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Income Tax Appellate Tribunal, MUMBAI BENCHES “E”, MUMBAI
Before: SHRI MAHAVIR SINGH & SHRI ASHWANI TANEJA
Date of hearing : 01-12-2016 Date of order : 15 -12-2016 O R D E R
Per ASHWANI TANEJA, AM:
This appeal has been filed by the assessee against the order of Ld. Commissioner of Income-tax (Appeals)-35, Mumbai [in short, CIT(A) dated 25-04-2013 passed against assessment order of the AO u/s 143(3) of the Act dated 07-03-2013 for AY. 2010-11, on the following grounds:-
“The ground or grounds of appeal are without prejudice to one another.
1.a) On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in confirming the process of action of the AO in assessing the Short term capital gains of ` 41,35,767/ - and Long term capital gains of ` 10,52,379/- both on sale of shares as business income and thereby erred in confirming the process of action of the AO in bringing to tax the same at normal rate of income tax instead of special rate prescribed u/s.111A/ 112 or exempt u/s. 10(38) and also erred in confirming the process of action of the AO in not allowing set off of brought forward Short term capital losses of the A.Y.2009-10 to the extent of Short term capital gains of `41,35,767/-. b) The Id. CIT(A) failed to appreciate that the profit on sale of shares held as investment ought to have been assessed as Long term capital gains of ` 10,52,379/- being exempt u/s.10(38) and Short term capital gains of ` 41,35,767/- being taxed at special rate prescribed u/s 111A/ 112 or eligible for set off against brought forward Short term capital losses of the A.Y.2009-10. c) In reaching to the conclusion and making such changes in heads of income, the Id. CIT(A) omitted to consider relevant factors, considerations, principles and evidences while he was overwhelmed, influenced and prejudiced by irrelevant considerations and factors. Even, in the concluding part of the order, the Id. CIT(A) given his findings on the facts which are not relevant to the facts of the Appellant.
2. The Id. CIT(A) erred in not disposing the ground No.3 raised disputing the levy of interest u/s.234B and 234C of the Income Tax Act, 1961. The Appellant denies his liability for such interest.
The Id. CIT(A) erred in not disposing the ground No. 4 raised disputing the initiation of the penalty proceedings u/s.271(1)(c). The Appellant denies his liability for such penalty.”
The only effective ground raised
during the course of hearing before us was that the lower authorities erred in treating the short term capital gain of Rs. 41,35,767/- and long term gain of Rs 10,52,379 arising out of sale of shares as business income and also erred consequently in taxing the same at normal rate of income-tax, instead of special rates prescribed u/s 111A / 112 of the Act and also denied benefit of exemption u/s 10(38) as was applicable on the long term capital gain and also erred in not granting benefit of set off of all brought forward short term capital losses of assessment year 2009-10.
3. The brief background as culled out from the orders of the lower authorities is that the assessee is an HUF, filed return of income showing income including Income from short term and long term capital gain on sale of shares, speculation profit on sale of shares, Income from house property and interest from bank. During the course of assessment proceedings, the AO asked the assessee to submit details with respect to share trading activities. Assessee filed the details, on the basis of which the AO concluded that share trading activities carried out by the assessee were done frequently and shares were held for a very short period. Thus, looking into the regularity and frequency of the transactions, the AO issued show-cause notice to the assessee requiring the assessee to explain why the gain arising from share trading transactions, should not be treated as business income.
4. In response, the assessee submitted detailed replies to justify that the shares were held as investment for the purpose of maximising wealth, and therefore, the resultant gain should be treated as capital gain under the Income-tax Act. The reply filed by the assessee, vide letter dated 12- 02-2013 reads as follows: "The assessee Sunderdas Kankas HUF is engaged in business of dealing in share as well as investment in shares. During the year under consideration, the assessee has shown short term capital gain at Rs.41,35, 767/-.
During the year under consideration the assessee was dealing in Securities, Stocks and other marketable instruments. The assessee has offered speculation business profit of Rs.71,251/- and profit on sale of investment of Rs.41,35, 767/- as short term capital gain and set 'off it against short term capital loss for A.Y.2009-10 which in total was Rs.43,32,497/- and balance Asst. Year. In this connection we submit as under:
1. 1. The assessee has been investing in share since many years, showing the said shares as investment in the balance sheet as submitted during the proceedings. The gain from the sale of said investments has been offered to tax as capital gains and the' profit from share trading has been offered to tax as Business income year after year.
2. As per accounting policy of assessee he shows the shares held as investment in balance sheet under the head investment, the same is valued at cost.
3. During the year under consideration, the assessee was dealing in securities, stocks and other marketable instruments. The assessee has offered speculation business profit of Rs.71,251/- and profit on sale of investment of Rs.41,33, 767/- as short term ital gains.
4. The assessee further submits that it has made investment in shares out of, its own funds and investment in securities was made with intention of capital appreciation. No borrowed funds were utilized for purchase of shares for investments.
5. The assessee further submits that the mere volume of transactions is not the sole determinative factor to determine the nature of transactions. It is an established principle that income is to be computed with regard to the nature of the transactions. The transaction in whole has to be taken into consideration and the magnitude of the transaction does not alter the nature of transaction.
6. The assessee further submits that it, holds the shares as an "investment" as well as "stock in trade". It is the intention of assessee which has to be seen to determine the nature of transaction. There is no basis for treating the investment activity of the assessee as trading in shares, when its intention was to hold shares in the companies as an investment and not as stock- in-trade. Magnitude of transaction is not the sole factor to determine the nature of transaction. We also draw attention to CBDT circular no.4/2007 dated 15.6.2007 wherein it is stated that " ..... The Assessing Officer are further advised that no single principle would be decisive and the total effect of al the principles should be considered to determine whether, in a given case, the share are held by the assessee as investment or stock in trade"
Further the assessee has been consistently investment in shares for the past several years and the assessee has been offering for income tax any' gains made by it on sale of shares under the head "capital gains" (i. e. long-term or short-term) depending on the period of holding.
We further submit that the intent of any investment in equities is to maximize returns. For these one needs to monitor, or an ongoing basis, whether the returns are fair irrespective of the period for which the equity is held. Therefore, just because a large gain is earned in a Short period of time by an investor, or these are large number of transactions, would not change' the nature of the income. The period of holding or Volume of transactions can;"ever determine the nature of income"
The AO did not accept the submissions of the assessee mainly for the reason that manner of recording transactions in the books of account is not conclusive proof to decide the head of income. It was observed by the AO that showing the shares as ‘investment’ was not determinative factor to decide real nature of transactions. In other words, if a receipt was a trading receipt, the fact that it was not shown as such in the accounts of the assessee does not prevent the AO from treating it as trading receipt. The AO was also influenced by the fact that assessee was dealing in large volume of shares and also the fact that many shares were bought and sold. Therefore, the AO was of the view that the nature of activity carried out by the assessee was share trading. He also placed reliance upon the CBDT circular No.4/2007 dated 15-06-2007 to arrive at the conclusion that the share trading activity of the assessee was in the nature of business and, therefore, the resultant gain should be treated as income from business. Accordingly, he assessed the income of the assessee as business income and denied the consequential benefits as have been mentioned in the grounds raised
by the assessee. During the course of appeal before CIT(A) detailed submissions were made by the Ld. Counsel on behalf of the assessee, but Ld.CIT(A) was not impressed with the arguments of the assessee; therefore, he endorsed the view taken by the AO and upheld the addition made by the AO.
6. During the course of hearing before us, the Ld. Counsel made detailed submissions in support of his claim. It was inter-alia argued by him that assessee has been consistently showing identical income earned from sale of shares under the head ‘capital gains’. The same has been accepted by the Revenue consistently in all the years right from AY 1999- 2000 upto 2009-10. In AY 2006-07, the assessment order was passed u/s 143(3) dt 07-08-2008 wherein the returned income was assessed, under the head ‘capital gains’ only. Even in subsequent assessment years from A.Ys. 2011-12 TO 2015-16, the income was retuned under the head ‘capital gains’ and assessed as such by the AO. There was no basis for the AO in this year to take a divergent view. The shares have always been shown as part of investment and accepted as such. Ld. Counsel relied upon the following judgements in support of his claim: 1) Gopal Purohit v. JCIT [2009] 29 SOT 117 (MUM) 2) CIT v.Gopal Purohit [2011] 336 ITR 287 (Bom) 3) ACIT v. Chetan K. Mehta - (ITA No.6529/Murn/2011) 4) ACIT v. Shri Ronnie Hosi Mehta (ITA No. 640/M/2012) 5) M/s. Mindset Technologies Pvt.Ltd. (ITA No.7071/M/2013) 6) Shri Dhairesh K. Sangvi v. DCIT (ITA No. 2933/M/2013) 7) DCIT v. M/s. E-Cap Partners (ITA No.4785/M/2009) 8) Shri Rajesh S. Sanghvi v. ACIT (ITA No, 1609/M/2011) 9) CIT V. Amit Jain (Delhi High Court)
7. Per contra, the Ld. DR relied upon the orders of the lower authorities and reiterated the observations made by the AO and the CIT(A) in their orders.
8. We have gone through the facts of the case. It has been noted by us that the assessee is a partner in certain partnership firms and is also engaged in making investment in shares. The income shown by the Income from speculation and ‘Income from other sources’. No income has been shown from any regular business activity. It has been claimed by the assessee that assessee is not engaged in any business activity in an organised and systematic manner. The assessee has been making investments in shares since so many years which have been accepted, as such. Our attention has been drawn upon the income-tax returns filed from assessment years 1999-2000 onwards. It is noted by us that assessee has been showing the amount of investments in shares under the head ‘investments’ in its Balance Sheets right from Balance Sheet dated 31-03-1999. During all the years, the investment has been shown in the Balance Sheet under the head ‘investment’. At no point of time, the investment made in shares has ever been shown as part of stock-in-trade. Gain arising on sale of shares has always been shown under the head ‘Income from capital gains’. The same has been accepted under the head ‘Income from capital gains’ by the AO in all the years, i.e. AY. 1999-2000. It is further noted that in A.Y. 2006-07, assessment order was passed u/s 143(3) dated 07-08-2008, wherein income returned under the head ‘Capital gain’ has been accepted, as such. Our attention was also drawn on the fact that the purchase and sale of shares in A.Y. 2006-07 was also done in identical manner. It is also shown to us that even in subsequent years, i.e. AYs. 2011-12 TO 2015-16, income from sale of shares has been returned and accepted under the head ‘Capital gains’. Under these circumstances, we do not find any reason with the AO or Ld. CIT(A) to deviate from the consistent stand which had been taken and accepted in all earlier and subsequent years. Thus, in view of judgments of Hon'ble Supreme Court in the case of Radhasoame Satsang vs CIT 293 ITR 321 (SC) and CIT vs Excel Industries Ltd 358 ITR 295, upholding the principle of consistency, the claim of the assessee deserves to be upheld.
In addition to the above, it is noted by us that the assessee had used its own funds in making investment in the shares. The shares have always been shown as part of investment in its balance-sheet consistently. It has also been noted that CBDT by way of its circular No.4/7 dated 15-06-2007 clarified that an assessee can have two portfolios, i.e. one for investment purposes and the other for business purposes. The amount held in the investment portfolio should be treated as income under the head ‘Capital gains’. Relevant part of the circular is reproduced below: "10. CBDT also wishes to emphasise that it is possible for a tax payer to have two portfolios, i.e., an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading as-sets. Where an assessee has two portfolios, the assessee may have income under both heads i.e. capital gains as well as business income.
11. Assessing officers are advised that the above principles should guide them in determining whether, in a given case, the shares are held by the assessee as investment (and therefore giving rise to capital gains) or as stock-in-trade (and therefore giving rise to business profits). The assessing officers are further advised 'that no single principle would be decisive and the total effect of all the principles should be considered to determine whether, in a given case, the shares are held by the assessee as investment or stock-in-trade."
Our attention was also drawn on CBDT circular No.6 of 2016 dated 29-02-2016 wherein the Board gave further guidelines with regard to the treatment of profit as arising on sale / purchase of shares. It was inter-alia observed in the circular that the AO shall take into account the following guidelines in deciding whether the surplus generated from sale of listed 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 or such shares/securities would be treated as its business income, b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding, the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years; c) In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT.”
It was further observed in the circular is as under:- “5. It is reiterated that the above principles have been formulated with the sole objective of reducing litigation and maintaining consistency in approach on the issue of treatment of income derived from transfer of shares and securities All the relevant provisions of the Act shall continue to apply on the transactions involving transfer or shares and securities.”
12. Thus, from the perusal of the above said circulars, i.e. circular No.4/2007 and circular No.6/2016, inter-alia, following points can be noted:- (i) An assessee can have two portfolios, i.e. investment and business; (ii) The assessee has choice of deciding whether the shares are purchased in investment portfolio or business portfolio. Once a particular decision is taken by the assessee, then he is obliged to follow the same in all AO shall also be bound to follow consistent approach; (iii) CBDT also wants to reduce litigation and maintain consistency by the Revenue as well as by the assessee in approach followed on the issue of treatment of income derived from sale of shares.
Thus, turning back to the facts of our case, it is an undisputed fact that in AY 1999-2000 the assessee included its shares as part of ‘investment’ and since then the assessee has been consistent in approach by showing the same under the head ‘investment’ and claiming the income from sale of shares as assessable under the head ‘Income from capital gains’. But the AO breached the consistency approach in the year before us despite the fact that in all earlier and subsequent years the stand of the assessee has been accepted. This approach is not permissible under the law. On the other hand, the assessee has offered the impugned income as assessable under the head ‘capital gains’ in accordance with law and facts and in line with its consistent approach. Thus, after taking into account all the facts and circumstances of the case, and especially in view of the circulars of the Board, we do not find legality in the actions of the lower authorities in assessing the impugned income under the head ‘business’. Thus, the impugned income arising from sale of shares is directed to be assessed under the head ‘capital gains’, i.e. short term capital gain or long term capital gain, as the case may be. The AO is also directed to provide all consequential benefits as have been mentioned in grounds of appeal
, after verifying requisite facts, viz. granting of exemption u/s 10(38) wherever applicable, charging of tax on special rate prescribed u/s 111A/112 and setting off of brought forward short term AY 2009-10, in accordance with law and facts of this case. Thus, with these directions, grounds raised by the assessee are allowed.
13. In the result, appeal of the assessee is allowed. Order was pronounced in the open court at the conclusion of the hearing.