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Income Tax Appellate Tribunal, MUMBAI “B” BENCH
Order u/s 254(1) of the Income-tax Act, 1961(the Act) O R D E R �याियक सद�य के अनुसार Per Mahavir Singh,JM : This appeal by the assessee is arising out of the order of CIT(A)-27, Mumbai in Appeal No.CIT(A)27/Addl.CIT16(1)/220/07-08 Order dated 03.03.2011. Assessment was framed by ACIT,Cir.16(1) under section 143(3) of the Income tax Act, 1961(hereafter “the Act”) for the assessment year 2005-06 vide his order dated 30.11.2007.
The only issue in this appeal of the assessee is against the order of CIT(A) confirming the action of the Assessing Officer (AO) in treating the Short Term Capital 5350/M/11 Meena Kothari Gains (STCG) arising out of sale and purchase of shares as business income. For this the assessee has raised following Ground No.1:-
“On the facts and in the circumstances of the case and in law, the Hon’ble CIT(A) erred in confirming the decision of ld. Assessing Officer in treating the Short Term Capital Gain of Rs.18,41,755/- as appellants Business Income. The appellant prays that gains of Rs.18,41,755/- should be treated as Short Term Capital Gain and not business income.”
3. Briefly stated, facts are that the assessee is in the business of dealing in shares and earned income from business, Long Term Capital Gains (LTCG) on sale and purchase of shares, Short Term Capital Gains (STCG) on mutual funds, STCG on sale of shares and income from other sources. The assessee declared income from LTCG and STCG on sale and purchase of shares. The AO during the course of assessment proceedings noticed that the assessee had bifurcated the STCG upto 30.09.2004 at Rs.18,41,755/- and balance after 01.10.2004. According to the AO the assessee has borrowed a sum of Rs.1,01,44,225/- from Rohit Financial Services and used these funds for purchase of shares and after selling the same, claimed the same as STCG .
The AO was also of the view that buying and selling of shares in short period and gain arising out of the same, that also by using borrowed funds definitely involves risk and it is organized activity, hence, same is business. According to AO, the assessee has also taken help from professionals and paid professional fee for sale and purchase of shares. Accordingly, he treated this STCG declared by the assessee at Rs.18,41,755/- as income from trading in shares i.e. the business income.
4. Aggrieved, assessee preferred appeal before CIT(A). The CIT(A) also confirmed the action of the AO exactly on the basis of above findings vide para 7 of his order which is as under:-
5350/M/11 Meena Kothari
“7.I have carefully considered the submissions made by the appellant and also the various details placed on record. The appellant tried to explain that the holding period more than 3 months in respect of the STCG earned during the year and the No. of shares dealt in are three shares involving 6 purchase transactions and 11 sale transactions and no churning is involved. Nevertheless the appellant has not furnished any explanation whatsoever to controvert the fact recorded by the A.O. that the appellant has borrowed an amount of Rs.1,01,44,225/- from Rohit Financial Services which has been used in purchase and sale of shares during the year. It is an accepted principle that an investor does not involve in borrowing of funds for the purpose of investment. Further the appellant herself submitted before the A.O. that the borrowed funds were utilized for investing in shares and payment of margin money for dealing in shares during the year. Having regard to the fact that the entire activity of the appellant in buying and selling of the shares during the year is carried out of borrowed capital, I am of the considered opinion that the appellant’s activity falls in the category of business and not that of the investor. In view of the above, I uphold the action of the A.O. in treating the STCG returned by the appellant as appellant’s business income. The appellant fails on this ground.” Aggrieved, the assessee is in second appeal before the Tribunal .
3. Before us, the ld. Counsel for the assessee apart from taking us through the assessment order and the order of the CIT(A), drew our attention to the ledger account of Rohit Financial Services and stated that the observations of the lower authorities that loan funds were used for purchase and sale of shares is totally wrong.
He narrated that the correct facts that there is outstanding balance as on 01.04.2004 of an amount of Rs.66,56,623/- in the assessee’s account on behalf of Rohit Financial Services and during the year the assessee has received amount and repaid also and final balance outstanding amount was Rs.2,21,708/-. Ld. Counsel for the assessee also drew our attention to entries dated 2 & 3.8.2004, wherein an amount of Rs.20.00 lakhs and Rs.7.00 lakhs of loan was taken by assessee from Rohit Financial Services for purchase of shares is depicted. According to ld. Counsel for the assessee this amount is loan taken for purchase of shares, but was repaid subsequently and for this he produced copy of ledger account of Rohit Financial Services. Ld. Counsel for the assessee also stated that this ledger account of Rohit Financial Services clarifies 5350/M/11 Meena Kothari purpose of taking loans from Rohit Financial Services, which is not for investment in the scrips of Munjal Auto of Rs.32,52,662/- in the month of July. The assessee had repaid the sum of Rs.53,45,848/- to Rohit Financial Services. According to him, this observation of the lower authorities is totally wrong that borrowed funds were utilized for investment in these shares, whereas the assessee taken this loan after the transaction and that also in August. The ld. Counsel for the assessee narrated the fact relating to STCG that it has dealt only in three scrips during the year i.e., Munjal Auto, NTPC and Jaiprakash Industries. Further, period of holding of shares is 5-6 months. Ld. Counsel for the assessee also had taken us through the statement of accounts, the balance sheet and Schedules appended thereto to show that these shares were held as an investment. Further, ld. Counsel for the assessee also explained that the assessee has used this scrip as investment and Revenue has accepted the same as investment and also the income declared by assessee is LTCG in future years. Ld. Counsel for the assessee drew our attention to page 5 and 6 of assessee’s paper book wherein computation of income is attached. Ld. Counsel for the assessee also took us through page-7 and 8 of assessee’s paper book wherein the details of STCG on sale of shares are noted including the holding period which varies from 111 days to 211 days.
He also drew our attention to the statement of STCG earned from sale of units of mutual funds, which is enclosed at page -8 of assessee’s paper book. In terms of above facts and circumstances, ld. Counsel for the assessee argued that none of the authorities below has examined these facts in proper perspective and just by recording wrong facts decided the issue. On the other hand ld. CIT-DR heavily relied on the assessment order and that of the order of CIT(A).
5350/M/11 Meena Kothari
We have heard the rival contentions and gone through the facts and circumstances of the case. We find from the statement of ledger account of Rohit Financial Services that there is outstanding balance as on 01.04.2004 at Rs.66,56,623/- and closing balance as on 31.03.2005 is at Rs.2,21,708/-. During the year i.e., precisely on 2nd and 3rd March, 2004, the assessee has taken loan for purchase of shares of Rs.20.00 lakhs and Rs.7.00 lakhs respectively from Rohit Financial Services. But before that it had repaid a sum of Rs.53,45,848/- . This means that the basic charge of the Revenue regarding investment of loan funds into these purchases of shares of Munjal Auto is totally baseless. Even otherwise these amounts were taken by the assessee after the purchase of shares on 29.07.2004. It is also a fact that the assessee has kept these shares as investment in its accounts and holding period is almost 4 to 8 months. Admittedly, the assessee has kept these investments for the purpose of long term and short term gains but not for the purpose of business.
Revenue in earlier years i.e. 2004-05 has treated these transaction as investment and for this assessee has enclosed the details of accounts. Assessee has also filed copies of assessment orders for the assessment years 2007-08, 2008-09 and 2009-10, wherein assessment was made by Revenue under section 143(3) of the Act and the STCG declared by the assessee out of the same scrip i.e. Munjal Auto was accepted as it is.
On similar facts, the Hon'ble Bombay High Court in the case of CIT vs. Gopal Purohit (2010) 336 ITR 287 (Bom) has held as under:-
“2. The Tribunal has entered a pure finding of fact that the assessee was engaged in two different types of transactions. The first set of transactions involved investment in shares. The second set of transactions involved dealing in shares for the purposes of business (described in paragraph 8.3 of the judgment of the Tribunal as transactions purely of jobbing without delivery). The Tribunal has correctly applied the principle of law in accepting the position that it is open to an assessee to maintain two separate 5 5350/M/11 Meena Kothari port folios, one relating to investment in shares and another relating to business activities involving dealing in shares. The Tribunal held that the delivery based transactions in the present case, should be treated as those in the nature of investment transactions and the profit received therefrom should be treated either as short term or, as the case may be, long term capital gain, depending upon the period of the holding. A finding of fact has been arrived at by the Tribunal as regards the existence of two distinct types of transactions namely, those by way of investment on one hand and those for the purposes of business on the other hand. Question (a) above, does not raise any substantial question of law.
In so far as Question (b) is concerned, the Tribunal has observed in paragraph 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.”
In view of the above facts and circumstances, we are of the view that mere volume or magnitude does not alter the nature of transaction, which are consistently assessed as income from capital gains from past years and even in future years by revenue. Where the assessee was holding large magnitude of shares as investment from year to year and transaction of shares in preceding years as well for the future years had been held as income from capital gains both on long term and short term basis, there was no basis for holding assessee as trader in shares for the year under consideration when his intention is clear that he want to hold the shares as investment ans not stock in trade. Accordingly, we are of the view that the Revenue has wrongly treated the transaction of sale and purchase of shares of Munjal Auto as business income, whereas actually it is an investment and income arising out of the same is capital gains. We direct the Assessing Officer to assess the same as short term capital gain.