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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY, JM & SHRI RAJESH KUMAR, AM
सुनवाई की तायीख / Date of Hearing : 5.5.2016 घोषणा की तायीख /Date of Pronouncement : 27.7.2016 आदेश / O R D E R PER RAJESH KUMAR, AM :
This is an appeal filed by the assessee against the order dated 29.5.2013 passed by the ld.CIT(A)-16, Mumbai and it relates to the assessment year 2008-09.
Ground No.1 is against the upholding the order of AO treating the Long Term Capital Gains on sale of shares of Rs.5,14,30,041/- as business income as against the income from Long Term Capital Gains on sale of shares shown by the assessee and claimed as exempt u/s 10(38) of the Act. Similarly the grievances as raised in ground no.2 and 3 are against upholding the order of AO treating the Short Term Capital Gain of Rs.2,57,89,560/- and Short Term Capital Loss of Rs.7,57,10,331/- (on equity shares) as business income and business loss respectively. Since the issues in all the three grounds of appeal
s relates to same issue of capital gain being treated as business income/loss all these are adjudicated and disposed of together for the sake of convenience.
3. The facts in brief are that the assessee filed its return of income on 29.9.2008 declaring income at NIL. The said return was processed under section 143(1) of the Act. Thereafter the case was selected for scrutiny and statutory notices u/s143(2) and 142(1) of the Act were issued and served upon the assessee. The assessee has income from speculation business and capital gains. The AO during the course of assessment proceedings found that the assessee has incurred loss from the derivative trading of Rs.27,14,30,253/ and assessee has incurred short term capital loss on equity shares of Rs.7,57,10,331/-, Short term capital gain on equity shares of Rs.2,57,89,650/- and long term capital gains on sale of shares Rs.5,14,30,041/- besides showing speculation profit on equity shares of Rs.10,471/-. The Long Term Capital Gains of Rs.5,14,30,041/ on sale of shares was claimed as exempt income u/s 10(38) of the Act which arose from the sale of three scrips only. The AO came to the conclusion that dealing in equity shares both short term and long capital gains were not in the nature of investments in view of the nature of frequency of transactions and therefore issued show cause notice to the assessee as to why these gains /loss from sale of equity shares short term/long term should not be treated as income/loss from trading activity of the assessee. The assessee replied the show cause notice vide his letter dated 1.11.2010 AO which was considered and rejected by the AO and finally assessment was framed at loss of Rs.26,99,20,980/- by treating the gain/loss on sale of equity shares as loss/profit from business activity vide order dated 31.12.2010 passed under section 143(3) of the Act. Aggrieved by the order of AO, the assessee preferred an appeal before the First Appellate Authority, who after considering the submissions of the ld.AR of the assessee dismissed the appeal by observing and holding as under : “Thus in view of the facts of the case, the magnitude and frequency of transitions, very low average period of holding, intention made clear by the repurchase and sale of shares already transacted earlier, the fact that the main business of the appellant is in an allied activity viz, trading in derivatives, the fact that the appellant has also made speculative transactions in the same scrips offered under LTCG/STCG, the fact that principles of res-judicata is not applicable to tax proceedings, it is held that the appellant has clearly indulged in adventure in the nature of trade. The AO has rightly brought the profits on sale of shares/securities under the head, declared as LTCG and STCG/STCL as profits and gains from business. The ground thus is dismissed” Aggrieved by the order of ld.CIT(A), the assessee is in appeal before the Bench.
The ld. AR vehemently submitted that the assessee company is primarily engaged in the activities of investments in shares and trading in derivatives. The ld. AR submitted that due to global uncertainty in the share and stock markets, the assessee has to frequently shuffle his portfolio in order to minimize losses or to maximize the profits. The assessee held some script for a fairly longer period of time of more than 12 months on the sale of which there arose long term capital gains of Rs.5,14,30,041/-. The ld. AR further submitted that in the earlier assessments which were completed and framed u/s 143(3) of the Act such as for the assessment years 2005-06 and 2007-08, the said scrips which were sold were accepted as opening and closing investment respectively and not as stock-in-trade and therefore the income accruing or loss arising there from would be long term/short term loss depending upon the period of holding of the particular script. Moreover, the shares were valued at the end of year at the cost and not at market value or cost whichever lower meaning thereby that shares purchased were purely of investments nature and accordingly valued at cost which was accepted by the department in the earlier years and thus, the intention of the assessee was to invest in shares and not to trade in shares as all the investments were delivery based. The assessee was doing trading in derivatives in option and futures and has earned gain/loss from the said activities accordingly. Besides, the AO has wrongly taken the basis of turnover for arriving at a conclusion that the assessee was doing huge trading activities in sharers. The ld. AR also argued that holding period or frequency of transactions or turnover should not be taken as basis to form an opinion whether the assessee was engaged in the activity of business in shares or investments in shares. The assessee has purchased shares with an intention to earn dividend and appreciation in the value of shares and therefore the contention of the AO that the assessee has subsequently, changed its mind was wrong and based on mere conjecture and surmises. Moreover, the assessee has utilized its own funds for purchase of shares for investment and no borrowed funds were ever used or utilized for the investment in shares. Finally, the ld. AR submitted that since the department has accepted the investment in shares as activity of the assessee in the earlier years even in the scrutiny proceeding, therefore, the principle of consistency was required to be followed in the current year also. In defence of his arguments, the ld.AR relied on the decisions in the case of CIT V/s Associated Industrial Development Co.(P.) Ltd. [1971] 82 ITR 586 (SC) and CIT V/s H. Holck Larsen [1986] 160 ITR 67 (SC). Finally, the ld.AR placed before us a copy of circular issued by the CBDT vide Circular No.6 of 2016, dated 29.2.2016 wherein it has been provided that if the shares and securities held for a period of more than 12 months before the transfer and the assessee desires to treat the income arising from sale of transfer of said shares /securities as capital gain and the same shall not be put to dispute by the AO. The ld. Counsel submitted that the circular brought out by the CBDT to set the controversy at rest which arose from treating gain/loss from the sale of shares under the head business income by the department in large number of cases giving rise to tremendous litigations. The ld. AR finally prayed that in view of the Circular issued by CBDT (supra) the intention of the government has been made clear that unnecessary controversy which was resulted in unending litigation due to treatment of loss/gain on sale of shares by the department was intended to be put at rest and that the LTCG on sale of shares and securities may be directed to be treated as gain/loss from investment and not from business by setting aside the order of ld.CIT(A).
The ld. DR on the other hand, relied heavily on the orders of authorities below and prayed that same be upheld by dismissing the appeal of the assessee.
We have heard the rival contentions carefully and perused the material placed before us and also have gone through the orders of authorities below including the decision of Apex court relied upon by the assessee. We have also considered the CBDT circular as relied upon by the assessee. We find that the assessee was doing the activities of investments in shares and securities and was trading in derivatives in future and option. Over the years, the assessee has been showing the gain/loss from sale of shares being investments which was accepted by the revenue as is clear from the assessment order passed u/s 143(3) for the assessment years 2005-06 and 2007-08 by the department in the earlier years even in the scrutiny proceedings as is clear from the copy of the assessment orders for the assessment years 2005-06 and 2007-08, which are placed at pages 10 to 15 of the assessee’s paper book. The assessee has been consistently showing closing and opening value of shares and securities at cost, under the head investment in shares as is clear from the copy of Balancesheet filed in the paper book. The assessee was not using any borrowed funds for the purpose of investment in shares and own funds were being routed for purchase and sale of the shares, as it is clear from the copy of balance sheet placed at page 4 of the paper book. During the year, the assessee earned LTCG of Rs.5,14,30,041/- and also STCG of Rs.2,57,89,650/- besides incurring short term capital loss on shares to the tune of Rs.7,57,10,331/-. It is also clear from the copy of profit and loss account that shares at the beginning and at the closing of the year were never shown as stock-in-trade but it has been shown under the head “Investments” Schedule-6” to the Balancesheet. The relevant extract is given herein for the sake of better understanding :
SCHEDULE -6 INVESTMENT (AT COST)
PARTICULARS QTY./UNITS AMOUNT A. EQUITY SHARES OF LIMITED COMPANY :- QUOTED AREVA T & D LTD BHARAT PETROLEUM CORPORATION LTD., (Bonus shares) 2,000 3,466,420 CAIRN INDIA LTD 100 - CUBEX TUBING LTD EVEREST KANTO LTD 500 130,760 EVEREADY INDUSTRIES LTD. 100 4,340 EVERRONN SYSTEMS INDIA Ltd. 175,750 33,084,797 SPANCO TELESYSTEMS LTD., 64,630 13,307,708 95,013 107,306,049 UNQUOTED 75,000 17,283,698 SHRI LAXMI WOOLLEN MILLS ESTATE LTD. B. MUTUAL FUND 752,704 BIRLA CASH PLUS 10,632.265 150,000 175,486,476 We also note that the assessee sold 25 script during the year out of which three were of Long term which were held for more than 12 months and 21 scrips were held for less than a year. In all there were 28 transactions of purchases and 43 transactions of sales in all. The average period of holding for long term securities was 768 days whereas the securities which yielded short term capital gain was 107 days and those yielded short term capital gains was 48 days. The assessee also filed the details of short term and long term capital gains right from the assessment year 2005-06 to AY 2011-12 which reveals that the revenue has consistently accepted the stand of the assessee barring the year under consideration. The details in respect of previous years are reproduced below for the sake of better understanding of the issue involved:
AY Remarks LTCG LTCL STCG STCL 2005-06 Accepted u/s 143(3) 77,18,627 - 32,58,466 2,70,640 2006-07 Accepted u/s 143(1) 40,91,787 - 25,59,171 14,48,287 20007-08 Accepted u/s 143(3) 36,98,798 - 1,32,58,078 11,986 2008-09 Year under 5,14,30,041 - 2,57,89,559 7,57,10,332 consideration 2009-10 Accepted u/s 143(1) 3,051 1,89,95,127 13,08,09,534 7,25,01,308 20010-11 Accepted u/s 143(1) - - 43,72,124 3,88.093 20011-12 Accepted u/s 143(1) 81,51,192 - - - After looking to the over all scenario of the assessee, we are of the considered view that the department cannot dictate the manner and method of treating the activity of assessee in shares as trading activity in one year while accepting the same as investment in shares in other years which were even scrutinized u/s 143(3). As it is clear from the above table. Moreover, the case of the assessee is fortified by the CBDT circular bearing number 6 of 2016 dated 29.2.2016 which is reproduced below for better understanding :
“Circular No.6 of 2016, dated 29th February, 2016 Sub: Issue of taxability of surplus on sale of shares and securities –capita. Gins or business income-instruction in order to reduce litigation-reg.
Sub-section (14) of Section 2 of the Income-tax Act, 1961 („Act‟) defines the term “capital asset” to include property of any kind held by an assessee, whether or not connected with his business or profession, but does not include any stock-in-trade or personal assets subject to certain exceptions. As regards shares and other securities, the same can be held either as capital assets or stock-in-trade/ trading assets or both. Determination of the character of a particular investment in shares or other securities, whether the same is in the nature of a capital asset or stock-in- trade, is essentially a fact-specific determination and has led to a lot of uncertainty and litigation in the past.
2.Over the years, the courts have laid down different parameters to distinguish the shares held as investments from the shares held as stock- in-trade. The Central Board of Direct Taxes („CBDT) has also, through Instruction No. 1827, dated August 31, 1989 and Circular No.4 of 2007 dated June 15, 2007, summarized the said principles for guidance of the field formations . 3.Disputes, however, continue to exist on the application of these principles to the facts of an individual case since the taxpayers find it difficult to prove the intention in acquiring such shares/securities. In this background, while recognizing that no universal principal in absolute terms can be laid down to decide the character of income from sale of shares and securities (i.e. Whether the same is in the nature of capital gain or business income), CBDT realizing that major part of shares/securities transactions takes place in respect of the listed ones and with a view to reduce litigation and uncertainty in the matter, in partial modification to the aforesaid Circulars, further instructs that the Assessing Officers in holding whether the surplus generated from sale of listed shares or other securities would be treated as Capital Gain or Business Income, shall take into account the following- (a) 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 of 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. 4.It is, however, clarified that the above shall not apply in respect of such transactions in shares/securities where the genuineness of the transaction itself is questionable, such as bogus claims of Long Term Capital Gain / Short Term Capital Loss or any other sham transactions. 5.It is reiterated that the above principles have been formulated with the sale 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 of shares and securities”
Taking into consideration the above circular and facts and circumstances of the case, we are of the considered view that the assessee was not carrying any trading activity into equity shares and securities and therefore, we are inclined to set aside the order of the ld. CIT(A) and direct the AO to treat the income from sale and purchase of shares as short term and long term capital gains.
In the result, the appeal of the assessee is allowed.