PRAVEEN RANJAN SINHA,GURGAON vs. DCIT, CIRCLE-3(1), GURGAON, GURGAON

The case was selected for limited scrutiny to examine the following areas:- a) interest expenditure; b) details of assets and liabilities; c) sales turnover mismatch; d) derivatives transactions and e) securities transactions.

The ld National Faceless Appeal Centre (NFAC) upheld the action of the ld AO by treating the subject mentioned transactions of the assessee as an adventure in the nature of trade by drawing support from the fact that the assessee had also dealt in derivatives trading, income thereon have been offered to tax under the head „business‟. The assessee placed reliance on the decision of the Pune Tribunal in the case of Adar Poonawala Vs. ACIT in and 824/PN/2012 dated 30.01.2015, before the ld National Faceless Appeal Centre (NFAC) which was sought to be distinguished by the ld National Faceless Appeal Centre (NFAC) by stating that in that case, there was no frequency of transaction of the scrips while in assessee‟s case there is huge frequency and magnitude of transaction; that in that case, assessee was involved in the job of Executive Director of Serum Institute of India Ltd whereas in assessee‟s case there is continuous activity of the adventure in the nature of trade. It is pertinent to note that the short term capital gains disclosed by the assessee have been accepted and assessed as such to the tune of Rs.

The main basis for the ld AO to rework the loss on sale of shares as above was by observing that for every bonus share issue, there is a corresponding

The ld AR before us placed heavy reliance on the coordinate bench decision of the Pune Tribunal in the case of Adar Poonawala (supra) stating that the facts and dispute prevailing thereon are exactly identical to the facts and dispute prevailing in assessee‟s case herein. He further stated that the said decision of the Pune Tribunal has been approved by the Hon‟ble Bombay High Court and Special Leave Petition preferred by the revenue is dismissed by the Hon'ble Supreme Court. Per contra, the ld DR sought to distinguish the applicability of decision of Pune Tribunal to the facts of the assessee‟s case by reiterating what has been mentioned by the National Faceless Appeal Centre (NFAC) and further stated that in that case, the ld AO treated the gains arising on sale of shares of City Park Ltd as business income, but whereas in assessee‟s case, the assessee had dealt in derivatives, NIFTY and hedging is done only by traders and not by investors. Accordingly, the ld DR vehemently argued that the lower authorities were duly justified in treating the assessee as a trader and not as a investor. Further, it was argued that the shares of HCL Technologies Ltd were bought by the assessee only at the fag end of the year to ensure short term capital loss for consequential set off with short term capital gain on sale of shares of Quickdel Logistics Pvt Ltd. The intent of the assessee is only adventure in the nature of trade. Accordingly, the ld. DR justified the treatment of loss arising on sale of shares of HCL Technologies Ltd and Tech Mahindra Ltd as business loss by the revenue. The ld AR in his rebuttal also stated that these bonus shares were duly held by the assessee for more than a year and assessee derived long term

We find that the issue in dispute is squarely covered by the decision of the coordinate bench of Pune Tribunal in the case of Adar Poonawala (supra). The facts prevailing on the issue of sale of share in the case of Adar Poonawala are as under:-

In so far as the transaction of sale of shares of City Park Pvt. Ltd. is concerned, the Assessing Officer treated the same as income from business of trading in shares. The said business income was worked out by the Assessing Officer as under :- "B. Profit on sale of City Park Pvt. Ltd. shares Sale of 66,70,000 shares @ Rs.270/- per share Rs.18,00,90,000/- Purchase of 66,70,000 shares @ Rs.10 per share Rs. 66,70,000/- ------------------- Rs.17,34,20,000/-"

With respect to the other transaction by way of sale of shares of HCL Technologies Ltd., Assessing Officer noticed that the said company had announced bonus issue of 1:1 on 12.02.2007 and the record date was fixed on 16.03.2007, as per intimation to the stock exchanges. The assessee purchased 4,71,517 equity shares of HCL Technologies Ltd. from 28.02.2007 to 13.03.2007 i.e. within a span of two weeks, with an average purchase price of Rs.622/- per share, which was cum-bonus. Bonus shares were issued by the investee company on 16.03.2007 and accordingly assessee received 4,71,517 bonus shares. Therefore, assessee effected sale of 4,71,500 shares out of the original shares at ex-bonus rates between 15.03.2007 to 28.03.2007 at an average selling rate of Rs.303/- per share, which resulted in a short term capital loss of Rs.14,95,84,935/-, which was claimed in the computation of income. In this context also, Assessing Officer concluded that the frequency of purchase and sale carried out by the assessee indicated that assessee was a trader in shares and not an investor. As per the Assessing Officer, the dealings in the shares of HCL Technologies Ltd. indicated a pre-mediated intention to set-off the loss incurred on account of bonus stripping of HCL Technologies Ltd.'s shares against the long term capital gain earned on the sale of unlisted equity shares of City Parks Pvt. Ltd..

To recapitulate, the background of the dispute in assessee's appeal can be summarized as follows. The assessee before us is an individual, who is Executive Director of Serum Institute of India Ltd.. In the period from 28.02.2007 to 13.03.2007, assessee purchased 4,71,517 equity shares of HCL Technologies Ltd. for a total consideration of Rs.29,36,28,768/- (inclusive of brokerage, etc.). The average purchase price of above purchase was Rs.622 per share. On 12.02.2007, HCL Technologies Ltd. announced bonus issue of shares in the ratio of one share for every one share held and the record date was fixed as 16.03.2007. Consequently, on account of his purchase of 4,71,517 equity shares, assessee received 4,71,517 bonus shares also. Subsequently, between 15.03.2007 to 28.03.2007 assessee sold 4,71,500 shares of HCL Technologies Ltd. out of the original 4,71,517 shares acquired by him. Such shares were sold for a consideration of Rs.14,28,67,804/- which reflected an average sale price of Rs.303 per share. Assessee declared a short term capital loss on sale of such shares of Rs.15,01,80,424/-.

The Assessing Officer has differed with the assessee on the treatment of the aforesaid transaction. As per the Assessing Officer, the aforesaid transaction reflected active involvement of the assessee as a 'trader', rather than as an investor. As per the Assessing Officer, assessee regularly dealt in the shares of HCL Technologies Ltd. which reflected a trading intention. Secondly, the stand of the Assessing Officer was that the motive for carrying out the aforesaid set of transactions in the shares of HCL Technologies Ltd. was to incur loss on account of bonus striping and then set-off such loss against the long term capital gain accruing to the assessee on sale of shares of City Park Pvt. Ltd.. As per the Assessing Officer, the motive of the assessee in dealing in the shares of HCL Technologies Ltd. was tax avoidance and a dubious tax planning. Ultimately, the Assessing Officer disagreed with the assessee with nature and the quantification of loss on the sale of 4,71,500 equity shares of HCL Technologies Ltd.. The Assessing Officer computed the loss at Rs.39,41,287/- as per the Tabulation which we have reproduced earlier in this order. The point of difference on this aspect between the assessee and the Assessing Officer was with regard to the cost of the shares sold. The Assessing Officer followed the methodology of spreading the cost of original shares to total shares i.e. the original shares plus bonus shares. In other words, the total shares held by the assessee (i.e. original shares 4,71,517 + bonus shares 4,71,517) were considered to have been acquired for an amount of Rs.29,36,28,768/-, i.e. the price originally incurred by the assessee. The Assessing Officer treated the shares of HCL Technologies Ltd. as stock-in-trade and therefore the loss of Rs.39,41,287/- treated as a business loss. The CIT(A) has affirmed both the stands of the Assessing Officer, namely, that the transaction in the shares of HCL Technologies Ltd. was a business transaction, and, secondly that the methodology of loss computed by the Assessing Officer was correct.

Before us, the Ld. Representative for the assessee vehemently argued that the lower authorities have erred in treating the activity of dealing in the shares of HCL Technologies Ltd. as a business activity. According to the Ld. Representative, assessee was whole-time involved as Executive Director of Serum Institute of India Ltd.; and, that there was neither an organized activity of trading in shares and nor was there any organizational support in this regard. With regard to the profit motive, it has been contended by the Ld. Representative that be it be a business transaction or an investment transaction, profit maximization is an element which is always present. It has also been contended that the lower authorities have erred in confirming that bonus shares received formed part of the stock-in-trade and taking the cost of shares sold on average basis was also wrong. In this context, reliance has been placed on the judgement of Hon'ble Supreme Court in the case of CIT vs. Madan Gopal Radhyey Lal, 73 ITR 652 wherein the Supreme Court held that in the hands of the dealer of shares, any bonus shares received constitute a 'capital asset' unless specifically converted into stock-in-trade. Based on the aforesaid judgement, it is contended that the assessee received the bonus shares as a 'capital asset' and never converted the bonus shares into stock-in- trade. It is submitted that in the subsequent assessment years, the sale proceeds in respect of bonus shares sold were offered to tax under the head 'capital gain' after considering their cost of acquisition as Nil and such a treatment has been accepted by the Assessing officer in scrutiny assessments. It was therefore contended that the quantity of bonus shares could not be considered while determining the cost of the original shares sold during the year under consideration. According to the Ld. Representative, this is also on par with section 55(2)(aa)(iiia) of the Act wherein the cost of bonus

At the time of hearing, it has also been pointed out that during the year under consideration, assessee had sold other shares and units of mutual funds, and profit arising from such transactions have been accepted by the Assessing Officer to be assessable as 'capital gains'. Furthermore, it was pointed out that in the preceding assessment years as well as in the subsequent assessment years, the Assessing Officer has assessed the gain on sale of shares as an income assessable under the head capital gains, even in the course of scrutiny assessment. For all the aforesaid reasons, it has been canvassed that there was no scope for treating the impugned transaction as business transactions. It was also vehemently argued that there was no material to impeach the genuineness of the transactions and that at best the transaction can be termed as a 'use of the provisions of law' and it cannot be said to be 'a abuse of law', as was observed by the Hon'ble Supreme Court in the case of CIT vs. Walfort Share & Stock Brokers (P.) Ltd., 326 ITR 1 (SC) in a somewhat similar situation.

On the other hand, the Ld. Departmental Representative appearing for the Revenue has reiterated that the magnitude and frequency of the transactions in the HCL Technologies Ltd. shares was quite substantial which reflects that the intention of the assessee was to trade in such shares. With regard to assessee's intention, it was pointed out that at the time of undertaking transactions in HCL Technologies Ltd. shares, assessee was aware that he was considering the sale of shares of City Park Pvt. Ltd., which was to yield him substantial amount of capital gain and therefore he undertook the impugned transaction in shares of HCL Technologies Ltd. in order to incur a loss. According to the Ld. Departmental Representative, it is a common knowledge that share prices come down after the issue of the bonus shares, since the bonus shares are allotted after capitalizing the free reserves of a company. Therefore, assessee bought the shares of HCL Technologies Ltd. on cum bonus basis and after having received the bonus shares, the original shares were sold in the market at the reduced prices. According to the Ld. Departmental Representative, sequence of events clearly indicate that the purchase and sale of shares was undertaken with the sole intention of booking a loss so as to set-off the same against the gain from sale of shares of City Park Pvt. Ltd. and take the benefit of provisions of section 10(38) of the Act, thereby claiming the capital gain on sale of bonus shares as exempt on a later date.

We have carefully considered the rival submissions. In the present case, the fundamental aspect which is permeating through the entire exercise carried out by the Assessing Officer is that the short term capital loss incurred by the assessee on sale of 4,71,500 shares of HCL Technologies Ltd. has been set-off against the long term capital gain earned by the assessee on the sale of shares of City Park Pvt. Ltd.. The appellant purchased 4,71,517 equity shares of HCL Technologies Ltd. at an average price of Rs.622 per share between 28.02.207 to 13.02.2007. After receipt of 4,71,517 bonus shares, assessee sold 4,71,500 shares out of original shares between 16.03.2007 to 28.02.2007 at an average selling price of Rs.303 per share. Ostensibly, after the issue of bonus shares, the price of HCL Technologies Ltd. declined in the market and therefore the sale price realized by the assessee was only Rs.303 per share as against as the purchase price of cum-bonus shares of Rs.622 per share. The resultant loss was canvassed to be a short capital loss. In the subsequent years, assessee sold the balance shares remaining with him i.e. bonus shares of 471517 and the 17 out of the original 471517 shares. As the SA No. 57/Del/2024 Praveen Ranjan Sinha period of holding that was in excess of 12 months, in subsequent years the gain on sale of such shares has been accepted by the Assessing Officer as long term capital gain, which was exempt u/s 10(38) of the Act. Notably, while computing such capital gain, the cost of acquisition of the bonus shares was taken as 'Nil' by application of the provisions of section 55(2)(aa)(iia) of the Act. The aforesaid position has been accepted by the Assessing Officer in scrutiny assessment, as asserted by the assessee in the course of the hearing before us, and this material has not been repudiated from the side of the Revenue.

In the current year, assessee computed the loss on sale of 4,71,500 original shares by considering the average acquisition cost of Rs.622 per share. Ostensibly, it resulted in a loss because the sale price realized was only Rs.303 per share. First of all, the Assessing Officer viewed the whole transaction as a dubious tax planning. In this context, a reference has been made to the judgement of the Hon'ble Supreme Court in the case of Walfort Share & Stock Brokers (P.) Ltd. (supra). In the case before the Hon'ble Supreme Court, assessee purchased mutual fund units on 24.03.2000 and became entitled to dividend on the units @ Rs.4 per unit and earned a dividend of Rs.1,82,12,862/-. As a result of the dividend payout the value of the units reduced from Rs.17.23 to Rs.13.23 per unit on March 27, 2000, when assessee sold all the units and collected an amount of Rs.5,90,55,207/- as well as other incentives of Rs.23,76,778/-. In all, assessee received back Rs.7,96,44,847/- as against initial payout of Rs.8,00,00,000/-. In the return of income, assessee claimed dividend of Rs.1,82,12,862/- as exempt u/s 10(33) of the Act and also claimed a set-off Rs.2,09,44,793/- as loss incurred on sale of units. The Revenue disallowed the set-off of loss claimed which was negated by the Tribunal and thereafter the Hon'ble Supreme Court. As per the Hon'ble Supreme Court, it stood established that there was a sale and that assessee received a dividend, which was tax-free. In this context, the Hon'ble Supreme Court noted that the entire transaction could not be seen as 'abuse of law' but the assessee had made use of the "provisions of section 10(33)". The Hon'ble Supreme Court observed that even if it was to be assumed that there was a pre-planned action yet there was nothing to impeach the genuineness of the transaction. Adverting to the provisions of section 94(7) of the Act, the Hon'ble Supreme Court noted that in the case of assessment, before 01.04.2002 i.e. before insertion of section 94(7) of the Act, losses pertaining to the exempted income could not be disallowed. The assessment year before the Hon'ble Supreme Court was before the insertion of section 94(7) of the Act. It has also been observed by the Hon'ble Supreme Court that even after applying section 94(7) to cases for assessment years after 01.04.2002, the loss to be ignored would be only to the extent of the dividend received and not the entire loss. In other words, the losses over and above the dividend received would still be allowed to be set-off. Considering the aforesaid scheme of the Act, the Hon'ble Supreme Court held that the Parliament has not treated the dividend stripping transaction as sham or bogus.

In our considered opinion, the parity of reasoning laid down by the Hon'ble Supreme Court in the case of Walfort Share & Stock Brokers (P.) Ltd. (supra) is definitely attracted in the present case too. In the present case, even if it is taken that the transaction in the shares of HCL Technologies Ltd. was pre- planned, but the inference drawn by the Assessing Officer that it was a dubious tax planning cannot be upheld because there is nothing to impeach the genuineness of the transaction carried out by the assessee. In the case before the Hon'ble Supreme Court also, similar situation prevailed and the SA No. 57/Del/2024 Praveen Ranjan Sinha Revenue had cast doubt on the transaction because of pre-planned nature of the transaction. The Hon'ble Supreme Court negated the stand of the Revenue, as noted by us earlier. Applying the similar parity of reasoning in the present case, the stand of the Assessing Officer that the transaction was pre- meditated with the intention of incurring loss and setting-off against capital gains income is an "abuse of law" cannot be affirmed.

We may also refer to section 94(8) of the Act, which has been inserted by the Finance (No.2) w.e.f. 01.04.2005, and it provides that loss arising on bonus stripping of units is to be ignored after 01.04.2005. The phraseology of section 94(8) of the Act itself reveals that the Parliament in its wisdom restricted the scope of bonus stripping u/s 94(8) of the Act only to the units and did not extend it to the shares while the scope of the dividend stripping contained in section 94(7) of the Act applied both to shares/securities as well as units. Therefore, on the strength of section 94(8) of the Act also and having regard to the parity of reasoning laid down by the Hon'ble Supreme Court in the case Walfort Share & Stock Brokers (P.) Ltd. (supra), the transactions of purchase and sale of shares of HCL Technologies Ltd. are to be understood as a genuine transaction and are not covered by the provisions of section 94(8) of the Act.

Now, with regard to the stand of the assessee that he has acted as an investor and not as a trader while carrying out the aforesaid transaction in the shares of HCL Technologies Ltd.. In this context, the sum and substance of the case made out by the Revenue is that within a short period of time assessee has carried out substantial purchase/sale transactions in the shares of HCL Technologies Ltd.. As per the Assessing Officer, the transaction has been carried out in a systematic and organized manner and the intent was to incur a loss, which could be set-off against the capital gains income. Therefore, according to the Revenue, the transactions have to understood as a 'business activity'.

It is trite law that whether a particular transaction is an adventure in the nature of trade or is an investment simplicitor is a mixed question of law and facts. It is also evident that there is a plethora of judicial rulings on this aspect. Nevertheless, a common thread which emerges from various judicial rulings is that no single test is conclusive but the entire conspectus of facts and circumstances of a given case have to be cumulatively appreciated in order to determine as to whether the transaction in question is an adventure in the nature of trade or is an investment simplicitor. In this background, we may examine the factual matrix of the present case. At the outset, the Ld. Representative pointed out that the gain derived on sale of other shares and mutual funds in this year has been accepted by the Assessing Officer to be assessable under the head 'capital gains'. It has also been pointed out that in the scrutiny assessment for the preceding assessment years as well as for the subsequent assessment years the profit on sale of shares earned by the assessee has been accepted as assessable under the head 'capital gains'. Notably, even with regard to the gain on sale of bonus shares of HCL Technologies Ltd., it was stated at Bar that in subsequent assessment years it has been accepted by the Assessing Officer as an income assessable under the head 'capital gains'. On all these aspects, the Revenue has not controverted the factual matrix brought out by the assessee. In this background, in our considered opinion, the onus was on the Revenue to establish that the transaction in the shares of HCL Technologies Ltd. was not assessable under the head 'capital gains', as declared by the assessee in the return of income. The moot point is as to whether or not, having regard to the discussion in the SA No. 57/Del/2024 Praveen Ranjan Sinha orders of the authorities below, such an onus has been discharged by the Revenue.

The only point made by the Revenue is that magnitude and frequency of the transaction in HCL Technologies Ltd. is substantial. In our considered opinion, in the present case, the nature of the assessee's dealing in shares as an investor stands established in past as well as also in future years. The assessee is full time involved in other activity of being Executive Director of Serum Institute of India Ltd.. There is no material to suggest that any organizational structure or infrastructure is possessed by the assessee to undertake trading in shares as a business activity. There is no material to say that assessee acted as a frequent dealer in shares over an extended period of time. No doubt, for a short spell of time in the months of February and March, assessee has undertaken transactions in the shares of HCL Technologies Ltd.. But the same by itself cannot be categorized as a business activity, as it is not a continuous activity. Moreover, we also find weight in the plea setup by the Ld. Representative before us that if the intention was to incur loss, as canvassed by the Assessing Officer, then obviously such an activity cannot be categorized as 'business'. It is well understood that no business is carried out with an intention of making a loss, rather the intention is always to make profits. Therefore, by taking an overall view of the facts and circumstances of the present case, we are unable to uphold the stand of the lower authorities that the transaction in the shares of HCL Technologies Ltd. is a business transaction. We hereby set-aside the order of the CIT(A) on this aspect and direct the Assessing Officer to re-compute the capital gain/loss on the sale of shares of HCL Technologies Ltd. considering it to be assessable under the head capital gains as per law. Thus, on this aspect assessee succeeds.”

It is pertinent to note that the aforesaid decision of the Pune Tribunal is duly approved by the Hon‟ble Bombay High Court which is reported in 100 taxmann.com 227 dated 19.11.2018. Further, it is pertinent to note that the SLP preferred by the revenue against this order was dismissed by the Hon'ble Supreme Court in Special Leave Petition (C) No. 17120/2019 dated 19.02.2021. We find that even the aspect of „bonus stripping‟ has been addressed by the Pune Tribunal referred (supra). Further, we find that the provisions of section 94(8) of the Act relating to „bonus stripping‟ were applicable only to units upto AY 2022- 23. From AY 2023-24, pursuant to the amendment brought in the Finance Act 2022, the said provision applies to „securities‟ also. This amendment is prospective in nature and hence cannot be made applicable for the year under consideration. It is pertinent to note that in subsequent Assessment Year in AY 2016-17, the assessee had indeed sold the bonus share of HCL Technologies Ltd and Tech Mahindra Ltd and derived long term capital gain which was claimed as exempt u/s 10(38) of the Act. This was duly accepted by the ld AO in the scrutiny assessment proceedings u/s 143(3) of the Act dated 22.12.2018 as is evident

Since, the main appeal is hereby disposed of in favour of the assessee, the Stay Application of the assessee is hereby dismissed as infructuous.

In the result, the appeal of the assessee is allowed and Stay Application of the assessee is dismissed as infructuous.