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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI VIJAY PAL RAO & SHRI INTURI RAMA RAO
Per Vijay Pal Rao, Judicial Member
This appeal by the assessee is directed against the order dated 31.7.2012 of the CIT(Appeals)-III, Bangalore for the assessment year 2006-07.
The assessee has raised the following concise grounds:-
“The order of the learned CIT (A) is opposed to the facts of the case and law applicable to it.
2. The learned CIT(A) erred in upholding the Assessing Officer order holding that the short term capital gains from shares is assessable under the head income from business. 3. The learned CIT (A) erred in holding that the period of holding and frequency of transaction of shares alone would decide the head of income. It is the nature of holding as to whether it is stock in trade or investment which decides by head of income to be either business or capital gains. The period or the quantum is never the criteria. 4. The learned CIT (A) failed to appreciate the fact that the law does not preclude an appellant from holding shares as investment though he is also in the activity of trading in the same commodity. The learned CIT(A) should have appreciated the fact that the appellant has been holding shares of huge quantum's even in the earlier years as investment and has declared not only income under the head long term capital gains & short term capital gain but also dividends. 5. That the appellant craves leave to add to, alter, and amend modify, substitute, delete and or rescind all or any of the grounds of appeal on or before the final hearing, if necessary so arises. The appellant request the Hon’ble Tribunal to set aside the impugned order passed by the assessing officer in the interest of justice.”
The only issue that arises for consideration and adjudication in the facts and circumstances is, whether the gain arising from purchase and sale of shares is short term capital gain or business income?
4. The assessee is an individual and a partner in M/s. Astra Exports and M/s. Astra Processors partnership firms engaged in the business of process and export of coffee. The assessee is also engaged in the activity of purchase and sale of shares and securities. In its return of income, the assessee declared total income of Rs.2,21,31,800 and agricultural income of Rs.7,59,579. The total income of the assessee comprises income from house property, income from business, income from short term capital gain and long term capital gain. The assessee has shown loss from trading in shares and derivatives of Rs.15,56,600; short term capital gain on sale of shares of Rs.2,35,49,225 and long term capital gain on sale of shares of Rs.2,87,57,549. The AO accepted the long term capital gain on sale of shares. However, in the scrutiny assessment, the AO proposed to treat the short term capital gain on sale of shares as business income. The AO noted that the short term capital gain arises from the shares held by the assessee for a very short period ranging from 20 days to 180 days.
Accordingly, the AO doubted that assessee has purchased the shares for earning dividend income, but the shares were purchased and sold for earning the profit. The AO further observed that 90% of shares have been purchased within the financial year and even sold within the financial year, rather within couple of months. These were not investment of the assessee or investment therein was not with a view to earn dividend income. Since the assessee is also engaged in the trading of shares and securities being derivative transaction, the AO has held that the purchase and sale of shares giving rise to the short term capital gain are trading activity and therefore the profit arising from this purchase and sale is business income and not capital gain.
The assessee challenged the action of the Assessing Officer before the CIT(Appeals), but could not succeed.
Before us, the ld. AR of the assessee submitted that out of the total short term capital gain of Rs.2.35 crores, capital gain of Rs.1,12,85,681 was earned on the shares held by the assessee for a period of 100 days to 365 days. Thus, the ld. AR has submitted that about 50% of short term capital gain has been earned by the assessee in respect of the shares held for a period of 100 to 365 days. Further, short term capital gain of Rs.76,88,322 was earned in respect of shares held for a period of 60 to 100 days and the remaining small amount of about Rs.45 lakhs of short term capital gain was earned by the assessee in respect of the shares, which were held upto 60 days. Thus, the ld. AR has submitted that majority of shares held by the assessee was for more than 2 months and upto 365 days, which has resulted in maximum short term capital gain in question.
He has further contended that assessee is primarily an investor in shares and securities. Investments of the assessee are managed by the professional managers of various banks. He has referred to the details regarding the investment of assessee which are managed by Professional Managers (PMS). Thus, assessee has invested money in the stock market through PMS services, who are managing the portfolio and the investment/wealth of the assessee. The investment made through PMS is not directly controlled by the assessee, as buying and selling of shares is controlled by PMS, who will take an appropriate decision as what to do with the investment of assessee. Therefore, PMS have managed the assets of portfolio of assessee to maximize investments. Assessee has declared short term capital gain as well as long term capital gain on sale of shares since A.Y. 2001-02. The Department has accepted the investment in shares and short term capital gain in the earlier assessment years and only during the year under consideration, the AO has taken a different view because of amendment in the relevant provisions of the Act wherein a differential tax treatment has been given to the short term capital gain.
Thus, the ld. AR has submitted that when the same transactions were accepted as investment in the earlier assessment year, then the AO cannot take a different view without pointing out the change in the nature of transactions merely because there is a differential tax chargeable on short term capital gain. He has further contended that out of the entire short term capital gain, a sum of Rs.84,08,390 resulted as sale of shares held and purchased in the previous year and shown as investment in the balance sheet at the end of the earlier year. Therefore, the shares which are held as an investment and shown in the books of account as investment accepted by the AO cannot be treated as stock-in-trade in the subsequent year, when the same were sold by the assessee.
The ld. AR has pointed out that even in the subsequent assessment year while passing the assessment order u/s. 143(3), the AO has accepted the short term capital gain arising from purchase and sale of shares. The AR has referred and filed the assessment order passed u/s. 143(3) for the AY 2009-10 and 2010-11, wherein the AO has accepted the short term capital gain arising from purchase and sale of shares.
He has further contended that so far as the transactions in the derivatives are concerned, the assessee is maintaining two portfolios and as per judgment of Hon'ble Bombay High Court in the case of CIT v. Gopal Purohit v. JCIT, 336 ITR 287 (Bom), there is no bar for maintaining two portfolios by the assessee, one in trading activity and another in investment in shares. Thus, the ld. AR has submitted that when all the transactions of purchase and sale of shares resulting in short term capital gain as well as long term capital gain are delivery based and same are held as investment in the books of account, then the AO cannot treat such investment as stock-in-trade. He has further pointed out that the entire investment in shares has been made by the assessee from his own funds and no borrowed fund has been used for the purpose of investment in shares. In support of this contention, he has relied on the following decisions:-
(1) ACIT v. P. Bhaskar Rao, dated 4.3.2015. (2) DCIT v. Kapur Investments (P) Ltd., ITA Nos. 1188 & 1189/Bang/2012 dated 29.11.2013.
(3) Vinod K. Nevatia V. ACIT, dated 3.12.2010. (4) Nehal V. Shah v. ACIT, ITA No.2733/Mum/2009 dated 15.12.2010.
On the other hand, the ld. DR has submitted that the assessee has carried out huge number of transactions over 245 transactions involving more than 25,000 shares of different companies. Further, the volume of the transactions and consideration is also very high which is more than Rs.16.68 crores. The holding period of the shares resulting in short term capital gains is very less as it is not disputed that the holding period is 22 to 60 days in most of the cases and majority of the transactions of purchase and sale have been carried out within the financial year. Therefore, the intention of the assessee is manifest from the short term holding period of the shares that the assessee has purchased and sold the shares with the intention of earning the profit on these transactions instead of holding the same as investment and earning the dividend income. He has relied on the orders of authorities below and submitted that the AO as well as CIT(A) have analysed the peculiar facts of the case and arrived at the conclusion that the transactions in question cannot be held as investment, but the same are in the nature of trading.
We have considered the rival submissions as well as relevant material on record. While deciding the issue whether the transaction of purchase and sale of shares in question giving rise to short term capital gains are investment or trading, the AO is guided by the fact that since the holding period is very short ranging from 20 to 180 days, therefore the assessee has not earned any dividend income on these shares and hence the motive for purchase of shares in question was not to earn dividend income, but to earn the profit from sale of shares. It is pertinent to note that earning of dividend income is not the sole motive for making investment in shares because the dividend income is not certain on the shares, as it depends on the performance of the company and also the policy of the company to declare dividend or not. Therefore, dividend alone cannot be the criterion for deciding the nature of transaction of purchase of share.
Further, even if a share is held for few days, one can earn dividend if it is purchased just prior to the record date and then sold after the record date.
Therefore, dividend cannot be considered as determinative criterion for the nature of transaction. There is no dispute that out of the total short term capital gain of Rs.2.35 crores, an amount of short term capital gains of Rs.84 lakhs was earned from the shares which were purchased in earlier year and shown in the balance sheet as investment. The AO has accepted the investment in the balance sheet in the earlier year as there is no disallowance of any claim of short term capital gain. Therefore, the shares which were purchased in the earlier year and accepted by the AO as investment cannot be treated as stock-in-trade in the subsequent year, when these shares were sold. In other words, the AO is not permitted to treat the investment accepted in the earlier year as stock-in-trade in the subsequent year, when the assessee has been showing the shares in the books of account as investment. Further, all the transactions in the investment portfolio are delivery based and the assessee has shown the same as investment in the books of account and particularly in the balance sheet as on 31st March of each year. The AO has not disputed that the holding period is ranging from 20 to 180 days. The assessee has given the details regarding holding period of the shares which has resulted in short term capital gains as under:-
Thus, it is clear that about 50% of the short term capital gain is arising from the shares which were held for a period of more than 100 days and upto 365 days, which shows that the intention of the assessee was to hold shares for considerable long period. Needless to say that as per provisions of Income-tax Act, if the shares of listed company at the stock exchange held for more than one year, then it will be treated as long term capital gain. There is no minimum period prescribed for the purpose of short term capital gain or short term capital asset. Therefore, the shares which are held less than one year fall under the category of short term capital asset. Accordingly, the holding period alone cannot be a criterion or parameter to decide the nature of transaction, when the statute does not prescribe any minimum period of holding for an asset. In order to determine the nature of transaction of purchase and sale of shares, whether trading or investment, there are number of criteria or parameters which are required to be considered. These criteria includes the intention of assessee, frequency of transaction, volume of the transaction, whether investment is made from assessee’s own fund or from borrowed fund, holding period, treatment in books of account, valuation, source of fund, etc. In the case in hand, there is no dispute that that assessee has used its own fund and investments are made through PMS as well as by assessee himself. The details of investment made through PMS and by the assessee are as under:-
Thus, it is clear that out of total short term capital gain of Rs.2.35 crores; captial gain of Rs.1.32 crores was earned by the assessee on investment through portfolio managers. In the case of Kapur Investments (P) Ltd., & 1189/Bang/2012 dated 29.11.2013, the coordinate Bench of the Tribunal while dealing with identical issue had in paras 6 to 6.2 held as under:-
6. We have carefully considered the rival submissions, perused the relevant materials on case records and also the case laws on which the learned AR had placed strong reliance. As a matter of fact, the issue has since been deliberated exhaustively by the CIT (A) and came to the right conclusion that the assessee had invested in shares with an intention of holding them as investments and the surplus on account of sale of these shares have to be treated as short-term or long term capital gains depending on the period of holding. The above finding of the CIT (A) is in conformity with the guidelines issued by the Board vide its Circular No.4 of 2007 dated 15.6.2007. Likewise, for the AY 2008-09, the CIT (A) took a stand that the income from capital gains, short-term or long-term capital based on the period of holding of such assets cannot be treated as ‘business income’. The Revenue has not brought any documentary evidence or proof to contradict the conclusion arrived at by the CIT(A). Photocopy of the agreements entered by the assessee company with the Portfolio Manager (M/s. Kotak Securities Ltd) has been placed on record. On perusal of the same, it is evident that the Portfolio Manager is trading in shares/scripts/mutual funds and the assessee company does have any say. In the instant case assessee company had invested its funds with the Portfolio Management Scheme for maximization of wealth. The assessee company cannot be said to be systematically dealing in share to term the activities of the assessee as in nature of ‘business’. 6.1 The learned AR has placed reliance on number of judicial views in support of the assessee’s contentions. To illustrate further, the views of judiciaries are analyzed as under:
(i) In the case of ITO v. Radha Birju Patel reported in A(2011) 11 Taxmann.com 293(Mum), the Hon’ble Mumbai Tribunal has held, on a similar issue, as under: “It was apparent from the record that the share transactions in question were carried out by the assessee’s PMS Manager. Therefore, these transactions were clearly in the nature of transactions meant for maximization of wealth rather encashing the profits on appreciation in value of shares. The very nature of Portfolio Management Scheme is such that the investment made by an assessee is protected and enhanced and in such a circumstance, it cannot be said that it is scheme of trading in shares and stock. Whether, an assessee is engaged in the business of dealing in shares or investment in shares is essentially a question of fact and it has to be determined with regard to the entirety of the circumstances. In circumstance, in which the assessee was engaged in a systematic activities of holding portfolio through the PMS Manager, it could not by any stretch of imagination, be said that the main object of holding the portfolio was to make profit by sale of shares during the course of maintaining the portfolio investment over the period. Therefore, the Commissioner (Appeals) was justified in accepting the gain on sale of shares as short-term capital gain as claimed by the assessee.”
(ii) Yet another finding, the Hon’ble ‘H’ Bench of Mumbai Tribunal in the case of Mahendra C Shah v. Addl. CIT reported in (2012) 19 taxmann.com 350 (Mum) has held that ‘prima facie there was enough evidence to show that the assessee was an investor in shares and, therefore, the surplus arising on the sale of shares should be assessed as short-term or long-term capital gains, depending on the period of holding and not as business income.’
(iii) The Hon’ble Gujarat High Court in the CIT v. Niraj Amidhar Surti reported in (2012) 20 taxmann.com 579 (Guj) has ruled as under:
“that in the light of the findings recorded by Commissioner (Appeals) that the assessee had held the shares in question for fourteen months which is along period for the purpose of long-term capital gain, the intention of the assessee had always been that of making investment in shares and not dealing in shares, which was also apparent from the fact that the shares had not been treated as stock in trade by the assessee; even after the sale, the assessee had made investment in bonds of NABARD, indicating that he had treated the same as long- term capital gain; as well as the fact that the assessee had not split the shares in lots but had sold the same in one lot; it was not possible to agree with the contention raised on behalf of the revenue that the transaction in question was an ‘adventure in the nature of trade’ and, therefore, income derived by the assessee from the said transaction was a business income and could not be treated as capital gains.”
6.2. Taking into account all the facts and circumstances of the issue as discussed above and also in conformity with the ratios laid down by the Hon’ble High Court of Gujarat and also the Hon’ble Mumbai Tribunal (supra), we are of the view that the CIT (A) was justified in coming to right conclusion which does not warrant any interference. In essence, the findings of the CIT (A) for both the assessment years under dispute are upheld.”
Thus, it is clear that the Tribunal has been consistently taking a view that the investment made through PMS cannot be treated as trading activity, unless and until apparent fact on record is brought by the AO to show that the very nature of transaction is trading. Further, when the assessee has shown these transactions as investment in its books of account and vlaued the same at cost, then the same cannot be treated as stock-in-trade as the intention of the assessee is clear from the treatment of the shares in books of acocunt and valuation of the same at cost, instead of cost or realisation, whichever is less in the case of stock-in-trade.
The assessee has been consistently showing the shares held as investment in the balance sheet right from the beginning which has not been disputed by the AO in the earlier assessment year. It is not the case of the AO that during the year under consideration, the activity of purhcase and sale of shares has any departure from the earlier years as well as from the subsequent years. The AO has accepted the claim of short term capital gain of assessee in the earlier years as well as in the subsequent years. We find that for the AY 2008-09, 2009-10 and 2010-11, the AO while passing assessment u/s. 143(3) has accepted the short term capital gain offered by the assessee arising from purchase and sale of shares. Therefore, even if the doctrine of res judicata is not applicble in the matter of taxation, when the facts are identical, the AO is required to maintain the rule of consistency as held by the Hon'ble Bombay High Court in the case of CIT v. Gopal Purohit, 336 ITR 287 (Bom) at para 3 & 4 as under:-
“3. Insofar as Question (b) is concerned, the Tribunal has observed in para 8.1 of its judgment that the assessee has followed a consistent practice in regard to the nature of the activities, the manner of keeping records and the presentation of shares as investment at the end of the year, in all the years. The Revenue submitted that a different view should be taken for the year under consideration, since the principle of res judicata is not applicable to assessment proceedings. The Tribunal correctly accepted the position that the principle of res judicata is not attracted since each assessment year is separate in itself. The Tribunal held that there ought to be uniformity in treatment and consistency when the facts and circumstances are identical, particularly in the case of the assessee. This approach of the Tribunal cannot be faulted. The Revenue did not furnish any justification for adopting a divergent approach for the assessment year in question. Question (b), therefore, does not also raise any substantial question.
Insofar as Question (c) is concerned, again there cannot be any dispute about the basic proposition that entries in the books of account alone are not conclusive in determining the nature of income. The Tribunal has applied the correct principle in arriving at the decision in the facts of the present case. The finding of fact does not call for interference in an appeal under s. 260A. No substantial question of law is raised. The appeal is accordingly dismissed.”
We further note that it is not a case of repetitive transaction of purhcase and sale in the same scrip. The AO had also not alleged any such transaction by the assessee during the year under consideration. Therefore, in the totality of facts and circumstances of the case as discussed above, we are of the considered opinion that when the claim of the assessee was acepted in the earlier year as well as in the subsequent years, the AO is not permitted to take a different view for the year under consideration. Hence, we set aside the orders of authorities below on this issue and hold that the gain arising from the sale and purhcase of shares is short term capital gain. Accordingly the AO is directed to treat the same as short term capital gain.
In the result, the appeal of the assessee is allowed.
Pronounced in the open court on this 31st day of March, 2016.