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Income Tax Appellate Tribunal, ‘B’ BENCH, MUMBAI
Before: SHRI D. KARUNAKARA RAO, AM & SHRI RAVISH SOOD, JM
सुनवाई की तारीख/ : 06/12/2016 Date of Hearing घोषणा की तारीख / : 06/03/2017 Date of Pronouncement आदेश / O R D E R PER RAVISH SOOD, JM:
That the present appeal had been filed by the assessee against the order passed by the CIT(A)-5, Mumbai, dated 18.03.2011, which in itself arises from the assessment order passed under Sec. 143(3) of the Income Tax Act, 1961, (for short ‘Act’), dated 29.12.2009. The assessee had assailed the order of the CIT(A) by raising the following grounds of appeal before us:- “CONCISE GROUNDS OF APPEAL
1. The Learned Commissioner of Income-tax erred in confirming the action of A.O in treating Short term capital gains of Rs.3,51,72,755/- & Long term capital gains of Rs.8,06,532/- as business income without appreciating the fact that the appellant was merely investor in shares and not dealer in shares and hence, the short term and long term capital gains treated as business income is without any justification and the gains be treated as short term and long term capital gains.
2. The Ld. CIT failed to appreciate that in earlier and subsequent assessment years, the gains from shares have been accepted by the department to be arising out of short term and long term capital gains and the A.O for making disallowance u/s. 14A also treated the shares as investments and not stock in trade and hence, the short term and tong term capital gains be accepted as declared by the appellant.
3. The appellant craves leave to add, amend, alter or delete all or any of the aforesaid grounds of appeal”.
Briefly stated, the facts of the case are that the assessee company which is engaged in the business of rendering innovative services in areas such as housekeeping and maintenance services , Computers and telecommunication services etc., had filed its return of income for A.Y. 2007-08 on 31.03.2008 declaring total income of Rs.3,68,85,369/-. The case of the assessee was thereafter taken up for scrutiny proceedings under Sec. 143(2) of the ‘Act’. That during the course of the assessment proceedings the A.O. observed that the assessee had claimed to have earned ‘Short term capital gain’ (STCG) of Rs.3,51,72,757/- and ‘Long term capital gain’ (LTCG) of Rs.7,87,532/- on sale of shares, which was credited as ‘Profit on sale of shares’. It was observed by the A.O. that the STCG shown by the assessee in its return of income was in respect of transactions in shares of 13 different scrips, mainly those of M/s. India Bull, Lloyd Electricals, Unichem Laboratories etc., while for the LTCG pertained to purchase and sale of shares of M/s. Prakash Industries. That as per the A.O. the assessee company had during the year under consideration carried out 26 purchase transactions of Rs.17,17,07,197/- and 71 sale transactions of Rs.20,76,67,483/-. The A.O. being of the view that the planned purchase and sale transactions of the aforesaid magnitude were in the nature of ‘business transactions’, therefore called upon the assessee to explain as to how the same had been shown as short term/long term capital gain in its return of income. The assessee during the course of the assessment proceedings in order to fortify its claim that the profit/gain from the sale of the shares had rightly been reflected under the head ‘Capital gain’, therein inter alia submitted as under:-
(i) That ‘Memorandum of association’ of the assessee company did not authorize carrying of the business of purchase and sale of shares.
(ii) That the assessee company which was incorporated to carry on the business of distribution, marketing and publicity of automobile spare parts and accessories, had carried out investment towards purchase of shares from the surplus funds available with it prior to the commencement of its business.
(iii) That the shares purchased by the assessee company constituted ‘Investments’ and not ‘Stock in trade’.
(iv) The intention of the assessee company was to hold the shares as investments, and there being no intraday trading of shares, the income from sale of the same, wherein both the purchase and sale transactions were delivery based, thus could safely be held as ‘Capital gains’.
(v) That the object of the assessee company in carrying out investments towards purchase of shares was to derive dividend income.
(vi) That both the purchase and sale transactions were delivery based and the ‘STT’ had been added back in the computation of income and no rebate under Sec. 88E was claimed by the assessee.
The A.O. however not finding favor with the contentions raised by the assessee, therein refuted the same by observing as under:-
“(a). Regarding the claim that the transactions resulting in STCG were 'delivery based', this is by no means a conclusive factor to establish that the profit on sale of shares was a capital gain and not business profit. If the transactions are settled without delivery, they may become speculative transactions within the meaning of Sec. 43(5) of the Act. Hence, being delivery-based or being done through demat account does not, ipso facto, render a share transaction on investment account or trading account.
(b).Regarding the classification by the assessee in its accounts as ‘investments' or stock in trade', this cannot be decisive to determine the nature of the transaction, As highlighted in Circular No. 4 dated 15.6.2007 of the Board it has been held by the Hon’bleSupreme Court in the case of Karamchand Thapar& Bros Pvt. Ltd. (83 ITR 899) that the classification by the assessee of shares as investment or stock in trade is by no means conclusive, Moreover, in the case of State Bank of Hyderabad vs CIT (151 ITR 703) (AP), the income arising from sale of securities, which was found to be closely connected to the banking business of the State Bank of Hyderabad, was held to be taxable as business-income. At the risk of repetition, it may be stressed that when an assessee indulges in any activity which is a part of its main line of business, the natural inference will be to hold that the additional activity is an integral part or mere an extension to the business activities.
(c).Regarding the assessee 's claim that the profit on sale of shares cannot be taxed as business income since the Memorandum of Association of the company does not permit trading in shares, it needs to he emphasized that the head under which income is taxable under the Income Tax Act, 1961, has to be decided with regard to the inherent nature of the transaction vis-à- vis. the head of income specified in the Act. The income Tax Act also defines what is business u/s 2(13) of the Income Tax Act, 1961. Hence, the 'Memorandum' has no decisive role to play in this context. In any case, the 'memorandum' merely states that the assessee can invest in shares, this in no way has any impact on the nature of the purchase-sale transactions in shares vis-à-vis Sec. 2(13) of the Act.
(d) As to the submission that the assessee has not taken any loans but has invested its own funds, this only leads to the inference that the assessee had sufficient resources to carry on business of purchase and sale of shares with its own funds instead of relying on the borrowed funds. Though this is an aspect which has a bearing on the question whether the purchase and sale amounts to trading or not, it is by no means the only or crucial factor. What matter is a combination of all the relevant factors.”
The A.O. thereafter proceeded with and therein concluded that the amount of Rs.3,51,72,755/- and Rs.7,87,532/- claimed by the assessee as income under the head ‘STCG’ and ‘LTCG’ were liable to be assessed as the normal ‘business income’ of the assessee company.
The A.O. still further observing that though the assessee company had received a ‘dividend income’ of Rs.31,60,807/- which though was claimed as exempt under Sec.10(34) of the ‘Act’, however no corresponding disallowance under Sec. 14A was carried out by the assessee while computing its income. The A.O. being of the view that the disallowance under Sec. 14A r.w. Rule 8D was mandatory and the mode of computing the amount of disallowance as specified in Rule 8D, which though was made available on the statute from 24.03.2008 was to be applied even to the preceding years, thus computed a disallowance of Rs.78,848/- under Sec. 14A in the hands of the assessee company. The A.O. thus deliberating on the aforesaid issues assessed the income of the assessee company as per the normal provisions at Rs.3,77,70,750/- and computed the ‘book profits’ at Rs.3,69,78,459/- under Sec. 115JB.
The assessee being aggrieved with the order of the A.O. therein carried the matter in appeal before the CIT(A)-5, Mumbai. The assessee in support of his contention that the profit/gain on sale of shares had rightly been reflected under the head ‘Capital gain’ in the return of income, which however had most arbitrarily been dislodged by the A.O, therein raised the following submissions before the CIT(A):-
“a).That even as the Assessing Officer has attempted to sound as if he had adopted a fair approach by recalling that the CBDT Circular on which he has relied requires him to take an overall and holistic view, all that he has really done is to summarily dismiss the following vital facts of our case by expressly suggesting in respect of each one of them that it was not conclusive or decisive. b) A bare reading of our Memorandum, of Association showed that it did not permit us to carry on any business in securities; that all that it did was to permit us to make investments in securities. c) The investments in question were made from our own funds which,because the main business envisaged by the Memorandum of Association could not be commenced were lying idle and therefore, were surplus. d) The Appellant has not made any borrowings for the purpose of making investments in question. The company incorporated under the Companies Act, 1956, our books of account are audited under the relevant provisions of that Act as also u/s. 44AB of the Income-tax Act, 1961- Audited books have consistently shown the investments in question as investments and not stock-in-trade and that the investments have been consistently shown in the Schedule of investments in the audited Balance Sheet every Year. e) All the transactions of purchase and sale of shares resulting into short term capital gain/ long term capital gains were delivery based transactions. That in respect of every single transaction resulting into the gain, Security Transaction Tax has been paid. The Assessing Officer has failed to appreciate that a company incorporated under the Companies Act, 1956, unlike a partnership whose very definition envisages that a partnership cannot exist without business, can very well exist without doing any business as such. By no stretch of the imagination can 26 transactions of purchase and 71 transactions of sale of shares with the purchase value of Rs.17.17 crore and sale value of Rs.20.76 crore can be regarded as such a large number of regular and frequent transactions in shares as could entitle the Assessing Officer to conclude that they amounted to business. f) The appellant had surplus funds. The management of the Appellant decided to make investment with the available funds in various share/ securities to earn and for the appreciation of the capital rather than keep the funds idle. The resolution was passed in the meeting of the Board of Directors held on 27 January, 2003 wherein the Board resolved to acquire and hold shares/securities out of surplus funds to be held as part of the investment portfolio of the company. g) The shares been held by the appellant not as ‘invest’ but as ‘stock-in-trade, the Appellant would have valued the same at lower of cost or market value and not at cost. As per Accounting Standard-13 issued by the Institute of Chartered Accountants of India, New Delhi, on ‘Accounting for Investments’, a company is required to value its’ ‘current investments', i.e. investments which have been made with a view to resell at a profit in a short period of time at cost or fair value whichever is lower, whereas 1ong term investments are required to be valued at cost, unless there is a permanent diminution in their value. Similarly, AS-2 on Valuation of Inventories require stock-in-trade to be valued at cost or market price whichever is lower and not at cost. h) Classification of shares/securities by the Appellant as 'investments' has been accepted by the department in the assessment years 2005-06 and 2006-07. The brokerages paid for purchasing the shares were included in the purchases and the brokerages paid on the sales were deducted from the sales. These expenses were not claimed as deductions. The expenditure of Rs.4,84,048/- by way of Security Transaction Tax incurred for purchasing and selling the shares was not claimed. The Appellant had not claimed any rebate for the same in view of Section 88E of the ‘Act’. i) Plain reading of the Circular shows, it has been issued by the CBDT only to update its earlier Instruction No 1827 of 31.08.1989 for information of the assessees as well as for guidance of the Assessing Officers. Thus the Circular seeks merely to update the instruction and does not replace it. The assessment order shows, the Assessing Officer has gone only by the above Circular and paid no heed to the earlier Instruction. In the peculiar facts and circumstances of the appellants case, the emphasized portion of the instruction quoted below ought to have been considered by him. Attention was invited to instruction No. 1827 dated 31.8.1989.
Reliance was placed on the following decisions: i) G. Venkata Swami Naidu & co. Vs. CIT 35 ITR 594 (SC) ii) H. Mohammad & Co. Vs. CIT 107 ITR 637 (Guj.) iii) Sarder Indra Singh & sons Ltd. Vs. CIT 24 ITR 415 (SC) iv) SBH. Vs.CIT 151 ITR 703 iv) Karam Chand Thapar and brothers (P) Ltd Vs. CIT 83 ITR 899 (SC) j) That without prejudice, it was submitted that under the present scheme of the Act providing for concessional tax treatment to Short Term capital Gains under Section 111A, the principles/criteria culled out from judicial decisions rendered in the context of the law as it then read, have become redundant, that the decision of the Supreme court in CIT v. H. Holck Larsen (160 ITR 67) where the Supreme Court has upheld the decision of the High Court reversing the decision of the Appellate Tribunal, (even in a case where the assessee investor had borrowed money) provides a very good guide of the kind of approach which must be adopted while deciding the issue as to whether profit on the transfer of shares in a company is of capital nature or business income. k) That Appellant makes investment in financial assets not merely with a view to earning periodical income by way of dividend or interest, but also with a view to get appreciation of the investment partly and that just because the appellant has been able to reap the appreciation of its investment in a relatively shorter period than it had originality bargained for, due to unprecedented bull run in the capital markets, the real intention of making the investment cannot be overturned and regarded as to trade in securities”.
That it was further submitted by the assessee before the CIT(A) that it had in the immediately preceding year, viz. A.Y: 2006-07, shown the income from sale of shares under the head ‘Capital gains’, which was accepted by the A.O after thorough verification in the assessment framed under Sec. 143(3). It was thus submitted by the assessee that now when the facts and circumstances during the year under consideration remained the same as that of the immediately preceding year, viz. A.Y. 2006-07, therefore the taking of a different view by the A.O as regards the nature of the sale transactions of shares was not warranted in the hands of the assessee company, and as such could not be sustained. It was further averred before the CIT(A) that the A.O. while carrying out disallowance under Sec.14A had himself considered the shares as ‘Investments’ and not ‘stock in trade’, and as such the inconsistent approach adopted by the A.O, and holding to the contrary while assessing the sale transactions of shares as ‘business transactions’ during the year, thus on the said count too could not be sustained and was liable to be vacated. The CIT(A) however not being persuaded to subscribe to either of the aforesaid contentions of the assessee, therein observed as under :-
“2.3. I have considered the assessment order and the submissions of the appellant. Looking into the nature of the transactions relating to the share transactions in question and the concept of business income as mentioned in the ITA, I agree with the Assessing Officer that the short term capital gain (STCG) and long term capital gain (LTCG) is to be treated as business income. In this respect I find that CBDT has issued its Circular No 4 dt. 15.6.2007 in which it has laid down exhaustive guidelines on which the character of share transactions is to be tested to determine whether or not they can be treated as business income. On this I find that the essence of the CBDT Circular is that transactions have to be examined in their totality before coming to the finding in the matter. For example, the CBDT Circular refers to the volume of the transactions, their magnitude, the ratio between purchase and Sales, the intention and many other such factors. Pitted against these tests, I find that the transactions in the Appellants case being voluminous, numerous, consistently spread over the year, and very significantly, having very short holding periods cannot be treated as source of capital gain income. In this respect, the Assessing Officer has clearly, pointed out that the Appellant has undertaken 26 transactions of purchase and 71 transactions of sale. The volume of transactions has also been high in as much as total value of purchases was Rs17,17,07,197/- and that of sale of Rs.20,76,67,483/-, Further, I find that the average period of holding of shares also ranges from only a few days to few months. This would show the high volume, high magnitude and high frequency of transactions. Further, I find that the transactions were carried out consistently throughout the year. Most significantly, the holding period of the shares transacted are very low as low as even 7 to 22 days in many cases indicating very clearly that the appellant did not want to stay invested in these shares. In this light, when the volume magnitude, frequency and average period of holding are seen together, it is quite clear that the intention of the appellant is not to make investment for the purpose of earning of dividend or for capital appreciation but very clearly for deriving regular income from the sales and purchases. Accordingly, I find that the appellants intention was to earn profit in a systematic manner and this being so, the income from the transaction is to be treated as business income. In this respect a recent decision of the Hon. ITAT, Mumbai in the case Wallfort Financial Services Ltd. v/s Addl. CIT Range 4(2) 41 SOT 200 bears special mention. In this case the share broker tried to pass off his trading transactions in shares after 1.10.2004 as investment in light of the possibility of availing lower tax rate. In this backdrop, in this case, after analyzing all facts, the Hon. ITAT has agreed with the assessment made holding the income as business income. In face of those overwhelming features, the appellants arguments are found to be out of place. As I find, the reference to trading activities with F & O and infra- day transactions is misplaced as these are governed by different principles.
Further, the appellants argument on the earning of dividend, holding the shares as investment, the shares being delivery based are rendered immaterial in face of the foregoing signature features of the share transactions. The Appellants case is rather tilted towards business in that there was no other business being carried out. Further, the appellant's intention to change the character of income also becomes clear from the fact that, as pointed out by the Assessing Officer, no STCG or LTCG was claimed prior to A.Y 2005-06, when section 111A came into effect. In this respect, on account of the profile of the transactions indicating Appellant's intention to make profits, I agree with Assessing Officer's observations as given on pages 3 to 8 of the assessment order. Further, in view of the peculiar facts of the appellants case, I find the appellant's case distinguishable from the cases relied upon by the appellant. In this respect, it is to be noted that the judicial evolution in the matter makes it clear that each case has to be decided on its individual facts. In line with the foregoing, the action of the Assessing Officer is confirmed and the ground of appeal is dismissed”.
7. That during the course of appellate proceedings before the CIT(A) it was further averred by the assessee that now when the loss on the sale of shares by the A.O had been assessed in the hands of the assessee under the head ‘Capital gain’ in the immediately preceding year, viz. A.Y. 2006-07, therefore the A.O in the absence of the facts and circumstances witnessing any change could not take a contrary view, and hold otherwise. The assessee still further to support his contention that the profit/gains on sale of shares was liable to assessed under the head ‘Capital gain’, therein submitted that now when the A.O himself while computing the disallowance u/s 14A in the hands of the assessee had held the shares as ‘Investments’, therefore he could not be allowed to turn around and hold the same as ‘stock in trade’ for the purpose of assessing the profits/gains on the sale of the said shares. The CIT(A) however declined to accept the aforesaid contentions of the assessee by observing as under:-
“3.1 I have considered the Appellant's additional grounds of appeal. Since they emanate from the assessment order, in terms of section 250(5) of the ITA, I admit them as being core to the issue, I do not find them unreasonable. However, considering my discussion above, with respect to the main grounds on the issue, I do not find any merit in the additional grounds. Besides, my discussion made in the foregoing pares, I further find that the principles of res-judicata do not apply to income-tax proceedings. In this respect, I particularly observe that the appellant also did not show any STCG/LTCG prior to AY 2005-06, when section 111A came into effect. Further, disallowance u/s 14A are on different principles. In the light of the foregoing, I do not see any merit in these grounds. They are dismissed”.
The CIT(A) thus on the basis of his aforesaid observations, not being persuaded to subscribe to the contentions of the assessee therein confirmed the action of the A.O. and dismissed the appeal.
The assessee being aggrieved with order of the CIT(A) had carried the matter in appeal before us. The Ld. Authorized Representatives (for short ‘A.R’) for the assessee at the very outset of the hearing of the appeal therein submitted that the authorities below had gravely erred in law and facts of the case in treating the profit/gain arising in the hands of the assessee from the sale of shares which were held as investments, as business profits. The Ld. A.R reiterating the submissions made before the lower authorities, therein tried to drive home and support his contention that the income from the sale of shares had rightly been shown under head LTCG and STCG in the return of income. The Ld. A.R in order to support his contention therein submitted that the nature of the purchase and sale transactions of shares, viz. period of holding of the scrips, no intraday transactions, delivery based purchase/sale transactions etc., therein in itself substantially evidenced the fact that the shares were purchased and thereafter held by the assessee as investments, and not as stock in trade. The Ld. A.R in support of his aforesaid contention therein drew our attention to Page 35-38 of his ‘Paper book’ (for short ‘APB’), wherein the various purchase/sale transaction of scrips carried out by the assessee during the year stands recorded. The Ld. A.R referring to the aforesaid chart therein averred that in the case of purchase/sale of shares reflected under the head STCG the period of holding ranged between 19 days to 242 days, which therein glaringly revealed that the assessee was neither carrying on any business, nor was holding the said shares as stock in trade, but rather had purchased the same with the sole intent as that of holding them as investments. The Ld. A.R in order to support his contention, therein submitted that a bare perusal of the aforesaid ‘Chart’ therein revealed beyond any scope of doubt that the purchase/sale transactions of the shares which were delivery based had been carried out with the intent to derive dividend income. The Ld. A.R further submitted that the sale of the scrips had been shown by the assessee in its return of income for the immediately preceding years, viz. A.Y. 2006-07 under the head ‘Capital gain’, and on the said basis ‘Short term capital loss’ of Rs.8,35,225/- was shown, which was accepted by the A.O in the assessment framed under Sec.143(3) for the said preceding year, viz. A.Y. 2006-07, and the carry forward of the said ‘Short term capital loss’ of Rs.8,35,225/- was allowed by the A.O. in light of a categorical observation recorded in the body of the said assessment order. Still further the Ld. A.R in support of his aforesaid contention therein drew our attention to the copy of the assessment order passed under Sec. 143(3) for A.Y. 2006.07 (Page 40-41 of APB) and the relevant extract of the ‘Computation of income’ for the said preceding year( Page 45-46 of ‘APB’) wherein the computation of the ‘Short term capital loss’ of Rs.8,35,225/- stood reflected. It was further submitted by the Ld. A.R that now when the assessee company had reflected the aforesaid scrips as ‘Investments’, and had neither shown nor treated the same as ‘Stock in trade’, which fact had been accepted by the department in the assessment framed under Sec. 143(3) of the assessee for A.Y. 2006-07, and the carry forward of the ‘Short term capital loss’ had been specifically allowed, therefore the department thereafter cannot be allowed to turn around and take a contrary view during the year under consideration, and thus in a whimsical and fanciful manner therein categorize the said scrips as ‘stock in trade’. It was thus submitted by the Ld. A.R that such inconsistent approach of the department cannot be sustained in the eyes of law and thus was liable to be vacated. The ld. A.R further averred that the material fact that the assessee had purchased the aforesaid scrips from its self owned funds and not any borrowed capital, coupled with the fact that the period of holding of the respective scrips in itself glaringly revealed that the same were in the nature of investments, had been brushed aside by the A.O., who as averred by the Ld. A.R had approached the matter with a prejudiced mind and a predetermined approach, and as such cannot be sustained.
The Ld. A.R further relied on the Circular No. 6/2016, dated 29.02.2016, issued by the Central Board of Direct Taxes (CBDT), and therein submitted that the CBDT referring to its earlier Instruction No. 1827, dated August 31, 1989 and Circular No. 4 of 2007, dated June 15, 2007, had therein observed that though parameters had been laid down for determination of the character of a particular investment in shares or other securities, i.e whether the same are in the nature of ‘Capital asset’ or ‘Stock in trade’, but despite that the disputes and controversies had continued to exist, and as such difficulties emerged in proving the intention of the assessee at the point of acquiring of such shares/securities. It was submitted by the Ld. A.R that the CBDT realizing that no universal principle in absolute terms can be laid down to decide the character of income arising from sale of shares and securities (i.e whether the same is in the nature of ‘capital gain’ or ‘business income’), read in light of the fact that as major shares/securities transactions takes place in respect of the listed ones, had thus in the backdrop of the said factual position , therein came up with certain modifications, and had laid down some broad guidelines/parameters which shall be taken into account by the A.O. while concluding as to whether the surplus generated from sale of listed shares or other securities were to be treated as ‘capital gain’ or ‘business income’. It was averred by the Ld. A.R that as per the aforesaid Circular No. 6/2016 (supra), broadly the following 3 parameters had been laid down:-
(i) Where the assessee irrespective of the period of holding the listed shares and securities had opted to treat them as stock in trade, then the income arising from transfer of such shares/securities would be treated as the ‘business income’ of the assessee.
(ii) Where an assessee in respect of listed shares and securities which are held by him for a period of more than 12 months immediately preceding the date of its transfer, therein desires to treat the income arising from the transfer thereof as ‘capital gain’, then the same shall not be put to dispute by the A.O., though subject to the condition that once such a stand is taken by the assessee in a particular assessment year, the same shall remain applicable in subsequent assessment years also and the assessee shall not be allowed to adopt a different/contrary stand in this regard in the subsequent years.
(iii) That as regards the other remaining cases, the nature of the transactions (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, viz. Instruction No. 1827, dated August 31, 1989 and Circular No. 4 of 2007, dated June 15, 2007.
That it was further submitted by the Ld. A.R that the aforesaid CBDT circular No. 6/2016, dated 29.02.2016 had been followed by ITAT, Ahmedabad ‘D’ bench in the case of Smt. Neelam Shukla Vs. ACIT, Circle 6, Surat (ITA No. 2974/Ahd/2008 A.Y. 2005-06 and A.Y. 2006-07; dated 11.03.2016) and therein placed on record the copy of the aforesaid order. The Ld. A.R further in support of his aforesaid contention relied on the order of a coordinate bench of the Tribunal, viz. ITAT, Mumbai of ‘H’ bench, in the case of Mr. Hitesh Satish Chandra Doshi, Mumbai Vs. ACIT 21(3), Mumbai ITA No. 6497/Mumbai/2009. That on the other hand the Ld. Departmental Representative (for short D.R) relied on the order passed by the ITAT, Jaipur bench, in the case of DCIT, Circle 2, Jaipur Vs. Shri Mahindra Kumar Bader, Jaipur (ITA no. 605/JP/2013) A.Y. 2008-09, dated 18.03.2016. The Ld. D.R further submitted that the CIT(A) duly appreciating the facts of the case in the backdrop of the settled position of law, had rightly concluded that the profit/gain from the transfer of the shares was liable to assessed in the hands of the assessee company as the latters ‘business income’. It was thus submitted by the Ld. D.R that the appeal of the assessee was devoid and bereft of any force and was liable to be dismissed.
We have heard the Ld. Authorized Representatives for both the parties, perused the orders of the lower authorities and the material produced before us. We herein advert to the facts as had emerged from the records, which we are of the considered view will have a strong bearing on the adjudication of the issue under consideration. We find that the assessee company was incorporated to carry on the business of distribution, marketing, and publicity of automobile spare parts and accessories, and as the business of the automobile spare parts was yet to commence, therefore, the assessee company had invested the surplus funds lying with it by way of investments in 13 different scrips, mainly those of M/s. India Bulls, Lloyd Electricals, Unichem laboratories and M/s. Prakash Industries, which were reflected as ‘Investments’ in the books of accounts . We though are not oblivious of the fact that the absence of the enabling clause in the ‘Memorandum of association’ of the assessee company to carry on the business of purchase and sale of shares would not be decisive for adjudging the color and character of the share transactions carried out by the assessee, viz. short term capital gain/long term capital gain or ‘business income’, but then we are of the considered view that the nature of business of the assessee company as stands circumscribed by its ‘Memorandum of association’ will have substantial bearing on the adjudication of the issue under consideration, when the same is pitted in the backdrop of the other facts as they so unfold and emerge from the records. We find that a perusal of the relevant extracts of the APB (Page 35-38 ) to which our attention was drawn by the Ld. A.R, therein reveals that in the case of ‘Short term capital gains’ the average period of holding of the shares by the assessee ranged between 19 to 242 days. It is not the case of the A.O. that the assessee had purchased and sold the shares on daily basis or without taking/giving delivery. That another important aspect which supports the contention of the assessee on the issue under consideration is that the entire investments had been made by the assessee out of its own funds, and no investment towards purchase of shares had been carried out from any borrowed funds. The assessee had never ever revalued the shares to bring them in line with the ‘market value’, as would have been so done by an assessee who would have held the shares as ‘stock in trade’, which is always valued at the lower of the cost or market price. We find that no such exercise of revaluation of the shares so done by the assessee fortifies its contention that the same had been purchased and thereafter held by the assessee purely as an ‘Investment’. The conduct of the assessee which goes to support his aforesaid contention can also be gathered from the fact that the ‘STT’ had been added back in the ‘Computation of income’, and no rebate was claimed by the assessee under Sec. 88E.
We are further of the considered view that independent of the aforesaid facts which would reasonably justify and therein support the contention of the assessee company that the shares were held by it as ‘Investment’, and as such the profit/gain from the purchase and sale transactions as regards the same had thus rightly been reflected by the assessee in its return of income under the head ‘Capital gain’, are further persuaded to subscribe to the said claim of the assessee, also for the reason that the latter had in the immediately preceding year, viz. A.Y. 2006-07 reflected the ‘loss’ suffered from the sale of scrips under the head as ‘Short term capital loss’, which was accepted by the A.O. in the course of regular assessment framed under Sec. 143(3). The A.O while specifically allowing the carry forward of the ‘Short term Capital Loss’ of Rs.8,35,225/-, had observed as under:-
“Short Term Capital Loss of Rs.8,35,225/- is allowed to be carry forward”.
We further find substantial force in the contention of the assessee that if the aforesaid shares would have been held by the assesee as ‘stock in trade’, then the loss suffered on the sale of the same would have been claimed as ‘business loss’ in aforesaid preceding year, viz. A.Y. 2006-07, and would have been ‘set off’ against the income of the assessee for the said year itself, which however we find was never so done by the assessee. We find that the assessee had also neither claimed the amount of Rs.4,84,048/- so incurred towards ‘Security transactions tax’ (STT) for purchasing and selling the shares, nor had raised any claim for rebate in view of Section 88E of the ‘Act’. The aforesaid claim of the assessee is further supported by the very fact that the brokerage paid for purchasing the shares were included by the assessee in the ‘purchase’, while for that paid on the sale of shares was deducted from the ‘sales’.
We have further given a thoughtful consideration to the facts of the case and find that the CBDT realizing that despite the Instruction No. 1827, dated August 31, 1989 and Circular No. 4/2007, dated June 15, 2007, which laid down certain parameters to distinguish the shares held by an assessee as ‘Investment’, as against those held or treated as ‘Stock in trade’, disputes as regards characterizing the said transactions continued to exist as the tax payers faced real difficulties to prove their intentions at the time of acquiring the said shares/securities, for the reason that no universal principle in absolute terms could be laid down to decide the character of income from sale of shares and securities (i.e whether the same were acquired as ‘Investment’ or as ‘Stock in trade’), thus with the clear intent to reduce the litigation on the said count therein adopted an assessee friendly approach and by resorting to a liberal view, therein came up with a Circular No. 6/2016, dated 29.02.2016 ,relevant extracts of which read as under :-
“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 taxed by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment years also and the taxpayer 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 was further observed by the CBDT in its aforesaid circular, as under:-
“2. 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 reinvent provisions of the Act shall continue to apply on the transactions involving transfer of shares and securities”.
13. We find that from a a perusal of the aforesaid CBDT Circular No. 6/2016 (supra), it is revealed that in respect of listed shares and securities which had been held by an assessee for a period of more 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 A.O. However, the said stand once so taken, shall thereafter remain applicable in subsequent assessment years also and the tax payers shall not be allowed to adopt a different/contrary stand as regards the same in the subsequent years. We are of the considered view that in the backdrop of Para 1(b) of the aforesaid Circular, which we find is though applicable only as regards the listed shares and securities held for a period more than 12 months, immediately preceding the date of its transfer, the claim of the assessee as regards profits/gains arising in its hands on transfer of 1,37,447 scrips of M/s. Prakash Industries Ltd. during the year under consideration and shown as ‘Long term Capital gain’ of Rs.7,86,532/- in the return of income, we are of the considered view on the said count itself can safely and justifiably be held as ‘LTCG’ in the hands of the assessee company.
We now advert to the issue pertaining to the profit/gain on sale of scrips held by the assesse for a period of less than 12 months and claimed by the latter as income under the head ‘STCG’. We are of the considered view that as the aforesaid scrips had not been held by the assessee for a period of more than 12 months immediately preceding date of its transfer, therefore the said fact in itself would take it beyond the sweep of applicability of Para 3(B) of the CBDT Circular No. 6/2016 (supra). We thus, independent of the concession allowed by the aforesaid CBDT Circular No. 6/2016 (supra), which as observed by us at length hereinabove would not be available to the assessee as regards the profit/gain on sale of scrips which were held by the assessee for a period of less than 12 months, are however of the considered view that the conduct of the assessee company, nature of purchase/sale transactions of the shares as can be deciphered from the records, holding period of the shares, volume of transactions, treatment of the scrips by the assessee in its books of account, nature of business of the assessee company, source of purchase of shares and last but not the least, the very fact that the A.O. while framing ‘regular assessment’ under Sec. 143(3) in the hands of the assessee for the immediately preceding year, viz. A.Y. 2006-07, had accepted that the shares as claimed by the assessee were in the nature of ‘Investments’, and had assessed the loss on the sale of shares under the head ‘Capital gain’ by making a specific mention in the body of the assessment order that the ‘Short term capital loss’ of Rs.8,35,225/- shown by the assessee on sale of shares shall be C/forward to the succeeding years. We thus in the totality of the aforesaid facts, are thus of the considered view that the conduct of the assessee duly goes to fortify and substantiate its claim , and as such the profit/gain on sale of the shares had rightly been reflected by the assessee company in its return of income under the head ‘Capital gain’. We may herein observe that we though find ourselves to be in agreement with the view taken by the CIT(A) that the doctrine of res judicata is not strictly applicable in income tax proceedings, but then we cannot remain oblivious of the settled position of law, as had been emphasized by the Hon’ble Supreme Court in the case of Radha Swami Satsang Vs. CIT (1992) 193 ITR 321 (SC) and CIT Vs. Excell India Ltd. (2013) 358 ITR 295 (SC), that an inconsistent approach adopted by an A.O in the backdrop of the same set of facts, cannot be permitted. Thus in the backdrop of the facts pertaining to the transactions as regards purchase and sale of shares by the assessee company, coupled with the fact that such claim of the assessee was accepted by the department after scrutinizing the case as well as the issue under consideration in the assessment framed u/s 143(3) in the hands of the assessee company for the immediately preceding year, viz. A.Y. 2006-07, and the Ld. D.R before us had neither dislodged, nor distinguished the facts or the findings of the A.O in the aforementioned preceding year, viz. A.Y. 2006-07, as against those involved in the year under consideration, we therefore in totality of the aforesaid facts, are thus unable to persuade ourselves to subscribe to the view of the lower authorities. We further find that the conduct of an assessee and other such factors from where its intention at the time of purchase of the shares and thereafter can be fairly gathered, which as per our considered view would be materially decisive in determining the color and character of the transaction, viz. whether the same is in the nature of ‘Capital gain’ or ‘business income’, had recently been looked into by a coordinate bench of the ITAT, Mumbai ‘E’ bench, in the case of ACIT 19(3), Mumbai Vs. Shri Sachin R. Tendulkar, Mumbai (ITA no. 3217/Mum/2014) A.Y. 2010-11, dated 25.01.2017, wherein it was observed by the Tribunal, as under:-
“12. We have carefully examined all the factual findings recorded by the Ld. CIT(A). It is noted by us that major income of the assessee is income from sports endorsement and other shares. In addition to that assessee had made investment into shares. The entire investment has been made by the assessee out of its own funds. No amount of shares has been invested from any borrowing. Huge amount of dividend income has been earned by the assessee which is roughly 3.25 times of the amount of capital gain. The investment in shares with Portfolio Manager is merely to the extent of 4.8% of the total investments. The assessee has disclosed the amounts invested in the shares in the category of ‘investments’ right from beginning. The shares have never been revalued to bring them in line with the market value as would have otherwise been done in the case of stock in trade. The stock in trade is always disclosed at cost or market price which is lower. No such exercise has been done by the assessee in the case of shares since these have been held under the head of ‘investments’. It is also noted from the facts brought before us that in the case of short term capital gains average period of holding ranged between from 82 days to 123 days. It is not the case of the A.O. that shares have been purchased and sold on daily basis or without taking delivery and giving delivery. It is further noted by us that Ld. CIT(A) has rightly analysed the facts with proper reasoning to reach on the conclusion that conduct of the assessee and facts and circumstances of the case indicate that the assessee did not carry out the activity of making investment in shares as a systematic and organized activity of carrying out shares trading or business.
In addition to the above, it is noted by us that though in the case of assessee before us, the shares have always been shown as part of investment in its Balance Sheet in all the past years consistently, but otherwise taxpayers have even been permitted to simultaneously carry out business of shares trading as well Investments into shares. The choice has been given to the taxpayers under the law that whether shares are to be kept by them as part of investment or stock in trade for the purpose of business.”
The Tribunal further held as under:-
“19. Turning back to the facts of the case before us, it is apparent that the assessee had adopted a particular course. He explicitly categorized the amount invested in shares as part of ‘investments’ and not as part of ‘stock in trade’. In our considered opinion, AO’s allegation that assessee did not make ‘investment’ into shares but carried it out as business activity merely relying upon factors like volume or frequency of transactions alone, was not in accordance with law and facts of this case”.
We are thus of the considered view that in light of our aforesaid observations, keeping in view the facts of the case read in light of settled position of law, the profits/gains arising in the hands of the assessee company from the sale of the scrips had rightly been reflected in the return of income under the head ‘Capital gain’, viz. LTCG and STCG and the view of the A.O. which thereafter had been sustained by the CIT(A) that the assessee had been carrying out systematic purchase and sale transactions in shares, and thus was liable to be assessed as ‘business activity’ cannot be sustained and is thus vacated. We in the backdrop of our aforesaid observations are of the considered view that the assessee had rightly reflected the income arising in its hands from sale of shares under the head ‘Capital gain’, and in light of our aforesaid observations set aside the order of the CIT(A) as regards the aforesaid issue under consideration. The ‘Ground of appeal No. 1’ so raised by the assessee before us is thus allowed.
We now advert to the disallowance of Rs.78,848/- made by the A.O under Sec. 14A of the ‘Act’, which thereafter had been upheld by the CIT(A). We are of the considered view that the CIT(A) had rightly relied on the judgment of the Hon’ble Bombay High Court in the case of Godrej Boyce Company Ltd., Vs. DCIT (2010) 328 ITR 81 (Bom), and as such had correctly sustained the disallowance of Rs. 78,848/- u/s 14A in the hands of the assessee company. We find no infirmity in the order of the CIT(A) to the extent the latter had sustained the disallowance of Rs.78,848/- made by the A.O under Sec. 14A of the Act, and as such uphold the same. The ‘Ground of appeal No. 2’ raised by the assessee before us is dismissed. The Ld. A.R had not raised any averment as regards ‘Ground of appeal No.3’, which is thus dismissed as not pressed.
The appeal of the assessee is partly allowed in light our aforesaid observations.