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Income Tax Appellate Tribunal, DELHI BENCH ‘E’, NEW DELHI
Before: SHRI N. K. SAINI & SMT. BEENA A. PILLAI
The present appeal filed by the Revenue, arises from the order dated 13.12.2013 passed by Ld. CIT(A) IX, New Delhi for the Assessment Year 2010-11 on the following grounds of appeal:
1. Whether on the facts and circumstances of the case & in law, the Ld. CIT (A) erred in directing the A.O to treat the income of Rs.55,80,788/· and Rs.1,59,15,398/·, disclosed as Long Term Capital Gain and Short Term capital Gain, respectively, by the assessee but held as business income by the A.O., as Long Term Capital Gain and Short term Capital Gain without appreciating the facts mentioned by the A.O?
2 I.T.A.No.1145/Del/2014
2. Whether on the facts and circumstances of the case, the Ld. CIT(A) erred in holding that the A.O has not applied the principles laid down by the CBDT in Circular No. 4/2007 ?
Whether on the facts and circumstances of the case, the Ld. CIT(A) erred in holding that the magnitude of transaction is not relevant for determining the profit from sale of shares/ MF as business income or L TCG/STCG?
Whether on the facts and circumstance of the case, the Ld. CIT(A) erred in holding that the principle of Consistency is to be followed by completely ignoring the fact that the principle of res-judicata is not applicable in the assessment proceeding as held by the Hon'ble Delhi High Court in the case of Krishak Bharati Cooperative Ltd. v. Deputy Commissioner of Income-tax, [2012] 23 taxmann.com 265 (Delhi) that rule of consistency should not create anomaly?
That the order of the Ld. CIT (A) is erroneous and is not tenable on facts and in law.
That the grounds of appeal are without prejudiced to each other.”
The brief facts of the case are as under: 2.1 The assessee is a non banking financial company registered with Reserve Bank of India (RBI) and is engaged in the business of trading in units of mutual funds and investment in shares and debentures. The assessee filed its return of income for the year under consideration on 21st October, 2010 declaring total income of Rs.2,91,48,395/- and the same was processed u/s 143(1) of the I.T. Act, 1961. The case of the assessee was selected for scrutiny and statutory notices u/s 143(2) / 142(1) were issued.
3 I.T.A.No.1145/Del/2014 2.2 During the assessment proceedings, Ld. Assessing Officer observed the assessee had purchased and sold mutual funds and shares. Apart from showing an amount of Rs.1,27,76,828/- as net profit, assessee claimed Long Term Capital Gain (Rs.55,80,788/-) and Short Term Capital Gain (Rs.1,59,15,398/-). Since the trading income is lower than capital gain, the AO proposed to treat transaction in all the shares as income from business and profession keeping the volume of business and percentge of income from trading in shares and mutual fund to the total income as basis. The Ld. AO held that the main activity of the assessee is trading in shares, and during the year, 60 transactions in shares were shown as capital gain. The volume of business, the volume of income from capital gain and the volume of investment indicates that trading in shares and mutual fund is the core activity of the assessee. The AO also noted that the time gap between purchase and sale of shares is very thin. The principle of consistency as argued by the assessee is not acceptable in view of the fact that, by paying capital gain and not business income for the same share transaction, the assessee falls under lower slab of taxation or under the exempt category. The AO observed that humongous expense on portfolio management is an indication towards trading in shares as core business. Accordingly, the AO treated entire STCG and LTCG as income from business. The AO relied upon circular No.4 of 2007 dated 15.6.2007 issued by CBDT, which covers the various parameters to be considered in determining whether the 4 I.T.A.No.1145/Del/2014 activity of trading of shares is to be taxed under the head 'Income from Business & profession' or 'Short Term Capital Gains'. 5.3 The Ld. Assessing Officer made following additions to the income of the assessee: “Long term capital gain treated as business income Rs.55,80,788/- Short term capital gain Treated as business income Rs.1,59,15,398/- 5.4 Aggrieved by the order of Ld. Assessing Officer, the assessee preferred appeal before Ld. CIT(A).
6. Ld. CIT(A) deleted the addition made by following the ratio laid down by Hon'ble Bombay High Court in the case of CIT Vs Gopal Purohit (2010) 336 ITR 387. 6.1 Aggrieved by the order of Ld. CIT(A), the Revenue is in appeal before us now. 6.2 Before us, Ld. D.R. submitted that every year being a separate year, the principle of res judicata will not apply to the income tax proceedings. He submitted that the assessee has entered into a large number of transactions of sale & purchase of units and, therefore, the income earned from such transaction should be treated as business income. 6.3 On the contrary, Ld. A.R. submitted that during the year under consideration, the assessee has sold only shares relating to Hindustan Construction and GMR Infrastructure. The remaining has been continued to be held as investment in the books of accounts, maintained by the assessee. Ld. A.R. submitted that the assessee is 5 I.T.A.No.1145/Del/2014 deriving income from business from capital gain and income from other sources which are as follows:
Particulars Asset type Amount Income from Trading in units of Mutual funds 13232997/- business Income from interest Incentive and Miscellaneous income Income from Income from capital assets 15915398/- capital gains Investment in Equities LTSCL (STT paid 5580788/- exempt u/s 10(38) STCG-15915398/- Income from Dividend earned form investment in 26180567/- other sources equities
Ld. A.R. submitted that the income from the above three sources are based on accounting principles and standards and the assessee has consistently been following the same accounting principle every year. He submitted that the assessee held the shares as investment and not as stock in trade. Ld. A.R. has submitted a list of shares held by the assessee during the year under consideration. Ld. A.R. has also placed reliance upon the decision of Hon'ble Jurisdictional High Court in the case of a sister concern of the assessee being CIT Vs Chowdary Associates in I.T.A. No. 544/2013. He submitted that Hon'ble High Court in the case of its sister concern, upheld the findings of the Tribunal by holding that the income derived by the assessee from the above purchase & sale of shares are to be considered under the head ‘income from capital gain’. He has also placed reliance upon the decision of Hon'ble Supreme Court in the case of 6 I.T.A.No.1145/Del/2014 CIT Vs Associated Industrial Development Co. P. Ltd. reported in 82 ITR 586.
We have perused the arguments advanced by both the parties, orders passed by authorities below as well as the judgements relied upon by the Ld. A.R. It is observed that’s the assessee has maintained itself throughout as investor. Ld. Assessing Officer had negated the assessee’s contention merely because of the dealing in shares by the assessee. There is no doubt that the bulk of shares held by the assessee were form substantial period. The objective of the assessee is to get substantial capital gain and not earning profits which would result in transaction being in nature of trade. Further it is observed that the method of valuation adopted by the assessee is at cost price on a permanent basis and not on ad-hoc basis. From the list of shares submitted before us, it is observed that the assessee has been holding the shares as investment from year to year. The treatment given to the transaction in the books of accounts is of importance, and the assessee has treated these shares and sale thereof as investment. It is observed that the assessee has been maintaining the clear distinction among its holdings, as units of mutual funds are held as stock in trade and shares are held as investments. Similar were the facts before Hon'ble Bombay High Court in the case of Gopal Purohit (supra). Hon’ble Court has held that the principle of consistency is a basic factor to be considered while deciding the nature of income. The Hon'ble Bombay High Court has also held that the uniformity in maintaining the 7 I.T.A.No.1145/Del/2014 books of accounts is the most crucial source of getting to know intention of the assessee as regard to the nature of transaction. It is observed from the details placed in the paper book that the assessee has made investments in the mutual funds and shares which has been shown by the said company under the head stock in trade / "Investments" in their balance sheet consistently. There is also no change in the year under consideration as well, as compared to the preceding years, where the income from sale / purchase of shares has been assessed as Short term capital gain. It is an accepted fact that the assessee had shown the stocks in his books of accounts as investments and not as stock-in-trade and this important treatment from the accounting angle has a bearing on the issue. There is no stock in trade of shares in the Balance sheet of the assessee, rather these are consistently shown by the assessee under the head investments. The assessee company had shown the gains in earlier years also under the head capital gain, which has been accepted as such.
From the details of purchase and sale and period of holding of shares, it is observed that the assessee has held 11 transactions of shares for more than 50 days and the balance were held for more than 100 days in total number of 30 transactions. In the previous year and the subsequent years relevant to the Assessment Year under consideration the Department has been consistently accepting the investment in shares held by the assessee. During the year under consideration, the assessee has 8 I.T.A.No.1145/Del/2014 sold shares of two companies being Hindustan Construction and GMR Infra Structure. The remaining shares relate to purchases made in the previous years.
The judicial pronouncements discussed above clearly indicates that; (i) Whether particular trading is from 'investment on capital asset' or from 'stock in trade' is a question of fact. (ii) The fact depends on how it is recorded in the books of accounts of assessee and what is the accounting treatment given to it. (iii) Magnitude of transaction is not relevant to the issue. (iv) Principle of consistency is to be followed on this issue.
Respectfully following the above judgments of the higher courts, and after considering the facts of the case as discussed above, we do not find any reason to hold that the short term capital gain or long term capital gain as declared by the assessee should not be assessed under these heads of income.
Accordingly, grounds raised by the Revenue stand dismissed. Order pronounced in the open court on 9th June, 2016.