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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI N.K. PRADHAN
PER SAKTIJIT DEY, J.M.
Aforesaid appeals by the Department are directed against separate orders passed by the learned Commissioner (Appeals)–27, Mumbai, for the assessment years 2005–06, 2006–07, 2007–08 and 2 Smt. Roopa Kapoor 2008–09. The common effective ground raised by the Department in all these appeals reads as under:–
The learned CIT(A) has erred in not considering the fact that assessee was involved in huge volumes of share transactions and such transactions were conducted regularly, continuously and frequently, and hence fall in the category of business.
As could be seen from the ground raised, the issue in dispute in all these assessment years is whether the income derived from sale of shares is to be assessed under the head “Capital Gain” or “Business Income”. While the assessee has claimed the gain derived from sale of shares as income under the head “Capital Gain” which is also accepted by the learned Commissioner (Appeals), the Revenue has disputed the aforesaid claim by relying upon the reasoning of the Assessing Officer that it should be assessed under the head “Income From Business”.
Brief facts are, the assessee, an individual, derives income from house property as well as income from interest on deposits. The assessee also is involved in share transactions and the income / loss arising out of such share transaction is shown under the head “Capital Gain” while filing the return of income. In the course of assessment proceedings for the assessment year 2006–07, the Assessing Officer while examining the details of share transactions undertaken by the assessee observed that the assessee was involved in frequent purchase and sale of shares during the year. He observed, the 3 Smt. Roopa Kapoor assessee during the year had purchased 29,43,216 shares and has sold 18,69,168 shares. The total transaction in shares during the relevant previous year are 48,12,384 shares and each purchase and sale is a complete transaction in itself. He further observed, Futures & Options (F&O) transactions are 385 during the entire year. According to the Assessing Officer, quantum and frequency of transaction indicate the intention to earn profit from the transaction and not to hold it as investment. He observed, number of transaction along with the volume of shares purchase and sold taken together leads to the conclusion that the assessee is indulging in trading in shares and not investing. The Assessing Officer observed, assessee had indulged in a number of transaction of purchase and immediate selling of shares which are attributes of business. He noted, demat account reveals frequent transaction in shares. The Assessing Officer observed, assessee is heavily into transactions of F&O which is purely in the nature of trading activities. He also observed, assessee had also taken loan from the relatives for carrying out the share transactions which shows that the share transaction is not for investment but for trading. Thus, on the basis of aforesaid observation, the Assessing Officer called upon the assessee to explain why the income derived from sale of shares should not be treated as “Income From Business”. In response to the show cause notice issued by the Assessing Officer, the 4 Smt. Roopa Kapoor assessee made elaborate submissions explaining the reason for which the income derived from share transaction should be assessed under the head “Capital Gain”. The Assessing Officer, however, did not find merit in the submissions of the assessee and concluded that the profits from share transaction is to be treated as business income of the assessee and accordingly, completed the assessments. On the basis of the aforesaid reasoning, the Assessing Officer re–opened the assessments for assessment years 2005–06 under section 147 of the Act and ultimately concluded the same by assessing the income derived from share transaction under the head “Business”. Assessments for the assessment year 2007–08 and 2008–09 were also completed in similar manner by assessing the income derived from share transaction under the head “Business Income”. Being aggrieved of the assessment order so passed, assessee preferred appeals before the learned Commissioner (Appeals) at different point of time. As it appears, appeal filed by the assessee for assessment year 2006–07 came up for hearing before the learned Commissioner (Appeals) first.
The learned Commissioner (Appeals) allowing assessee’s claim held that income derived from share transaction has to be assessed under the head capital gain. Being aggrieved, Revenue preferred appeal before the Tribunal. The Tribunal disposed off the appeal of the Revenue registered as ITA no.6176/Mum./2009, vide order dated 30th
5 Smt. Roopa Kapoor November 2010, by restoring the matter back to the file of the learned Commissioner (Appeals) to decide the issue afresh after considering certain aspects of the share transaction as directed by the Tribunal. On the basis of the guidelines set out in the order of the Tribunal for assessment year 2006–07 learned Commissioner (Appeals) proceeded to dispose off the same along with appeals for the assessment year 2005–06, 2007–08 and 2008–09 which were pending before him. The learned Commissioner (Appeals) referring to the directions of the Tribunal observed, as per the said direction, it was required to be examined whether the income derived from share transaction is to be treated as “Income From Capital Gain” or “Income From Business”. During the appellate proceedings, apart from examining the material on record, the learned Commissioner (Appeals) called for various other details from the assessee. The learned Commissioner (Appeals) also called upon the assessee to submit his objections in respect of each of the findings of the Assessing Officer to hold the share transaction as “Income From Business”. In response to the query raised, the assessee submitted detailed reply with supporting evidence. The submissions made along with evidences produced were sent to the Assessing Officer for his comments and necessary reply by way of a remand report. In the light of the observations of the Tribunal and considering the submissions of the assessee, and the remand report as 6 Smt. Roopa Kapoor well as materials available on record, the learned Commissioner (Appeals) observed that the assessee from the very inception has been investor in shares. Over the years, she has consistently treated the investment in shares as an investment and not as stock in trade. The income from share transaction was always offered to tax as capital gain. He also found that shares held as investment were valued at cost and no marked to market loss was provided for. After examining the portfolios held by the assessee over the years, vis–a–vis the scrips held or purchased or sold and corresponding number of transaction as well as investment made from own funds with dividend received over the years, learned Commissioner (Appeals) observed that the assessee is not a trader but an investor. As far as the allegation of the Assessing Officer with regard to volume of share transaction, learned Commissioner (Appeals) observed that the total quantity of share transacted always depends on the financial strength of the individual concerned and volume of share transaction can never be a guiding factor to decide whether the share transaction is taken up as an investment or trading. He also noted that the transactions entered into by the assessee cannot also be considered to be of high volume. He also noted that the assessee had not entered into share transaction continuously and regularly throughout the year. From the details submitted, the learned Commissioner (Appeals) found that the 7 Smt. Roopa Kapoor allegation of the Assessing Officer that holding period of shares is less is not correct. The learned Commissioner (Appeals) observed that the assessee had certain un–booked and unrealised capital gain which would not be a case had she been a trader. He also observed that the assessee had retained substantial value of investment at the end of the year. According to him, such a high retention of closing investment cannot happen in business as stock is always cleared and profit is booked. He noted, the assessee has maintained consistency in claiming the income derived from share transaction as capital gain. Whereas, the Assessing Officer is inconsistent in his stand. He noted, the Assessing Officer prior to assessment year 2005–06, had accepted the income from share transaction under the head “Capital Gain”. Further, in assessment years 2008–09 and 2009–10, the Assessing Officer while computing the income had accepted assessee’s claim of long term and short term capital loss. The learned Commissioner (Appeals) noted, the assessee used her own surplus funds for investing in shares. She has neither borrowed any money from external sources nor paid any interest thereon which indicates that the assessee is an investor and not a trader in shares. Learned Commissioner (Appeals) observed, if the assessee having worked in UTI had gained knowledge in share market, it cannot be held against her as long as knowledge is utilised in making investment for herself.
8 Smt. Roopa Kapoor The learned Commissioner (Appeals) also observed that the assessee has earned substantial dividend also. As far as the specific direction of the Tribunal to examine whether the assessee has made frequent entries and exist in the same scrip, the learned Commissioner (Appeals) after examining the details of share transaction over the period of four assessment years viz. A.Y. 2005–06 to 2008–09, found that out of 95 scrips in which the assessee had transacted during the aforesaid block of four years there was only 12 scrips wherein repetitive transactions were carried out. After examining those transactions, the learned Commissioner (Appeals) observed, even in these 12 cases of repetitive transactions also rentry was after a minimum of six months gap after the date of last sale with a maximum of two years and six months. He observed, the minimum holding period of a normal transaction was ranging between the minimum of 41 days and maximum of 407 days and in case of re–investment the minimum holding period was 38 days and maximum was 404 days. He also found that in five out of 12 instances of repetitive transactions, the re–purchase price was lower than the sale price. Further, the profit earned on sale of re–purchase cost was mainly on account of stocks which were purchased at a price higher than the sale price and which were held for a period of 149 days to 404 days after re–purchase. Thus, the profit earned on re–purchase cost was also essentially on 9 Smt. Roopa Kapoor account of holding them as investment. The learned Commissioner (Appeals) after analysing the details of share transactions noted that the assessee had no repetitive transactions in the same shares at short intervals and in majority of cases i.e., 83 out of 95 instances of share transaction over the four year period assessee has no transactions in the same scrip at all. Thus, it was observed by the learned Commissioner (Appeals) that considered in the light of the directions issued by the Tribunal the assessee cannot be treated as a trader in shares but an investor, hence the income derived from share transaction has to be assessed under the head “Capital Gain”. Accordingly, he disposed off appeals for the impugned assessment years. Being aggrieved, the Department is in appeal before us.
The learned Departmental Representative relied upon the observations of the Assessing Officer.
The learned Authorised Representative on the other hand strongly supporting the findings of the learned Commissioner (Appeals) submitted, the first appellate authority has examined each and every details of the share transaction in the light of the direction of the Tribunal and has given a factual finding holding that the assessee is involved in share transaction as an investor and not as a trader. The learned Authorised Representative referring to the 10 Smt. Roopa Kapoor observations of the learned Commissioner (Appeals) in his order as well as his analysis of share transactions as annexed to the appellate order submitted, the learned Commissioner (Appeals) has gone into every aspect of the issue before concluding that the assessee is an investor and not a trader. He, therefore, submitted that there is no reason to interfere with the finding of the learned Commissioner (Appeals). The learned Authorised Representative submitted, the assessee had been consistently showing the income derived from share transaction under the head “Capital Gain” and the Revenue had accepted the claim of the assessee in the earlier as well as subsequent assessment year. In this context, learned Authorised Representative submitted before us the assessment order passed under section 143(3) for the assessment years 2003–04, 2004–05, 2010–11 and 2011–12. The learned Authorised Representative submitted, on the other hand the Assessing Officer is inconsistent in his approach. While he had accepted the share transactions as investment activities in some assessment years, he has treated the same as business income in the assessment years under appeal. He submitted, even in these assessment years also the stand of the Assessing Officer is inconsistent as he has treated the short term capital gain as business income in assessment years 2005–06 and 2008–09 whereas the long term capital gain has been accepted as such by the Assessing Officer.
11 Smt. Roopa Kapoor Further, learned Authorised Representative referring to the CBDT circular no.6 of 2016, dated 29th February 2016, submitted as per the said circular the Department cannot dispute the claim of the assessee as the assessee had been consistently claiming the income derived from share transaction as an investment activity and offering capital gain.
We have considered the submissions of the parties and perused the material available on record. It is obvious that the fundamental reason for which the Assessing Officer has treated the income derived from share transaction as business income is the share transactions are voluminous and the assessee has entered into repetitive transactions in the same shares. We have noted, while considering the aforesaid allegation of the Department while deciding the appeal preferred by the Department in assessee’s own case for assessment year 2006–07, the Tribunal in ITA no.6176/Mum./2009, dated 30th November 2010, observed as under:–
“6. We have noted the assessee's stand broadly has been that she was is only an investor and the portfolio was reshuffled only so as to maximize the value of the portfolio and not with a view to book profits on sale of shares. It is this basic argument which has been accepted by the CIT(A) as well, and which has been emphasized before us. No doubt when an assessee is reshuffling the portfolio just to maximize its value and pick up the shares which have greater potential in times to come, even if there is a profit on sale of the shares sold, such gains cannot be taxed as business income but only as capital gains. However, in such a situation, when you decide to sell a share it is with a view to discard the same from the 12 Smt. Roopa Kapoor portfolio and there cannot be any good reasons to buy the same shares again. In a situation in which an assessee sells a particular share, and yet buys the same share again within a short span of time, such a sale cannot but be for the purpose of trading in the same. There is no finding by any of the authorities below whether the same shares are not sold and purchased again within that short period. In our considered view, that is a very important aspect of the matter and in case it Is indeed a case of mere portfolio adjustment, all these grievances raised by the Assessing Officer are merely academic. We must also add that asiong as it is a genuine reshuffling of portfolio, which essentially involves that a share discarded from portfolio is not bought again unless things change materially or after long intervening period, the profit on sale of shares, irrespective indeed f the number of transactions in the process of this reshuffling of portfolio, is required to be taxed under the head capital gains, and not under the head business income. In this view of the matter, we deem it fit and proper to remit the matter to the file of the CIT(A) for fresh examination of the matter on the above lines. As we are remitting the matter, with the consent of the parties, on this limited short issue, we see no need to deal with other aspects of the matter which the assessee can very well lean upon, if atall needed, in the event of an adverse finding by the CIT(A). Those issues are left open, though, in case the plea of the assessee regarding reshuffle of portfolio is held to be correct, all those issues are not of any consequence. With these observations, the matter stands restored to the file of the CIT(A).”
On careful reading of the aforesaid observations of the Bench, it is clear that the Tribunal has held that as long as there is a genuine reshuffling of portfolio which essentially involves that a share discarded from portfolio is not brought again unless things change materially or after long intervening period, the profit on sale of shares irrespective of the number of transactions in the process of reshuffling of portfolio has to be taxed under the heard capital gain and not as business income. The Bench, however, directed the learned Commissioner (Appeals) to examine whether the assessee after selling
13 Smt. Roopa Kapoor a particular share has bought it again within a short span of time which, according to the Tribunal may lead to the conclusion that such transaction is for the purpose of trading. As could be seen from the order of the learned Commissioner (Appeals) along with the annexure attached to it, the learned Commissioner (Appeals) has examined in detail each of the share transaction carried on by the assessee for the four assessment years under appeal and has found that out of 95 scrips in which the assessee had transacted during the four year period, repetitive transactions were found in only 12 cases and that too the re–enter was after a minimum of six months’ gap after the last sale. Thus, the aforesaid factual analysis made by the learned Commissioner (Appeals) if considered in the light of the observations made by the Tribunal, it is seen that the assessee had made investment in share transaction as an investor and not as stock–in– trade. Moreover, after carefully reading of order of the first appellate authority we are convinced that he has examined each aspect of the share transaction painstakingly and has given a factual finding after considering the nuances and attributes of the share transaction to hold it as an investment activity of the assessee, thereby, holding that the income derived from sale of share is to be assessed under the head “Capital Gain”. None of the factual finding of the learned Commissioner (Appeals) could be controverted by the learned Departmental
14 Smt. Roopa Kapoor Representative. Moreover, we have noted that the assessee had consistently taken the stand over the years that the share transactions have been undertaken as investment activity and not as a trading activity. It is also noted by us that in assessment year 2003–04 and 2004–05, the Assessing Officer accepting assessee’s claim of share transaction as investment activity has assessed the income declared under capital gain while completing assessment under section 143(3). Even in the subsequent assessment years 2010–11 and 2011–12, the Assessing Officer has accepted the share transaction as investment activity and assessed the income offered by the assessee from share transaction under the head “Capital Gain”. Further, in Circular no.6 of 2016, the CBDT has also clarified the issue by stating that in a case where the assessee has treated the income arising from transfer of share as capital gain the same shall not be disputed by the Assessing Officer. Thus, on overall consideration of facts and material on record including the latest circular issued by the CBDT as referred to above, we are of the considered opinion that the conclusion drawn by the learned Commissioner (Appeals) in treating the share transaction as an investment activity of the assessee, thereby allowing assessee’s claim to be assessed under the head “Capital Gain” as far as income derived from share transaction do not require any interference by us. Accordingly, we confirm the orders of the learned Commissioner
15 Smt. Roopa Kapoor (Appeals) for all the assessment years under appeal by dismissing the ground raised by the Revenue.
In the result, Revenue’s appeal for A.Y. 2005–06, 2006–07, 2007–08 and 2008–09 are dismissed. Order pronounced in the open Court on 16.09.2016