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Income Tax Appellate Tribunal, ‘SMC’ ‘B’ BENCH, CHENNAI
Before: Shri A. Mohan Alankamony
आदेश / O R D E R
This appeal by the Revenue and cross objection by the assessee are arising out of the order passed by the Ld. Commissioner of Income Tax (Appeals)-4, Chennai dated 18.10.2016 in ITA No.133/2015-16/A.Y 2009-10/CIT(A)-4 for the assessment year 2009-10, passed U/s.250(6) r.w.s.143(3) & 147 of the Act.
The Revenue has raised several grounds in its appeal, however the crux of the issue is that the Ld.CIT(A) has erred in allowing the appeal of the assessee by holding that the income earned out of trading in shares by the assessee through its portfolio manager “M/s. Reliance Capital Asset Management” will fall under the head ‘capital gain / loss’ and not under the head ‘business income/loss’ as held by the Ld.AO.
In the cross objection the assessee has challenged the reopening of the assessment U/s.147 of the Act.
The brief facts of the case are that the assessee is an individual engaged in the business of imparting soft skills and trading in shares, filed her return of income for the assessment year 2009-10 on electronically on 30.09.2009 admitting total income of Rs.11,64,970/-. The case was selected for scrutiny and final assessment order was passed U/s.143(3) r.w.s 147 of the Act on 29.01.2016, wherein the Ld.AO recomputed the income of the assessee at Rs.35,20,284/- by treating the ‘business loss’ claimed by the assessee as ‘capital loss’.
During the course of scrutiny assessment it was observed by the Ld.AO that the assessee had traded in shares by entrusting the assignment of buying and selling shares with M/s.
Reliance Capital Assets Management as Portfolio Manager. The Ld.AO opined that such activity of the assessee is in the nature of investment and not expansion of her business activities.
Since the assessee had made investments in the form of deposits with various banks and post office aggregating to Rs.55 lakhs and Rs.63.4 lakhs in mutual funds, the Ld.AO further strengthened his view because the assessee was in the habit of making investments. Accordingly, the Ld.AO treated the trading loss of Rs.23,55,314/- suffered by the assessee as ‘capital loss’ and allowed it to be carried forward as per the provisions of Section 70 of the Act and thereby disallowed the claim of ‘business loss’. On appeal the Ld.CIT(A) relying on the circular issued by the CBDT No.4/2007 dated 15.06.2007 held the issue in favour of the assessee by observing as under:-
“Disputes, however, continue to exist on the application of these principles to the facts of an individual case since the taxpayers find it difficult to prove the intention in acquiring such shares/securities. In this background, while recognizing that no universal principal in absolute terms can be laid down to decide the character of income from sale of shares and securities (i.e. whether the same is in the nature of capital gain or business income), CBDT realizing that major part of shares/securities transactions takes place in respect of the listed ones and with a view to reduce litigation and uncertainty in the matter, in partial modification to the aforesaid Circulars, further instructs that the Assessing Officers in holding whether the surplus generated from sale of listed shares or other securities would be treated as Capital Gain or Business Income, shall take into account the following- a) Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income, b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment year shall remain applicable in subsequent Assessment years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years. c) In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT.
It is however, clarified that the above shall not apply in respect of such transactions in shares/securities where the genuineness of the transaction itself is questionable, such as bogus claims of Long Term Capital Gain/Short Term Capital Loss or any other sham transactions.
It is reiterated that the above principles have been formulated with the sole objective of reducing litigation and maintaining consistency in approach on the issue of treatment of income derived from transfer of shares and securities. All the relevant provisions of the Act shall continue to apply on the transactions involving transfer of shares and securities.
After considering the above Circulars of the Board, the following relevant issues are noticed which should decide whether the transaction carried out by the present appellant was in the nature of business or investment. Firstly, whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee who holds the shares. In the present case of the appellant, the relevant transactions in shares which amounted to loss have been treated as business activity. Secondly, it is possible for a taxpayer to have portfolios one for the business and the other for investment. The present appellant has also maintained two different portfolios, the one as investment and other as venture. Thirdly, no single principle would be decisive and the total effect of all the principles should be considered to determine whether, in a given case, the shares are held by the assessee as investment or stock-in-trade. Lastly, where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade. Lastly, where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in- trade, the income arising from transfer of such shares/securities would be treated as its business income. In the present case of the appellant, the relevant transactions have been opted as business transactions only.
From the above, it is evident that it is prerogative of the assessee to decide whether he intends to treat the transaction as business or investment. At the same time, there has to be coherence in what the assessee has opted for. The Assessing Officer cannot dispute this intention of the assessee. Even the assessee can have two different portfolios, the one for the purposes of business and the other as investment. However, in such cases, the assessee has to maintain complete and distinct set of accounts to substantiate the same. It means, under the circumstances, the onus is on the Assessing Officer to prove that the assessee has not maintained any such distinct and complete accounts pertaining to the respective portfolios. Without proving the same, the AO is supposed to accept the version of the assessee.
In the present case of the appellant, after re-opening of the earlier assessment, the Assessing Officer has not given any detailed or specific finding to substantiate the conclusion drawn by him. I have perused the entire relevant assessment record and also the re-assessment record and could not lay hand on anything substantive to reveal that the AO had carried out any examination or investigation of the accounts of the appellant to prove the appellant wrong. He has simply relied on the methodology adopted by the appellant in transacting in shares, i.e. through the Portfolio Management Services Scheme of Reliance Capital Asset Management Ltd. and erroneously held that the purchase and sale of shares was in the nature of investment rather than trading.
Therefore, in view of the above facts and circumstances of the case and also considering the relevant Circulars of the Board, I do not find any logic in sustaining the findings of the AO in this regard. Hence, the loss of Rs.23,55,314/- is treated as business loss and not as capital loss. The A.O is directed to allow the credit of the same in calculating the taxable business income of the appellant for the relevant year under consideration.”
Before us, the Ld.DR argued in support of the orders of the Ld.AO while as the Ld.AR relied on the orders of the Ld.CIT(A) and pleaded for confirming the same.
7.1 I have heard the rival submissions and carefully perused the materials available on record. From the facts of the case, it is apparent that the assessee had entrusted her funds with M/s. Reliance Capital Asset Management Ltd., under the portfolio management service. Thus it is apparent that M/s.
Reliance Capital Asset Management Ltd., is only acting as an agent of the assessee for her trading activities. The actions of M/s. Reliance Capital Asset Management Ltd are thus binding on the assessee. In this situation, when the agent of the assessee had traded in purchase and sale of shares which is in the nature of business activity, the profit derived thereon by the assessee, has to be necessarily treated as the business income/loss of the assessee, and not profit/loss on investment. The Ld.AO without verifying the actual activity carried on by M/s. Reliance Capital Assets Management Limited on behalf of the assessee, had simply treated the transaction as investments in the hands of the assessee, and accordingly assessed the loss as “capital loss”.
Therefore the treatment of the Ld.AO with respect to the loss incurred by the assessee towards trading in share does not have any merit. The Ld.CIT(A) after examining the circular issued by the CBDT and after examining the nature of transaction has held that the loss incurred by the assessee is in the nature of “business loss” and not “capital loss”. In this situation, I do not find it necessary to interfere with the order of the Ld.CIT(A) on this issue. Therefore the appeal of the Revenue does not have any merit.
7.2 As far as the cross objection of the assessee is concerned, since I have decided the issue on merit, with respect to the nature of loss incurred by the assessee on trading in shares through M/s. Reliance Capital Assets Management Limited, in favour of the assessee, I do not find it necessary to address the ground raised by the assessee with respect to reopening as it would be only academic.
8 In the result the appeal of the Revenue is dismissed and the cross objection of the assessee is dismissed in-limine.
Order pronounced on the 17th August, 2017 at Chennai.