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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI G.S. PANNU, AM & SHRI SANDEEP GOSAIN, JM
This appeal filed by the assessee is directed against the order of ld. CIT(A) -20, Mumbai, dated 4-1-2010 for A.Y. 2006-07.
The only ground raised by the assessee in this appeal is the treatment of profit arising on share transaction of Rs. 1,05,41,397/- as business as held by the A.O. against short term capital gain as offered by the assessee.
Brief facts in this case are that the assessee is a company which is engaged in the business of development of real estate, speculation in shares ITA 2265/M/10 2 and dealings in shares. The return of income was filed by the assessee on 29-11-2006 declaring total income of Rs. 1,57,50,580/-. In the Profit & Loss Account of the assessee, an amount of Rs. 1,05,31,812/- being short term capital gain on sale of shares, an amount of Rs. 9,585/- as long term capital gain has been shown. In the computation of income the assessee has treated these transactions chargeable to tax under the head ‘capital gain’. However, the A.O. has taxed these amounts under the head ‘business income’. The A.O. was of the view that the assessee is not a small scale retail investor, but a trader in shares. For this, he held that for the majority of the share transactions, the assessee had sold shares within a period of 12 months of their acquisition. He also held that except in one script, the assessee has earned small long term capital gain, all other transactions are huge in volume resulting into voluminous, therefore, the amount earned by the assessee was not in the capacity of an investor, but dealer in shares. Aggrieved by the order of the A.O., the assessee has preferred an appeal before the ld. CIT(A) who concurring with the views of the A.O. has also held that the assessee had purchased very large quantity of shares and the continuity in such transactions throughout the year coupled with shorter duration of holding, it was evident that the assessee had profit motive while dealing in shares and, therefore, the income generated on share profit is business income.
On further appeal before us, the ld. Counsel for the assessee submitted a detail written submission in the form of comparative chart which demonstrated that the assessee is, in fact, engaged in the business of real estate development and in assessee’s own case in A.Y. 2007-08, the Mumbai Bench of Tribunal in vide its order dated 27.9-2013 has held that the assessee is an investor and not a trader. He further relied on the order of the co-ordinate Bench of this Tribunal in the case of Sagar Construction vs. ACIT in ITA No. 4646/Mum/2011 dated 11-03-2015 wherein it has been held that the assessee is an investor in the shares. He further ITA 2265/M/10 3 submitted that the transaction in the share is through D-mat account and they have shown in the balance sheet as an investor. During the year, the assessee company had earned dividend income of Rs. 3254/- and no borrowed funds have been used for the purpose of investment in shares. The main contention of the assessee is that in A.Y. 2007-08, the assessee has earned short term capital gain of Rs. 7,24,45,273/- and in this year the assessee had earned short term capital gain of Rs. 1,05,31,812/-. In A.Y. 2007-08, the number of shares purchased are 24 whereas in the current year it is 26. The ld. Counsel for the assessee has mainly relied on the order of the Tribunal in assessee’s own case of A.Y. 2007-08, where on identical facts and circumstances, the ITAT has held that the assessee to be an investor. He further submitted that during the year, the short term capital gain, long term capital gain as well as dividend income is less compared to earlier year as investment portfolio is sold and deployed in the regular business of the assessee. He further submitted that the main reason of investment is only because the assessee could not get permission from the local authorities in its regular business. He also stated that the assessee is held to be an investor by the order of the Tribunal in A.Y. 2007-08, and the A.O. and the ld. CIT(A) themselves treated the assessee as investor in A.Y. 2008-09, though the facts are similar, but both A.O. & ld. CIT(A) were at error in considering the assessee as trader in this year. He further stated that all transactions are delivery based transactions and are not with profit motive.
The ld. Counsel for the assessee also relied on the Board Circular No. 4 of 2007 as well as the Speech of Hon’ble Finance Minister supporting his contention that all conditions should be same cumulatively and independent and isolated condition cannot be used against the assessee. Therefore, he stated that the assessee is an investor.
ITA 2265/M/10 4
The ld. D.R. submitted that the facts of the each case in each year to be seen separately and, therefore, reliance placed by the ld. Counsel for the assessee on the decision of the Tribunal in assessee’s own case for A.Y. 2007- 08 does not come into any help to the assessee. He further contended that holding period which has resulted into short term capital gain is just 10/15 days and, therefore, intention of the assessee is evident that it wanted to maximize the profit. He also submitted that disclosure of shares in the books of account as investment cannot be the only criteria to decide the issue. The submission made by the ld. DR on less dividend received during the year was also to support its contention that the intention of the assessee is not an investor in shares but was profit therefrom. He also relied upon the orders of the A.O. as well as the ld. CIT(A) and contended that looking into the volume, frequency and other factors, the assessee is rightly treated as trader in shares.
We have considered the rival submissions as well as the orders of lower authorities and the decisions cited before us. It is true that in assessee’s own case for A.Y. 2007-08, the Tribunal in dated 5-9- 2013 has considered this issue and held as under:-
“8. We have carefully considered the rival submissions and perused the orders of the lower authorities. The dispute is regarding the nature of income on sale and purchase of shares by the assessee. The issue, whether the income from sale and purchase of shares in a particular case should be treated as capital gain or as business income has been a debatable issue and there are conflicting decisions of the Tribunal on this issue. Each case is, therefore, to be based on its own factual situation. A perusal of the profit and loss account of the assessee shows that the assessee has separately shown share trading profit, long term capital gains on shares and profit from business. In the balance sheet, the assessee has shown shares under the head ‘investment’. These investment shares have been valued at cost . The Hon’ble Supreme Court in the case of CIT Associated Industrial Development Co Pvt. Ltd. 82 ITR 586, which decision has also been considered by the CBDT in its Circular No. 4/2007 dt. 15.6.2007, has observed that : “Whether a particular holding of shares is by way of investment or forms part of the stock-in- trade is a matter which is within the knowledge of the assessee who ITA 2265/M/10 5 holds the shares and it should, in normal circumstances, be in a position to produce evidence from its records as to whether it has maintained any distinction between those shares which are its stock-in-trade and those which are held by way of investment” The CBDT has also mentioned in its circular that it is possible for a tax payer to have two portfolios i.e. an investment portfolio and trading portfolio. This view has also been fortified by the decision of the Hon’ble Jurisdictional High Court in the case of CIT Vs Gopal Purohit – 336 ITR 287.
9. The assessee had opening investment at Rs. 4,01,49,296/- and the investment as on 31.3.2007 was at Rs. 3,97,99,072/-. This clearly shows 5 that the assessee had brought forward investment in shares. The borrowed capital of Rs. 1,36,23,246/- has come down to Rs. 2,396/- at the close of the current financial year. The allegation of the Revenue authorities is that the assessee has indulged into high frequency transaction. This in itself could not mean that trading activities have been carried out. A prudent investor always keep a watch on the volatility of the market and makes sound investment decision in accordance with such market fluctuation and has the liberty to liquidate its investments in shares as and when necessary. The law itself has recognized this fact by treating the same as short term capital gains for shares held less than 12 months and long term capital gains where the shares are held for more than 12 months. Had this been not the case, all the gains on shares would have been considered as business income only. The fact that the law recognizes such volatility and has specifically provided a separate holding period in respect of such shares makes it very clear that gains on such shares having a holding period of less than 12 months and held as investment would be considered as short term capital gains only. Thus the assessee’s claim cannot be negated on the basis of frequency of transaction as held in the case of Gopal Purohit (supra). 9.1. As regards the allegation that the borrowed funds had been applied for investment in shares, it has been held by the Tribunal, Delhi Bench in the case of Narendra Gehlaut Vs JCIT 21 Taxmann .com 82 that “ it cannot constitute a factor as in none of the case laws or CBDT Circular it has been held that borrowings will not be allowed in investment transactions. The investment in capital assets can also be carried out by way of borrowed funds, there being no bar notified by the law, judicial pronouncement or CBDT circular.” 6 ITA No.1074/M/2011 9.2. Considering the entire facts in totality in the light of the judicial decision discussed here in above , we find that it has not been disputed that the assessee has shown shares as investment right from the date of purchase and that was shown as such in the balance sheet of the assessee which was filed before the AO. In our humble opinion, the shares have to be treated as an investment and therefore any profit earned on the sale thereof is to be treated as capital gain. Findings of the Ld. CIT(A) are reversed. The AO is directed to treat the profits on sale of shares as capital gain, short term or long term as the case may be. Ground No. 1 & 2 are accordingly allowed. “
ITA 2265/M/10 6
We have considered the decision of the Tribunal cited supra and are of the view that the facts of that year as well as of this year are identical according to the following chart :-
Facts A.Y. 2007-08 A.Y. 2006-07 Shares Shown in Yes Yes Investment Transaction Yes Yes through D-Mat Short term 7,24,45,273 10531812 Capital Gain Long term 100445 9585 Company 24 26 Separate yes Yes Portfolio Dividend 452588 3254 Reason for The assessee company has completed the sale of Industrial Galas in the project “Sagar Plaza”. The project “Sagar Signature” is under investment construction. The Appellant could not start new project due to dispute between CIDCO and Virar Vasai Municipal that who will grant necessary permission. Since the new construction was taking time, the assessee deployed the funds for investments in shares. When Permission granted Investment were sold out and Deploy funds in business. Therefore, in A.Y. 2008-09 appellant incurred loss. And DEPARTMENT ALSO ASSESSEE THE LOSS UNDER CAPITAL GAIN HEAD ON PROTECTIVE BASIS. Borrowed Funds No borrowed funds were used and further there is no bar on borrowed fund used in Investment as per Narendra Gehlaut vs. JCIT 21 Taxmann.com 82 ITAT finding The Hon’ble Appeal before your honour. Tribunal after considering all these facts held that appellant is an investor and gain is liable to be assessed under capital gain head. Submission Facts are exact same and department also accepted appellant as investor in A.Y. 2008-09 i.e. subsequent year. Therefore, as per Rule of consistency assessee has to be treated as investor and gain is liable to be taxed under capital gain Head. On same aspect the Hon’ble tribunal in case of ITA 2265/M/10 7
Sagar Constructions vs. ACIT ITA o. 4646/Mum/2011 held that after going through the order of the Tribunal in assessee’s own case for the immediately preceding assessment year, wherein facts and circumstances were the same, we direct the AO to treat the profit on sale of shares as short term and long term capital gain depending on the period of holding of share.
Respectfully following the decision of the Tribunal cited supra, we allow this ground raised by the assessee.
In the result, appeal of the assessee is allowed. Order pronounced in the open court on 28.09.2016 September, 2015. आदेश क� घोषणा खुले �यायालय म� �दनांकः 28.09.2016 को क� गई । Sd/- Sd/- (G.S. PANNU) (SANDEEP GOSAIN) लेखा सद�य ACCOUNTANT MEMBER �या�यक सद�य/JUDICIAL MEMBER मुंबई Mumbai; �दनांक Dated 28.09.2016 [ व.�न.स./ R.K. R.K., Sr. PS R.K. R.K.