ACIT, NEW DELHI vs. SH. BHUWANESHWAR PRASAD SINGH, NEW DELHI

PER ANADEE NATH MISSHRA, ACCOUNTANT MEMBER (A). The present appeal has been filed by the Revenue against the order dated 18.05.2011 of CIT(A)-XXVI, New Delhi pertaining to A.Y. 2007-08. Grounds of appeal are as under:-

(A). “On facts and circumstances of the case, whether the Ld.CIT(A) has erred by treating business income as held by the A.O. amounting to Rs.45,97,508/- as short term capital gain particularly when the nature and the manner in which transactions of sale/purchase has been undertaken by the brokers on behalf of the assessee shows that these are not in the nature of investment but business activity. (B). On the facts and circumstances of the case, whether the Ld.CIT(A) has erred in deleting the addition of Rs.80,32,765/-

Page 2 of 12 treated as income from undisclosed sources when A.O. has reason to believe that the assessee has used the modus operandi to invest Rs.80,32,765/- through his income from undisclosed sources.” (B.) The return was filed by the assessee on 15.11.2007 showing income of Rs.57,15,384/-. In the return of income, the assessee had shown short term capital gain amounting to Rs.45,97,508/- on sale of shares and had also in addition shown long term capital gain amounting to Rs.80,32,765/- on sale of shares. The Assessing Officer (in short “AO”) vide assessment order dated 29.12.2009 u/s 143(3) of I.T.Act, 1961 (in short “Act”) assessed the aforesaid amount of Rs.45,97,508/- as business income and assessed the aforesaid Rs.80,32,765/- as income from undisclosed sources. The assessee filed appeal before Ld. Commissioner of Income Tax (Appeal) [in short “CIT(A)”]. Vide appellate order dated 18.05.2011, the Ld.CIT(A) reversed the order of the AO on the issue of treatment of the aforesaid amount of Rs.80,32,765/- as income from undisclosed sources, and held that the Assessing Officer was not justified in making addition to the income of the assessee as income from undisclosed sources on account of long term capital gains declared by the assessee. As far as aforesaid amount of Rs.45,97,508/- (shown by the assessee as short term capital gain but assessed by the AO as business income) is ACIT VS BHUWANESHWAR PRASAD SINGH

Page 3 of 12 concerned, the Ld.CIT(A) directed the AO to treat an amount of Rs.45,51,746/- as short term capital gain as declared by the assessee and not as income from business; while upholding assessment of balance amount of Rs.45,761/- as business income. The present appeal before us has been filed by the Revenue against aforesaid order dated 18.05.2011 of Ld.CIT(A). During appellate proceedings in ITAT, the assessee filed a Paper Book containing 25 pages. The assessee also filed papers containing broker’s notes for purchase and sale of shares of “Reliance Capital” to support the claim of long term capital gain. He also contended that Ld.CIT(A) granted relief to the assessee without sufficient material. At the time of hearing before us, Ld. Departmental Representative (in short “DR”) supported the order of the AO by highlighting relevant portions of the assessment order. At the same time, Ld. Counsel for the assessee supported the order of the Ld.CIT(A) by reading out relevant portions of appellate order passed by the Ld.CIT(A). On the issue of the amount of Rs.45,51,746/- shown by the assessee as short term capital gain and upheld by the Ld.CIT(A), he drew our special attention to the case of Gopal Purohit vs JCIT 20 DTR 99 [Delhi]; which was also duly considered by Ld.CIT(A) in his order.

ACIT VS BHUWANESHWAR PRASAD SINGH

Page 4 of 12 (C.) We have heard both sides patiently. We have also perused all materials on record carefully. As far as the first ground of appeal regarding treatment of amount shown by the assessee as short term capital gain and upheld by Ld.CIT(A) is concerned; the contrary view of the AO who treated the amount as business income, was based on his understanding that the magnitude and frequency of share transactions was high, that period for which shares were held (i.e. holding period) was small and that the motive of the assessee was to realize profits.

The Ld.CIT(A) reversed this view of the AO giving detailed reasons. The relevant portion of the order of Ld.CIT(A) is reproduced as under:-

“7.7. ………..It is observed that as regards the law point in various cases, courts have taken their views based on the facts on record hence there are clear-cut principles to decide on these types of cases which have to be decided on individual merits and facts on record of that case. The case law of Gopal Purohit (supra) relied upon by the assessee throws light on the basis to be adopted to differentiate between capital gains and business income. This case has been decided on the facts that the assessee in this case was a trader in shares and how to demarcate the business income from capital gains as explained in an earlier case of Sarnath infrastructure P Ltd (supra). The Hon'ble tribunal has stated that after considering above rulings and various provisions of ACIT VS BHUWANESHWAR PRASAD SINGH

Page 5 of 12 the circulars issued by the CBDT, we cull out following principles which can be applied on the facts of a case to find out whether transaction(s) in question are in the nature of trade or are merely for investment purposes: (1) What is the intention of the assessee at the time of purchase of the shares (or any other item)? This can be found out from the treatment it gives to such purchase in its books of account. Whether it is treated as stock-in- trade or investment? Whether shown in opening/closing stock or shown separately as investment or non-trading asset? In the case of the appellant, it has been shown as investment in his books of account and balance sheet filed on record. (2) Whether assessee has borrowed money to purchase and paid interest thereon? Normally, money is borrowed to purchase goods for the purposes of trade and not for investing in an asset for retaining. In the case of appellant, no money was borrowed by the appellant. (3) What is the frequency of such purchases and disposal in that particular item? If purchase and sale are frequent, or there are substantial transactions in that item, it would indicate trade. Habitual dealing in that particular item is indicative of intention of trade. Similarly, ratio between the purchases and sales and the holdings may show whether the assessee is trading or investing (high transactions and low holdings indicate trade whereas low

ACIT VS BHUWANESHWAR PRASAD SINGH

Page 6 of 12 transactions and high holdings indicate investment). In the instant case, there are 49 transactions in the entire year for the purchase of shares of 5 companies and which have shown substantial gain in value within the year and have been sold by the year end. (4) Whether purchase and sale is for realizing profit or purchases are made for retention and appreciation in its value? Former will indicate intention of trade and latter, an investment. In the case of shares whether intention was to enjoy, dividend and not merely earn profit on sale and purchase of shares. A commercial motive is an essential ingredient of trade. It has been submitted that there was no commercial motive involved in case of the appellant as these transactions were done on the basis of various news and market reports. (5). How the value of the items has been taken in the balance sheet? If the items in question are valued at cost, it would indicate that they are investment: or where they are valued at cost or market value or net realizable valuer (whichever is less), it will indicate that items in question are treated as stock-in trade. In case of the appellant, the shares have values at cost and treated as investments. (6) How the company (assessee) is authorized in memorandum of association/ articles of association? Whether for trade or for investment? If authorized only for ACIT VS BHUWANESHWAR PRASAD SINGH

Page 7 of 12 trade, then whether there are separate resolutions of the board of directors to carry out investments in that commodity? And vice versa. This point is not applicable to the appellant. (7) It is for the assessee to adduce evidence to show that his holding is for investment or for trading and what distinction he has kept in the records or otherwise, between two types of holdings. If the assessee is able to discharge the primary onus and could prima facie show that particular item is held as investment (or say, stock-in- trade) then onus would shift to Revenue to prove that apparent is not real. In the present case, the appellant has adduced sufficient evidence to show that his holding is for investment which the Assessing Officer has not been able to disprove. (8) The mere fact of credit of sale proceeds of shares (or for that matter any other item in question) in a particular account or not so much frequency of sale and purchase will alone not be sufficient to say that assessee was holding the shares (or the items in question) for investment. The copy of the ledger account and the contract notes reflect the assessee to be an investor. (9) One has to find out what are the legal requisites for dealing as a trader in the items in question and whether the assessee is complying with them. Whether it is the argument of the assessee that it is violating those legal

ACIT VS BHUWANESHWAR PRASAD SINGH

Page 8 of 12 requirements, f it is claimed that it is dealing as a trader in that item? Whether it had such an intention (to carry on illegal business in that item) since beginning or when purchases were made? The assessee is an investor and has dealt in shares through the broker itself and has traded in his own name only. (10) It is permissible as per CBDT Circular No. 4 of 2007 of 15th June, 2007 that an assessee can have both portfolios, one for trading and other for investment provided it is maintaining separate account for each type, there are distinctive features for both and there is no intermingling of holdings in the two portfolios. The assessee has investment portfolio only. (11) Not one or two factors out of above alone will be sufficient to come to a definite conclusion but the cumulative effect of several factors has to be seen. In the instant case, the entire facts & circumstances of the case clearly lead to the conclusion that the purchase/sale of shares by the assessee has to be treated as an investment activity and not as trading in view of the following facts as brought out in the preceding paragraphs; • As per the books of accounts, the assessee has treated the entire investment as investment and not as stock in trade.

ACIT VS BHUWANESHWAR PRASAD SINGH

Page 9 of 12 • The entire short term capital gain is from equity shares and which were held for an average of about 67 days. • There were no derivative transactions by the assessee. • All the transactions were delivery based (except for one transaction and which has been rightly treated as business income). • The assessee is not a share broker nor is having registration with any stock exchange. • The assessee used his own surplus funds for investing in shares and not borrowed any money. • The assessee has declared dividend income as well. 7.8. In view of the above discussion, and after careful consideration of various case laws referred above, it is hereby held that the Assessing Officer was not justified in changing the treatment of income of the appellant from short term capital gains to income from business. The Assessing Officer is, accordingly, directed to treat an amount of Rs.45,51,746/- as short term capital gains as declared by the assessee and not as income from business. However, the balance amount of Rs.45,761/- has been rightly treated as business income by the Assessing Officer which is hereby upheld.”

We are of the view that the order of Ld.CIT(A) on this issue is just, fair and in accordance with law in the facts and circumstances of the case; and the Ld.DR failed to point out any infirmity, mistake or ACIT VS BHUWANESHWAR PRASAD SINGH

Page 10 of 12 illegality in the impugned order of Ld.CIT(A) on this issue and failed to make out any case for interference with the impugned order on this issue. The Ld.DR also failed to bring any decided precedents in favour of the Revenue to warrant any interference with the order of Ld.CIT(A) on this issue. Therefore, we uphold the order of the Ld.CIT(A) as far as treatment of aforesaid amount of Rs.45,51,746/- as short term capital gain is concerned. As far as the balance amount of Rs.45,761/- is concerned, the assessee has accepted its treatment as business income and there is no dispute before us regarding this amount. Hence, there is no need for us to adjudicate on the amount of Rs.45,761/-. For statistical purposes, first ground of appeal is dismissed.

(C.1.) Regarding the other issue of the aforesaid amount of Rs.80,32,765/- shown by the assessee as long term capital gain but taxed by the AO as income from undisclosed sources; we find that the lower authorities [both AO and Ld.CIT(A)] have failed to carry out/cause necessary inquiries. Whether this amount is genuinely claimed by the assessee as long term capital gain or it is income from undisclosed sources as opined by the AO will depend on relevant facts all of which are not presently available. One such relevant fact, presently not available before us, is whether distinctive numbers of ACIT VS BHUWANESHWAR PRASAD SINGH

Page 11 of 12 purchase transactions in the shares of “Reliance Capital” as per records of stock exchange for the relevant date exactly match with distinctive numbers of sale transactions in the shares of “Reliance Capital” as per records of stock exchange for the relevant date. To substantiate his claim for long term capital gain on sale of shares; the assessee needs to furnish conclusive evidence that the shares (of “Reliance Capital”) claimed to have been sold are exactly the same shares (of “Reliance Capital”) having regard to corresponding distinctive numbers of shares. Convincing materials can also be presented with the help of corresponding order no., order time, trade no. and trade time. From the materials presently available before us, it is not possible to conclude whether the shares claimed to have been sold by the assessee are exactly the same as the shares claimed to have been purchased by the assessee – as far as assessee’s claim of long term capital gain is concerned. As relevant facts for adjudication of this issue are not presently available; in the fitness of things, we set aside the orders of Ld.CIT(A) and AO on this issue and restore the issue in dispute in the second ground of appeal to the file of the AO with the direction to pass a fresh order denovo after carrying out necessary

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Page 12 of 12 inquiries and after providing opportunity to the assessee. For statistical purposes, the second ground of appeal is partly allowed.

(D.) For statistical purposes, this appeal of the Revenue is partly allowed. Order pronounced in open court on 19th May 2017.