KRISHNA SHARMA,MUMBAI vs. ADDL CIT 19(1), MUMBAI

This is an appeal filed by the assessee against the order of CIT(A) for the assessment year 2006-07, in the matter of order passed u/s.143(3) of the I.T Act.

Only grievance of assessee relates to decline of assessee‟s claim of short term capital gain of Rs.45,37,169/- and treating the same as business income.

Rival contentions have been heard and record perused.

Facts in brief are that assessee is a housewife. She was regularly investing in shares as investment. During the year assessee has also entered into transaction of purchase and sale of shares. The profit arising 2 Ms. Krishna Sharma there from was offered by assessee as short term or long term capital gains depending on period of holding. While framing assessments u/s. 143(3), the AO has accepted the assessee‟s claim of long term capital gains of Rs.6,21,563/-, however, he has treated short term capital gains of Rs.45,37,169/- as business income on the plea of frequency and volume of transactions being entered by assessee.

In his order, the AO also observed that assessee had borrowed funds for investment in shares. AO held that assessee was involved in business of share trading on the plea of holding period of shares. Our attention was drawn to the fact that not a single transaction out of the number of transactions mentioned by the learned AO is other than delivery based. This confirms the fact that the assessee was not intending to make any trading profit with the shares held as investments. There was not even one such transaction that shows the trading business bent of mind of assessee. As per learned A.R, merely because as a prudent investor, the assessee was seeking to minimize her loss on investment gains arising on its sales cannot be taxed as business profits. The only loan taken was Rs.5 lacs during the year and that too for immovable property. Our attention was also invited to the frequency and volume of the transaction to indicate that it was not sufficient for the AO to merely rely on the same and change the conclusion already drawn in the earlier year. Our attention was also invited to the method of valuation of shares held as investment, which were always valued at “cost” and not at cost at market price, whichever is less. Attention was also invited to the dividend income 3 Ms. Krishna Sharma regularly earned by the assessee on its investment and offered for tax as income from other sources and also accepted by the department.

Assessee‟s intention of having shares as investor is clear from the fact that during the year under consideration also the assessee has earned dividend income of Rs. 1,80,989/-. However, AO did not accept assessee‟s contention and treated short term capital gain as business income.

We have considered the rival contentions. There is no denial by the Revenue to the fact that the assessee has been investing the surplus business profits in purchase of shares since 1997 and it has always been accepted as an investor. For the year under consideration, the assessee has also been treated as investor in respect of income from share transactions claimed by the assessee as long term capital gains. The Assessing Officer has treated the assessee as trader in respect of only short term capital gains claimed by the M/s. Siddhalchal Enterprises Pvt. Ltd. assessee. In our view, the Revenue cannot adopt double yardstick while treating the assessee as an investor in respect of long term capital gain and as a trader in respect of short term capital gain. If such yardstick is allowed to be adopted, then the provisions of short term capital gain will become redundant. When the assessee has been consistently been treated and accepted as investor since so many years and there is not much change in the investing pattern or in the facts and circumstances of the case, then applying the rule of consistency, the assessee is to be treated as investor only. Moreover, as explained by the learned A.R., the Memorandum and Articles of Association of the assessee company does not allow it to trade in shares and it has been consistently investing its money as an investor in shares. No borrowed funds have been used for making the share transactions. The assessee has also earned substantial income from long term capital gain and also dividend income. All these facts prove beyond doubt that the intention of the assessee has always been to invest the money in shares and not the trading in shares. High frequency of 4 Ms. Krishna Sharma the transactions cannot be the sole factor in holding the assessee as a trader. Even there is no minimum holding period of shares is prescribed under the statute for treatment of the same as short term capital gain. Keeping in view the overall facts and circumstances of the case and in view of the principle of consistency, in our view, the assessee has to be treated as an investor and the M/s. Siddhalchal Enterprises Pvt. Ltd. income earned from purchase and sale of shares is to be treated as short term capital gain. Thus, this issue is decided in favour of the assessee.

Learned AR invited our attention to the decision of Delhi Bench of Tribunal relied on by CIT(A) in case of Radials International, and placed on record the order of Hon‟ble Delhi High Court dated 25/04/2014, wherein decision of ITAT was reversed and Hon‟ble High Court held that profit arising on sale of shares were to be taxed as income from capital gains rather than business income.

Reliance was also placed on the decision of Bombay High Court in case of Gopal Purohit 336,ITR 287, in support of the proposition that there ought to be uniformity in treatment and consistency when facts and circumstances are identical. An SLP filed against this decision of Bombay High Court was dismissed by Hon‟ble Supreme Court vide its order dated 15/11/2010.

On the other hand, learned DR relied on the order of the lower authorities and contended that in view of high volume and frequency of transaction so entered by assessee during the year on account of purchase and sale of shares, the AO was justified in treating the income arising from such transaction as business income.

We have considered rival contentions and also deliberated on the judicial pronouncements referred by lower authorities in their respective 5 Ms. Krishna Sharma orders as well as cited by learned AR and DR during the course of hearing before us in the context of factual matrix of instant case. From the record, we found that for the year under consideration assessee has filed its return of income on 31/07/2006 declaring income of Rs.49,76,382/- which comprises of income from house property Rs. 4,93,234. (b) Long Term capital gains from sale of shares -Rs.6,21,563 (exempt). (c) Short term capital gains from sale of shares – Rs.45,37,169. (d) Dividend income -Rs.1,80,989 (exempt). In assessment order u/s 143 (3) dt.31-12- 2008, the learned A.O has accepted long term capital gains of Rs.6,21,563, but he has treated short term capital gains of Rs. 45,37,169 as business income.

From the record, we found that even in the past the income shown as long term capital gain was allowed as exempt u/s.10(38) of the IT Act and short term capital gains also accepted by department. In addition to the short term and long term capital gains, assessee was also earning dividend income on the shares held as investment. There is no dispute to the well settled proposition that for deciding as to whether assessee is an investor in share or trader in share, so many factors are relevant which comprises of volume and frequency of transaction, intention of assessee while acquiring the shares which results into earning the dividend income, use of owned/borrowed funds for acquiring shares, period of holding of shares etc. One of the important factors for deciding the nature of gains so earned by the assessee is to find out whether the assessee had acquired the shares with an intention to earn dividend by holding the 6 Ms. Krishna Sharma shares as investor or to earn profit by trading in the same. It is also true that volume and frequency of transactions is an important indicator of the intention of the assessee, whether to deal in the shares as businessman or to hold the shares as an investor, but certainly not the sole criteria. The intention of the assessee while purchasing the share, is the important and guiding factor as to whether the same was purchased with an intention of investment or for trading. The facts of the instant case clearly reveal that the assessee was consistently investing in shares as investor. Even after accepting assessee claim of short term capital gains u/s.143(3) r.w.s.153A in the immediate assessment year i.e., A.Y.2005-06, the AO has not pointed out as to in what manner the activity of the assessee for the year under consideration had been changed from investor to that of a trader especially when in respect of very same shares which were held for more than 12 months, the AO has accepted the profit arising therefrom as long term capital gains during the year under consideration. However, during this year under consideration the assessee has been treated as a trader because of certain tax benefits granted to an investor in securities by way of amendment in the relevant provisions of the Income Tax Act brought by Finance Act, 2004. By insertion of provisions of section 111A and section 10(38), the levy of tax has been reduced to 10% on short term capital gains and long term capital gains have been made exempt. Under the old provisions of the Act, profits or gains arising to an investor from the transfer of securities were charged depending on the period of holding of the said securities. Short term capital gains were taxed at 7 Ms. Krishna Sharma applicable rates (normal rates) and long term capital gains were taxed at the rate of 20% after adjusting for inflation by indexing the cost of acquisition. For listed securities, the tax payer had an option to pay tax on long term capital gains at the rate of 10% but without indexation. In case of trader in securities, however, the capital gains were taxed as any other normal business income. Thus, tax liability on the income on sale and purchase of shares as regards to short term capital gains and business income was at par. The issue of treatment of income from share transaction as short term capital gains or business income has in fact arisen after the amendment brought with Finance Act, 2004 w.e.f. 01.10.2004. It is an admitted fact on the record that prior to the amendment when the tax on short term capital gains, as discussed above, was at par with that of business income, the department has been consistently accepting the treatment of income by the assessee as capital gains.

The frequency and repetition of the purchase and sale transactions play important role, but the same is not conclusive and other factors like main business/profession of assessee, intention while purchasing shares, holding the same as investment, earning of dividend income thereon etc. are required to be seen for reaching to the conclusion regarding assessee being investor or trader in shares.

ITAT Mumbai Bench in Siddhalchal Enterprises Pvt. Ltd. vs. ITO - "A/Bench –ITA no.8969/Mum/2010 dated 28-5-2015 for A.Y. 2006-07 where long term capital gains on sale of shares were accepted by AO in 8 Ms. Krishna Sharma assessment, but short term capital gains were treat business income. ITAT held such treatment by Assessing Officer is not permissible as this would render income tax provisions of short term capital gains redundant.

Reliance can placed on the following judicial pronouncements :- i) In the case of Bharat Kuverji Kenia Vs. Add.CIT, 130 TTJ 86 (Mum), the Mumbai Bench of the Tribunal observed that, “There is no justification for treating the activity of purchase and sale of shares as 'business' merely on the reason of the' volume of transactions. As per well settled principles of law, the frequency of transactions cannot be per se decisive.” ii) In the case of Mr. Nehal V. Shah vs, ACIT (ITA. No.2733/Mum/2009), the Mumbai Bench of the Tribunal held "that a single transaction would be split by the computers trading of the stock exchanges into many smaller transactions, but, that does not mean that assessee has carried so many transactions”. In the case of Hitesh Satishchandra Doshi vs. J'Cl'I' (ITA No. 64971Mum/2009), the Tribunal held that the frequency of purchase and sale of shares, transactions through the electronic system of Stock Exchange split a single order into numerous transactions. This gives an unrealistic figure of the number of transactions.” iii) In case of DCIT vs. SMK Shares & Stock Broking (ITA No. 799/Mum/2009) the Hon'ble Mumbai tribunal held that "the fact that the AO accepted the appellant's claim in earlier years that it 9 Ms. Krishna Sharma was an investor is material because though the principles of res judicata do not strictly apply to income tax proceedings it is well settled law that the principles of consistency should not be ignored. Uniformity in treatment and consistency under the same facts and circumstances is one of the fundamentals of the judicial principles which cannot be brushed aside without proper reason.

From the record, we found that assessee was having capital of Rs.2.30 crores as against investment in shares of Rs.1.21 crores. Thus, capital was much more than the investment in shares. There was secured loans of 5.23 lakhs against assessee‟s own Kisan Vikas Patra, and bank overdraft of Rs.11.56 lacs against assessee‟s own FDR‟s. Thus, loan from bank was only against assessee‟s own security which cannot be treated as business advance. Assessee was also having loan from family members without any interest. From the record we also found that assessee has no business income. No evidence on record to suggest that assessee had any establishment for running share activities. Assessee has also not claimed any business expenditure in respect of her activity of dealing in shares. No organized activity to suggest a business activity in existence. No significant risk exposure from borrowings. Capital is more than investments in shares. Secured loans are not significant compared to the level of investment in shares and any case, obtained on security of liquid assets. Unsecured loans are from family members and after taking into account corresponding loans given to family members, the net amount is not significant.

We found that the CIT (A) has selectively cherry picked few lines from decision. In fact, the SC held that principle of res judicata should be observed unless there are compelling reasons to divert. The Apex Court held as under :- "We are aware of the fact that strictly speaking res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what has to be decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed .in a subsequent year.”

We also found that even in the assessment year 2012-13, scrutiny assessment was framed u/s.143(3) vide order dated 04/03/2015, wherein 11 Ms. Krishna Sharma assessee‟s claim of short term capital loss was accepted in scrutiny assessment and the same was not treated as business loss.

Hon‟ble Bombay HC in CIT vs. Gopal Purohit (2011) 336 ITR 287 (Bom) held that there must be uniformity in treatment by income tax department in assessments on issue of share dealings by assesse - i.e. whether investment or business activity. Department's SLP against this order of Bombay High Court has been rejected by Supreme Court on 15- 11-2010. 21. Also similar finding on rule of consistency by Mumbai IT AT decision in Siddhalchal Enterprises Pvt. Ltd. Vs. ITO "A” Bench ITA no.8969/Mum/2010 dated 28/5/2015 for A.Y.2006-07. 22. From the order of CIT(A) we found that Supreme Court decision in Trustee, Loka Shikshana Trust vs. CIT(A) on page 16, para no.27 of his order supports the case of assessee. Here, the Apex Court defined „business as an occupation which engaged the time, attention and labour of the person normally with object of making profit. 23. Reliance can also be placed on Supreme Court decision in CIT vs. H. Holck Larsen (1986) 160 ITR 67 (SC) wherein, it was held that activities undertaken by an investor in purchase and sale of shares to nurse his investment in shares and avoid erosion of its value of shares does not amount to trading in shares but are investment activities. 24. From the Order of CIT(A) we observe that the CIT(A) has relied on Delhi ITAT decision in Radial International vs. ACIT (2012) 18 taxmann.com 20 (Delhi) to hold that assessee‟s dealing in shares is 12 ITA No.1959/2014 Ms. Krishna Sharma business activity and not investment. We found that the Delhi ITAT decision was given in case of portfolio management scheme where share activities were allegedly aggressively pursued. No such PMS activity in case of assessee and hence, ITAT decision is distinguishable. In any case, the ITAT decision has been over ruled by Delhi HC in ITA no. 485/2012 vide order dated 25-04-2014. 25. In view of the above, we direct the AO to treat gain arising out of sale of shares as short term capital gains rather than business income. 26. In the result, appeal of the assessee is allowed.