SHANKAR REALTY P.LTD,MUMBAI vs. ASST CIT 5(3), MUMBAI

1. This appeal, filed by the Assessee, being 14.11.2011 passed by learned Commissioner of Income Tax (Appeals)-9, Mumbai (hereinafter called “the CIT(A)”), for assessment year 2008-09, appellate proceedings had arisen before learned CIT(A) from the assessment order dated 13.12.2010 passed by learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) of the Income-tax Act, 1961 (hereinafter called “the Act”).

The grounds of appeal raised by the assessee in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called “the tribunal”) read as under:-

The assessee is a company engaged in the business of renting of properties thereby deriving income from house property and dealing in shares . The sole issue in this appeal between rival parties is a dispute between the revenue and the assessee as to treatment of income arising from dealing in share to be charged to tax as income from capital gains or to be charged to tax as income from business. The revenue is treating gains arising from purchase and sale of shares as business income while the assessee is contending that the said income arising from sale and purchase of shares is an income chargeable to tax as income from capital gain. The assessee was called upon to explain the same by the A.O and the assessee submitted before the AO as under:-

The matter was carried further by the assessee by filing first appeal before learned CIT(A) who dismissed the appeal of the assessee . The assessee also raised an alternative contention that if the gains arising from purchase and sales of shares are held to be business income , then the assessee be allowed deduction of Securities Transaction Tax paid by it , which claim of the assessee was also denied by learned CIT(A) as assessee did not raised any such claim before the A.O in the return of income filed with the Revenue , vide appellate order dated 14-11-2011 passed by learned CIT(A).

Aggrieved by the appellate order dated 14-11-2011 passed by learned CIT(A), the assessee filed an appeal before the tribunal. It was submitted by ld. Counsel for the assessee that the assessee is engaged in purchase and sale of shares as an investor and income is to be brought to tax as capital gains instead of business income. It was submitted that in the alternative if the said income is held to be business income, then STT paid by the assessee is to be allowed as business expenses. Our attention was also drawn to the orders of authorities below and it was submitted that assessee main business is real estate and it was submitted that the authorities below has not given any reasons before bringing to tax income from purchase and sale of shares as business income instead of income from capital gains . The learned counsel for the assessee submitted that investments in immovable 5 property made by the assessee as at 31-03-2008 were to the tune of Rs. 4.07 crores out of total investments of Rs. 6.28 crores(pb/page7). It was also submitted that interest bearing Debentures to the tune of Rs.3.66 crores were raised which were utilised by the assessee for the purposes of making investments in properties. He drew our attention to the paper book / page no.5 wherein audited balance sheet is placed . He also drew our attention to page 7 of the paper book where schedule of investments is placed wherein the total investments held by the assessee as of 31-03-2008 were to the tune of Rs. 6.28 crores , out of which investments in properties are to the tune of Rs. 4.07 crores Our attention was also drawn to the schedule of unsecured loans which is placed in paper book / page 7 and our attention was drawn to details of financial expenses of Rs. 20.02 lacs paid on unsecured loan raised are placed page no. 9 of the paper book which constituted interest on debentures of Rs.14.65 lacs and other interest of Rs. 5.37 lacs . The learned counsel for the assessee also drew our attention to page no. 37 to 56 wherein all the detail of capital gain earned by the assessee are placed . He also drew our attention to page no. 14 to 34/paper book wherein Memorandum and Articles of association of the company is paced and it was claimed that main object clause of the company is to deal in real estate . The learned counsel for the assessee also drew our attention to internal page no. 15 of the A.O assessment order wherein interest of Rs. 20,02,795/- is allowed as interest paid on loan for buying the property under the head income from house property. Thus, it was contended that the entire interest bearing loans were utilized for investment in properties and such interest was allowed by the AO itself under the head income from house property and hence it could not be imputed that interest bearing borrowed funds were utilised by the assessee for investments in shares. it was also submitted that rental income from properties earned by the assessee was to the tune of Rs.80 lacks which was offered for taxation. Thus, it was claimed that no borrowed funds were utilised for investment in shares. The assessee also has given fund flow statement to reflect investments in properties which is at page no.

It was submitted that out of capital gains arising from shares claimed by the assessee of Rs. 41,07,492/- , capital gains to the tune of Rs.8,62,038/- were earned within 30 days of buying of the shares as the shares so bought were sold within 30 days. It was submitted that if it is held that the assessee is engaged in the business of dealing in shares wherein income is held to be assessed as business income, then STT paid should be allowed. It was submitted that this ground was raised before learned CIT(A) but he did not allowed the same as the claim was not made in the return of income filed with the revenue. He relied upon the decision of Hon‟ble Bombay High Court in the case of CIT v. Pruthvi Brokers & Shareholders (2012) 349 ITR 336(Bom HC) and it was submitted that the additional ground can be taken up for the first time before appellate authorities.

The Ld. DR on the other hand submitted that the controversy is with respect to the treatment of gains earned on sales and purchase of shares wherein the assessee is claiming the same to be capital gain while revenue is contending the same to be business income . It was submitted by learned DR that the assessee is engaged in trading of shares wherein only intention was to make profits and the income arising therefrom is an business income and not capital gains as contended by the assessee. It was submitted that majority of shares was sold within 90 days. It was submitted by learned DR that there is frequent transactions of shares and hence frequency of transactions itself reflected that the assessee is doing this activity as business activity. Our attention was drawn to page 37-56/paper book. It was claimed that the assessee has not claimed any income from sales and purchase of real estate and it is only income earned from the house property which is offered for tax under the head income from house property. The learned DR prayed that the matter may be set aside and restored to the file of the A.O.

We have considered revival contentions and perused the material on record . We have observed that the assessee is declaring income from house property as well income from capital gain in the return of income filed with the Revenue. The dispute is within narrow compass wherein the assessee is contending that the income from sale and purchase of shares be treated as capital gains while revenue is contending the same to be business income. The assessee duly explained before us that no interest bearing borrowed funds were utilised for buying the shares. The assessee has duly explained that the interest of Rs.20.02 lacs was paid towards borrowed funds which were invested in immovable properties and the said interest expenses were allowed by the revenue by way of deduction under the head „income from house property‟. We have gone through the details of transactions carried on by the assessee relating to the sale and purchase of shares which are placed in paper book page no. 37 to 56. We have carefully gone through these transactions which are large number of transactions entered into by the assessee in shares which were entered into frequently, regularly and in many cases the transactions are squared within a short span of buying of the shares. No doubt every investment which is made by the tax payer , there is always an intention to make profits but the same cannot be classified as business income merely because it was carried on with profit motive and its classification is to be tested based on motives, frequency , regularity transactions entered into by the tax-payer to come to the conclusion whether the activity is a business activity or an investment to earn capital gains. It is also noted that in majority of the cases the assessee has sold the shares within 90 days of purchase. This is a mixed question of fact and law and is to be decided on the factual matrix of each case. It is also undisputed that the transactions for purchase and sale of shares entered into by the assessee are all delivery based transactions for sale and purchase of shares. After carefully considering the voluminous transactions entered into by the assessee during the year running into several pages of paper book from page no. 37 to 56 and the overall conduct of the assessee , we are of the considered view that gains arising from purchase and sale of shares which are squared within 30 days of purchase by the assessee , the same may be treated as a business income and correspondingly STT paid be allowed as deduction in accordance with law , while the transactions for purchase and sale of shares which are squared after 30 days of its purchase, the same may be treated as income from capital gains. In view of decision of Hon‟ble Bombay High Court in the case of CIT v. Pruthvi Brokers & Shareholders (supra) , the claim of the assessee raised for the first time before tribunal for grant of deduction towards STT paid is admitted and allowed as business deduction after verification on merits in accordance with law and corresponding STT paid on such shares income of which is held to be business income be allowed by the AO after verification. For the limited purposes we are restoring this matter to the file of the A.O to make computation of business income as well capital gains on shares after verification of period of holding of such shares in accordance with our above directions. We order accordingly.

In the result, appeal of the assessee in 2008-09 is partly allowed as indicated above. Order pronounced in the open court on 31.10.2017 आदेश की घोषणा खुऱे न्यायाऱय में ददनांकः 31.10.2017 को की गई । Sd/- Sd/- (JOGINDER SINGH ) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER