble High court against the said order of the Tribunal by the Revenue. The Hon’ble High Court vide order dated 6.8.2014 has restored back the matter to the Tribunal to be decided afresh with the following observations :
“10. The aforesaid tests also find reference in the Circular No.4/2007, dated 15th June 2007, issued by the Central Board of Direct Taxes. The Tribunal has only quoted a part of the said circular and not referred to the tests elucidated therein.
Looking at the facts stated by the Assessing Officer, we feel that the matter requires deeper and detailed examination. The facts stated by the Assessing Officer have not been given due notice nor examined by the Tribunal. Learned counsel for the respondent-assessee states that though some of the facts were wrongly noticed by the Assessing Officer but these and other aspects will have to be examined before it is held that the shares held were or were not in the nature of “investments”. It is highlighted that the shares subject matter of short-term capital gains were held for less than 365 days, but there is difference between short term capital gains and profit/loss from trading in shares.
12. In view of the aforesaid discussion, we feel that the matter should be remanded back to the Tribunal for a fresh discussion, who in the light of aforesaid tests, shall examine and ascertain whether or not the shares were held as “investment”. The question of law is accordingly answered.
13. Learned counsel for the respondent-assessee states that he will like to file an application for additional documents before the Tribunal. If any such application if filed, the same will be considered sympathetically by the Tribunal. We clarify that we have referred to the two orders passed by the Assessing Officer and the appellate authorities to decide the present appeals. The Tribunal will be at liberty to decide the issue without being influenced by the observations made in favour or against any party in the present order or the impugned order passed by the Tribunal.”
At the outset, the ld. DR submitted that the Hon’ble High Court has remanded back the issue to the Tribunal for fresh adjudication and further submitted that the assessee sold the shares in a short period and sometimes in two-three days and even on the same day. He quoted from AO’s order for A.Y. 2006-07 that shares of M/s LML Ltd were sold 8 times and M/s Oswal Chemical were sold 14 times which pointed to trading transactions and not investment activity. He also submitted that the assessee received very little dividend on the investments held by it. He referred to the AO’s order for A.Y. 2006-07 that earning dividend was sine-qua-non of investment activity. He argued that separate Demat accounts maintained for the shares held as stock-in- trade and shares held as investment and keeping accounting and showing in Balance Sheet under specific head for Investment and Stock In Trade do not throw any light on the intention of the assessee regarding the treatment to be given to transactions. He stated that there are three types of incomes viz. Trading Income/Business, Long Term Capital Gain and Short Term Capital Gain and each type of income has to be verified by using the principles mentioned in CBDT Circular No. 4 of 2007 dated 15th June, 2007. He stated that the MOA specifies that assessee carries business of Investment and hence not entitled for income as investor. He also submitted that consistency does not apply in Income tax, every year is a different year and that and the assessee has dealt in 55 securities and only 10 scrips were in closing stock and 45 were sold in same year.
On the other hand, the ld. counsel for the assessee submitted that while remanding the matter to the Tribunal the Hon’ble High Court has clarified that the Tribunal shall be at liberty to decide the issue afresh without being uninfluenced by the observations made in the order. His main arguments are summarized as under: i) It has been accepted by the AO also that the respondent company is also into investment of shares and stocks. The AO has himself accepted the long term capital gain declared by the assessee for these years and it is only with respect to short term capital gain that the AO has not accepted. He further stated that MOA of the assessee authorizes it to make investments in stocks and shares. The assessee has been making such investments for last 10 years and the same is accepted as long term or short terms capital gains even under 143(3) assessments. ii) It is denied that any share which was treated as investments was sold on same day of purchase. In fact, all the shares which were treated as investment were sold on delivery basis only i.e. delivery of scrips purchases were taken and delivery given when such investment was sold in due course. He submitted charts for both
Asstt. years FY 2005-06 and 2006-07 showing scrip names, dates of purchase and sale and capital gain/loss thereon to buttress his claim. Further, as against alleged by DR, the specific transactions of sale of M/s LML Ltd and M/s Oswal Chemicals were in fact coming from investments made in earlier year as such accepted by the Ld.AO in its scrutiny assessment for AY2005-06. He again referred to the charts submitted by him and submitted that the shares of M/s LML Ltd were held for more than 260 days and on average for 277 days and that shares of M/s Oswal Chemicals were held for period ranging from 55 days to 259 days before being sold He submitted that the sale were effected in tranches and in fact constituted single transaction. There was not frequency buying or selling the same. iii) He submitted that the quantum of dividend income on the shares claimed as investment is not relevant factor for determining as to whether those shares have been purchased as investment or stock- in-trade. When the shares are purchased it cannot be said with certainty whether the company will declare dividend and at the same time the decision to classify the share as investment/stock-in- trade is taken by the assessee at the time of purchase of share.
Further, average dividend yield on BSE Benchmark Sensex – 30 shares varies from 0.9% to only 1.5%. Clearly no prudent investor would invest in share only for earning of dividend. If earning of dividend was an essential condition of investment activity, no one would buy gold or house or paintings as investment. Therefore, it cannot be a yardstick for classification of share as alleged by the assessing officer. iv) He further stated that there is Separate Demat for investments. He submitted that the fact remains that the books of accounts were accepted by the AO in both FY 2005-06 and FY 2006-07. v) He further submitted that the assessee has been maintaining separate depository account for the shares held as investment and separate depository account for the shares required as for stock in trade. At the time for purchasing the shares, the assessee clearly identifies as to whether it is for Investment or as stock in trade and accordingly these shares gets credited directly to the concerned depository account. He submitted that the intention becomes clear from the conscious act of the assessee at the time of purchase itself. He stated that the Demat accounts are maintained by NSDL and assessee has no control over it. He pointed out that the Demat account maintained for investment has its title as “Investment” while for the Demat account maintained for stock-in-trade, there is no such remarks. He submitted that AO in his assessment order for AY 2005-06 has noted that the said investment Demat Account was opened on 07.01.2004, much before the commencement of assessment year under consideration and not on any advantage of hindsight. vi) The ld. counsel for the assessee further submitted that that any transfer from one Demat A/c. to another Demat A/c can be made only by officially transferring the scrips at prevailing market price and by following the prescribed procedure. vii) He further submitted that the categorization of incomes into three categories is not correct. There are only two types of incomes envisaged i.e. Trading income and Capital Gains. Capital gain is assessed as Long Term or Short Term depending on period of holding. The AO himself accepts that Assessee had made investments and income from which is to be assessed as capital gain as he has accepted Long term capital gain. Merely some investments are sold before 365 days that itself will not make it business income. viii) He submitted that assessee company is a share broker and at the same time it is doing Investment and declaring Long Term and Short Term Capital Gains which has been accepted in 2002- 03 to 2004-05. Ld. AR further submitted that one of the objects read with ancillary object is to carry on the business of an investment company. Thus, the company is authorized for investment. ix) He submitted that the AO has accepted the share transactions as for investment where the holding period is 365 days or more and has treated the same as LTCG, however, wherever the holding period is less than 365 days even the shares were distinctively held in the same demat account marked as “Investment A/c”, he has treated the same as for business purposes. x) Ld. AR submitted that in financial books of a/c, these purchases have been shown under the head ‘investment’ in contrast to other shares which have been shown as purchases / stock in trade. This itself proves the nature and the intention of the assessee at the time of purchase. xi) Ld. AR submitted that in the balance sheet, these shares held as on the closing date have been shown under the head ‘investment’ in contrast to stock-in-trade for other shares and books of account have been accepted by the AO then how the sale of these investments can be treated as Business Income. xii) He further submitted that the valuation of the shares held as stock in trade is at cost or market value whichever is lower. However, for shares held as investment they are valued at cost. This method of valuation stands disclosed in the audited balance sheet and accepted. He filed a chart showing valuation of shares held under the head “Investments” as on 31.03.2005 and submitted that there was a valuation loss of Rs.36,16,094/- on these shares which is not claimed as these shares are held as Investments and not as stock in trade. As per the consistent practice, the shares once treated as for investment/ stock, their nomenclature and tax treatment remains under the same nomenclature till its disposal irrespective of the tax liability on account of said treatment. This shows that the assessee has been showing and claiming the investment / corresponding STCG/LTCG on such investments under a properly consistent method. xiii) He submitted that Security Transaction Tax (STT) paid on the scripts held as investment has not been claimed as pre-paid tax or as expenditure in the books of accounts, which is otherwise allowed as expense in the case of stock-in-trade. xiv) He submitted that assessee is a share broker and at the same time has been making investments in shares which have been declared as long term or short term capital gains even in the past several years. He submitted copies of assessment orders for AY2002-03, 2003-04, 2004-05, 2007-08 and 2008-09 for the same. This contention of the appellant has been accepted by the Assessing Officer for various assessment years from 2002-03 to 2004-05. xv) He submitted that for making investments, no funds have been borrowed. The payments have been made simultaneous on delivery. To put it in different way, no script has been treated as investment where payments have not been made and / or delivery has not been taken. He also relied on the decision of Janak Rangwala V/s ACIT 11 SOT 627 (Mum) in support of his argument that magnitude of investment is not the deciding factor of nature of investment.
We have heard both sides and gone through the relevant material available on record. The AO has observed that the assessee is into stock broking business as well as investor in shares and stocks. The AO has accepted the long term capital gains declared by the assessee in respect of shares which are held for more than 365 days. This fact is not denied by the DR. The assessee is having two different Demat accounts and the investment account is marked as Demat investment account. The other Demat account is for shares held as stock in trade. It is at the time of purchase of share that the assessee has to decide if it is for investment or its stock in trade and is credited in the required Demat account. It has been investing in shares for the last years and its accepted by the department. In some cases the assessment is order made u/s 143(3). There no borrowed funds used by the assessee for purchase of these investments. All the transactions are actual delivery.
The STT paid is not claimed as deduction by the assessee. Moreover the balance investments in the balance sheet as on the last day of the years are taken at cost and not at market value or cost whichever is less. Chart filed by the assessee shows that valuation loss is not claimed and this fact is not denied by the DR.
The ld. CIT(A) elaborately considered the issue and held as under for assessment year 2005-06:
“I have considered the submissions of the appellant. It is seen that the appellant has maintained two separate accounts for the share dealings – one in respect of shares held as stock in trade and the other in respect of investment. As pointed out by the A.R. of the appellant, under the SEBI rules one cannot transfer the shares from one account to another according to one’s own whims and pleasure but only at the prevailing market price as on that date. The Assessing Officer never went into this basic fact that once the shares are kept as stock in trade/ investments DMAT account any transfer is possible only at the prevailing market price hence, there is no scope of any tax evasion by changing the nature of share by transferring it from one account to another.
Further, the ratio of the decision of Hon’ble ITAT, Mumbai J- Bench in the case of J.M. Share and Stock Brokers Ltd. and other cases, relied upon by the appellant, squarely applies to the facts of the appellant’s case. Moreover, the department in the past has already accepted the system followed by the appellant and there is no change in the system of accounting adopted by the appellant from year to year and no new facts/ evidence has been brought on record to support the contention of the Assessing Officer. The contention of the Assessing Officer cannot be accepted. The Assessing Officer, is therefore, directed to accept the capital gain declared by the appellant and tax it at the rate applicable to capital gain instead of treating it as business income.”
Furthermore, Ld. Commissioner of Income Tax (Appeals) for the assessment year 2006-07 has held as under:-
“I have gone through the facts and circumstances of the case, submissions of the A.R. of the appellant, observations of the Assessing Officer, CBDT circulars on the issue and various judicial pronouncements as well as the decision of Ld. Commissioner of Income Tax (Appeals) in the appellant’s own case for the assessment year 2005-06. This ground of the appellant is being finalized after making the following observations:- a) From the facts it is observed that the appellant is a share broker and at the same time has been making investments in shares which have been declared as long term or short term capital gains even in the past years. This contention of the appellant has been accepted by the Assessing Officer for various assessment years from 2002-03 to 2004-05. Further for the assessment year 2005-06, the Ld. Commissioner of Income Tax (Appeals) had decided the issue in favour of the appellant. The facts of the case in this year also are similar as to those in the earlier years. b) From the facts it is also clear that the Assessing Officer has accepted that the assessee had accepted the claim of all the share transactions which have been shown as long term capital gain. However, the Assessing Officer has not accepted the claim of short term capital gains, even though these shares had been shown as investment in the balance sheet. The Ld. Authorised Representative has strongly contended that the valuation of these shares had been shown in the balance sheet by treating this as investment and a consistent policy with regard to such shares have been followed by the appellant for the past several years.
Accordingly it is also observed that the Assessing Officer has not brought out any differentiating facts as to how and why under similar circumstances though the claim of the appellant had been accepted in the earlier years, while in this year this should be treated differently. c) The A.R. has also highlighted various facts including maintenance of separate D-Mat accounts for investments in shares, the clear intention of the assessee by not claiming any STT deduction on the shares claimed as investment and the losses on the sale of shares being set off against gains on sale of shares, even though setting it off against business income would have been more profitable. These specific facts have not been controverted by the Assessing Officer and the intention of the appellant with regard to holding these shares for the purpose of investment could not be doubted. The reliance placed upon the Ld. Authorised Representative of the appellant on the decision of Gopal Purohit (supra), Mumbai High Court is also supporting the claim of the A.R. of the appellant that the assessee has right to engaged in two different type of transactions.
After considering the various judicial pronouncements as well as the specific facts relating to the appellant, I am inclined to follow the findings of the Ld. Commissioner of Income Tax (Appeals) for assessment year 2005-06 vide order dated 16.5.2008 wherein this issue has been decided in favour of the appellant. The Assessing Officer had also accepted the claim of the appellant on similar facts for various earlier assessment years. As a result the Assessing Officer is directed to delete this addition. This ground is decided in favour of the appellant.”
After considering the submissions of the rival representatives, we find that the mere fact that dividend received is nominal, cannot be the deciding factor as to whether income from sale of investment is to be assessed as business income or capital gain, particularly when long term capital gain is accepted by the AO. In respect of sale of shares of LML Ltd and Oswal chemicals, it can been seen that sale is made on various dates as the sale order sometimes takes days to be fully executed. It is not the case that on some days sales are being purchased and sold. Just because assessee has purchased and sold number of shares does not by itself make it business income when the AO has accepted the scripts as investment in the balance sheet and books of account are accepted. In view of the above discussion, we are of the considered view that the CIT(A) has rightly treated the gain on sale of shares as short term capital gain. Accordingly, we find no infirmity in the order of the ld. CIT(A). Thus, the grounds raised by the Revenue in are dismissed.
ITA No. 3897/DEL/2010 [A.Y. 2006-07]
11. The Grounds of appeals raised by the Revenue are as under: The Grounds of appeals raised by the Revenue are as under:
“1. On the facts and circumstances of the case and in law, the order of the ld. CIT(A) is wrong, perverse, illegal and against the provisions of law which is liable to be set aside.
2. The ld. CIT(A) erred in law and facts in directing the Assessing Officer to treat the short term capital gains shown by the assessee as business income, ignoring the fact that during
the year under consideration the assessee had sold shares and securities which were purchased primarily during the year itself”.
The issues raised in this appeal are identical to the issues involved in the assessment year 2005-06 in decided by us hereinabove. Accordingly, our order hereinabove on these issues shall be identically applicable in this year also. Grounds raised by the Revenue stand dismissed.
In the result, the appeals of the Revenue in & 3897/DEL/2010 are dismissed. The order is pronounced in the open court on 21.12.2017.