ANAND R BAHL,MUMBAI vs. DCIT RG 20(3), MUMBAI

3. First we shall take up the assessee’s appeals. Though the assessee has raised as many as three Grounds, the same in substance raise a single issue, i.e., as regards the head of income under which the income by way of gain on sale of shares by the assessee is to be assessed, i.e., as ‘short term capital gain’ (STCG), as returned by the assessee, or as ‘business income’, as assessed and confirmed.

4. The brief facts of the case are that the assessee filed return of income for relevant AY declaring a loss of Rs. 50,54,982/-. The return of income was selected for scrutiny. While framing assessment, the Assessing Officer (AO) observed that the assessee is mainly engaged in the business of share trading and received income from the futures and options, which are intimately connected with the stock market operations. The AO required details with regard to the STCG and the business activities of the assessee, who was also asked to submit the analysis of entire portfolio, taking into consideration the various parameters, viz. number of scrips, volume, frequency of transaction and their systematic and periodical nature. The assessee submitted his reply dated 21.11.2009. In reply, the assessee contended that he is a partner in two firms, i.e., East and West Handicrafts Enterprises and Aarkey Fashion Garments. The assessee in his individual capacity has been investing across various assets, including in shares, for the past many years. At the end of each financial year, the stocks are shown in the balance-sheet at cost under the head “investments”. That the assessee is basically an investor, earning Long Term as well as ‘Short-Term Gains/losses from purchases/sales of shares and such income for the last so many years had been declared under the head ‘Short Term Capital Gain’ (STCG) or ‘Long Term (A.Ys. 2007-08 & 2008-09) Anand R Behl Capital Gain’ (LTCG) depending upon the period of holding. Such income has been declared by him for last many years under the head short term capital gain and accepted by the Department. The contention of assessee was not accepted by the AO. The AO concluded that the STCG returned by the assessee is assessable under the head of income ‘profits and gains of business or profession’ as the activities of assessee are in nature of trade/business. Being aggrieved by the order of AO, the assessee filed appeal before the CIT(A) but without any success. Thus, the present appeal is filed before us.

State of Punjab vs. Bajaj Electricals Ltd. [1968] 70 ITR 730 (SC); Rajputana Textiles (Agencies) Ltd. vs. CIT [1961] 42 ITR 743 (SC); Raja Bahadur Visheshwara Singh vs. CIT [1961] 41 ITR 685 (SC); Lakshminarayan Ram Gopan and Son Ltd. vs. The Government of Hyderabad 1954] 25 ITR 449 (SC); Allahabad Bank ltd. vs. CIT [1953] 24 ITR 519 (SC); CIT vs. Smt. Minal Rameshchandra [1987] 167 ITR 0507 (Guj); CIT vs .Godavari Corporation Ltd. [1985] 156 ITR 835 (Mad); CIT vs. Motilal Hirabhai Spg. & Wvg. Co. Ltd. [1978] 113 ITR 173 (Guj); A.P. Damodara Shenoy vs. CIT [1954] 26 ITR 0650 (Bom); W.L. Knopp vs. CIT [1948] 16 ITR 398 (Mad); Punjab Co-operative Bank Ltd. vs. CIT [1940] 8 ITR 635 (PC) 6.3 We may next examine the facts of the case. The first thing that strikes us is that the assessee is a trader/operator in the F&O market, i.e., deals in shares in the said market on a regular basis, which activity is admittedly business, and income there-from offered to tax as business income. The difference between those transactions and that of purchase and sale - which are stated to be by way of investment, is that the latter are delivery based, while the former are not. That, however, would not be a distinguishing feature. Both require understanding of the market as well as market trends, i.e., both generally as well as qua the specific scrips. Whether derivative segment or otherwise, the assessee would transact only in shares where he perceives a favourable market position in future, seizing the opportunity to make a gain. Rather, in the derivative, he could strike a trade even anticipating a down turn (in the price of the scrip) by ‘selling’ it at the prevailing (higher) rate, squaring the transaction in future. This could be (A.Ys. 2007-08 & 2008-09) Anand R Behl done even in the regular market, selling now to buy later, the only rider being that in case the sale is not accompanied by delivery, the same is liable to be deemed as a speculative transaction. Continuing further, either way, he capitalizes on the share price movement, underlining our observation of he being in a regular in the share market, in fact undertaking such activity in the past. Unarguably, he has a keen understanding thereof, and which he employs, on a continuous basis, with a view to earn profit. The assessee, on the other hand, claims that the purchase and sale of shares is per delivery based transactions, and only by way of investment. Investment, by definition, would imply selection of certain scrips for investment, i.e., on a study and analysis of the industry and company profile. There is nothing on record to suggest such an exercise as having been undertaken at any time, much less followed, or any other advisory, as further signified by the investment being limited to a few scrips (across certain industries), with few transactions. This predicates that such an activity (investment) would be limited to few scrips in-as-much as anyone would chose only the best (or from among the best) in any industry, spreading it (investment) over more than one scrip to diversify both, the company-specific and industry- specific risk. It is in fact neither feasible nor preferable to follow more than few scrips and/or industries/sectors, being a continuous rather than the one time exercise. Investment theory advocates 7 to 8 scrips. Then, by definition, a sound investment opportunity would only imply an asset which has a potential to yield good returns in future. Allowance of time for an investment - which stands acquired at, and would also stand to be realized at, the prevalent market value, to grow and yield return is a pre-requisite; rather, axiomatic. An underpriced share (asset), identified on such value analysis, may stand to be sold on regaining its’ correct (perceived) market value. This, then, would be an exception, and where the investment realized in a short span of time, constitute STCG, even as we find no such analysis undertaken in the present case.

6.4 The activity of or the purchase and sale behaviour in the present case stands analyzed by both the Revenue authorities to find it as strongly, nay, un- (A.Ys. 2007-08 & 2008-09) Anand R Behl mistakably, in favour of a systematic, regular, business activity. Reference in this context may be made to paragraphs 3.4 (vi) and 2.3.2 of the assessment and the impugned orders for AY 2007-08 and AY 2008-09 respectively. The transactions stand in fact tabulated by the assessee himself (refer pages 1 & 9 of the assessee’s paper-book (PB) for the two consecutive years respectively, which we reproduce for ready reference, as under: Statement of number of transaction for the year ended 31.3.2007 (AY 200-08)

Period of holding No. of Gains Sales Value transaction Less than one month 44 (1547703) 94030893 More than one month and 38 (13870705) 115490237 less than 3 month More than 3 month and 34 16802395 73166493 less than 6 month More than 6 month and 46 19137562 78256821 less than 12 month Total 162 20521549 360944443 Statement of number of transaction for the year ended 31.3.2008 (AY 2008-09) Period of holding No. of Gains Sales Value transaction Less than one month 55 3986795 25,83,44,804 More than one month and 42 (24472619) 11,31,64,170 less than 3 month More than 3 month and 44 2,55,38,143 8,82,71,147 less than 6 month More than 6 month and 50 4,44,28,610 13,28,33,002 less than 12 month Total 191 49,480,930 592,613,123 The facts are self-speaking. The assessee has engaged in the activity throughout the year/s; the market being operative for about the 175-200 days during the year. Add to this that the assessee has dealt in about 50 scrips, with holding period as low as 1 day -implying an immediate sale, i.e., a high churning of funds, including borrowed capital, and the picture is complete. The assessee is a regular operator in the market, buying and selling (same) shares on a regular, even repetitive, basis, in both markets/segments. Rather, even a much lesser (A.Ys. 2007-08 & 2008-09) Anand R Behl number of transactions, in-as-much as the same is preceded by a constant vigil of the market and market trend, would signify a vocation and continuous exercise of activity. Why, we find that the assessee has squared off about 50% of the transactions (60% by value) within 90 days of entering the market or “investment”. This is particularly surprising as most of such trades are, in contradistinction to trades with a shelf-life of 3 to 12 months, at a loss. An investor would be wont to be more patient, allowing time for the investment to gain in value and yield returns; time being of essence for an investment, only whereupon it could perform. The matter; the proposition of law being well- settled, turns on facts. Needless to add, the indica or the parameter based conditions stipulated by the Board Circular (supra), are satisfied.

6.5 We may, however, meet the assessee’s argument of having undertaken the impugned activity in the past years as well, income from which stands returned and accepted as short term capital gain (STCG). The admission or the fact of the assessee being engaged in such transactions in the past as well, stands also noted by us in our foregoing analysis; rather, supports our findings and indicts that of the assessee. As regards the head of income under which the income stands disclosed and assessed; the assessee’s contention is, firstly, completely un- evidenced, even as it could of any value only if it is an assessment u/s. 143(3), i.e., a regular assessment and, further, is accompanied by a finding to this effect. We have decided the matter on an analysis of the assessee’s behaviour, noting and applying the settled law in the matter. There is, further, no estoppel against the law, and the principle of res judicata is not applicable to the proceedings under the Act, even as sought to be emphasized by the AO, referring to the decisions in the case of New Jahagir M. Vakil Mills Ltd. vs. CIT [1963] 49 ITR 137 (SC); Dalhousie Investment Trade Co. Ltd. vs. CIT [1968] 68 ITR 486 (SC) and Sole Trustee, Lok Shikshana Trust vs. CIT [1975] 101 ITR 234 (SC) toward the same. The assessee’s plea of having accounted for the transactions in its books as ‘investment’ would also to be little consequence; the treatment in its books of account by the assessee being not determinative of the matter, as (A.Ys. 2007-08 & 2008-09) Anand R Behl explained in, among others, Tuticorin Alkali Chemical and Fertilizers Ltd. vs. CIT [1997] 227 ITR 172 (SC) (at Page 183), referred to the assessment order. The assessee has also returned LTCG, which has not been disturbed by the Revenue, so that where and to the extent his accounts are conform with his undisputed behaviour, the same stands fairly accepted by the Revenue. We may add that no contentions were raised by the assessee with regard to settled propositions of law, nor qua the findings by the Revenue authorities, which we find as supported by the Board Circular (supra).

6.6 In view of the foregoing discussion, we find no infirmity in the impugned order, which accordingly gets upheld, and the assessee fails.

10.1 We have considered the rival contentions and perused the orders of the authorities below. The Revenue’s case is that the assessee admittedly follows cash system of accounting, which it has to, choosing from either cash or mercantile method of accounting (sec. 145). That being the case, liability on account of buy and sell transactions in shares (which in the present case is under the derivative segment), could be allowed only on payment basis, while the revenue would also stand to be considered on receipt basis. It is not open for the assessee to follow the cash, or for that matter any, method, selectively, extending it only to expenses, as explained by the assessee (before the AO), whose accounts did not reflect any liability on account of expenses (as at the year-end). We do not find any infirmity in the AO’s understanding in this regard and, consequently, his findings in principle. The acceptance by the ld. CIT(A) of the assessee’s case is on the basis that the assessee had been accounting for its’ transactions in futures and options (F & O) in the same manner consistently from the past. That apart, the matching principle would dictate allowance of liability inasmuch as, how could it be that the sales are included (in computing income) while the corresponding purchases are not, so that it would in effect require deduction for the corresponding sales. Tax is to be levied on real income, and not on some artificial or fictitious income.

10.2 We proceed on the footing that the impugned outstanding represents a liability on account of, as stated, concluded contracts, and that no part of it is in respect of margin requirement. Our first observation in the matter is that the allowance of liability due to the brokers, viz. Kotak Securities and Sharekhan (at Rs. 1638.97 lacs) does not represent purchase, and neither does the amount due from the brokers (Rs. 2663/-) represent sales. Both are balances reflected in the (A.Ys. 2007-08 & 2008-09) Anand R Behl accounts of the brokers on the settlement of the contracts, i.e., after adjustment for payments to or receipts therefrom. Each contract results in either an amount payable to or receivable from a broker, representing the loss or gain, as the case may be, arising in the transaction. This gain or loss is itself the difference, i.e., positive or negative, between the value of the transaction, booked on the basis of the anticipated movement in the share price over the interim period, and the actual price obtaining at the end of the contract period. The invocation of the matching principle by the ld. CIT(A) is therefore incorrect.

10.3 He, then, speaks of the real income theory. True, but then the same has to be subject to the express provisions of the Act. It is not that the AO has considered some income which is conceivably not so, or does not answer the notion of the ‘income’ (which includes ‘loss’), a term of wide amplitude. The adjustment made (in assessment) is for ‘the ‘losses’ and ‘gains’ which would not, under the method of accounting admittedly followed, arise for being considered as so. Section 5 of the Act, which defines the scope of total income under the Act, makes it subject to the other provisions of the Act, including section 145, which provides that the business income is to be computed following either cash or mercantile method of accounting. Each year is a separate and independent unit of assessment, which (assessment) has therefore to be made on the basis of the income assessable and expenditure admissible for that year, and not by making allowance for expenditure that is not liable to be regarded as such, i.e., as expenditure, for the year under reference on the basis of method of accounting being followed. The liability, which represents a loss, and against which there is no corresponding sale/receipt, would stand to be allowed only in the year of payment. The law in the matter is well settled, and case law, legion. We may, for ready reference, advert to the decisions in CIT vs. British Paints India Ltd. [1991] 188 ITR 44 (SC) and Southern Technologies Ltd. v. Jt. CIT [2010] 320 ITR 577 (at pages 608-610). The said argument by the ld. CIT(A) made qua real income is again misconceived. (A.Ys. 2007-08 & 2008-09) Anand R Behl 10.4 The question, however, that arises is if the assessee is, as claimed and accepted, following cash system of accounting, how is it that the impugned sums appear as payable and/or receivable in its final accounts? The very fact that the assessee is so accounting, claimed to be consistently from the past, it cannot be said to be following cash system of accounting, which does not admit accrual as a basis for recognising either income or expenditure. A loss under the derivative contract, after all, is only the excess (short-fall) of the ‘purchase’ cost over the ‘sale’ (purchase) value, with an opposite situation resulting in a gain. That the ‘purchase’ and ‘sale’ rates are booked in advance, and loss/gain arises on the movement in the price as actually obtains over the period under contract, is another matter. What would therefore have to be seen is if the assessee is actually following such a method on a regular, consistent basis, or is it that it has, in view of the huge loss arising to it for the current year, accounted for the same. It is not the amount, if any, outstanding as at the year-end, but the method of accounting adopted in accounting for the contract/s, particularly on its’ conclusion, that would have to be seen. Though the ld. CIT(A) has issued a finding of the assessee having followed the same method of accounting as in the past, the same is neither here nor there. There is, firstly, nothing to indicate his having examined the assessee’s account books for the preceding years, which rather ought to have been preceded by such an opportunity being given to the AO. Two, the assessee’s method for the current year is, as explained, hybrid, so that it in any case is not acceptable.

10.5 The assessee’s accounts for the preceding years would therefore have to be examined. If the assessee is consistent in accounting in the manner he claims to be, he is definitely not following ‘cash’ method of accounting, as he believes are considers himself to be, or is certified by his Auditor as following. It is the correct legal position that is relevant, and not the view that the parties may take of their rights in the matter [refer: CIT v. C. Parakh & Co. (India) Ltd. [1956] 29 ITR 661 (SC); Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC)]. By (A.Ys. 2007-08 & 2008-09) Anand R Behl not claiming certain expenses, admissible in nature, on the ground that the same are unpaid, he is at best following hybrid system of accounting, since proscribed by law (by Finance Act, 1995 w.e.f. 1/4/1997). Where so, the option of choosing between the cash or mercantile method of accounting being with the assessee, he is entitled to make the choice for the current year (assuming it to have been not so in the past). Either, therefore, the assessee would stand to be allowed the same, disallowing the expenses (pertaining to other years), claim for which, on payment basis, may have been claimed and allowed to it or, vice versa, it allowed the expenses on cash basis, while the impugned (net) disallowance gets upheld. On the other hand, if the AO finds no consistency in the method of accounting followed by the assessee or it is only for the first time, in digression with the past, that the assessee has accounted for in the manner it has, it is clearly a case of the assessee following cash system of accounting, but claiming the loss in departure with its consistent method of accounting for both income and expenditure on receipt/payment basis. The impugned disallowance made, at net of payable and receivable, stands in such a case correctly made. There is a third possibility is well. That is, the trades have been entered into by the assessee for the first time. Though improbable in light of the contentions raised, where so, the AO shall have to apply the same method of accounting as he finds the assessee to be consistently following; there being no claim of a change in the method of accounting from the current year, or which he decides for being adopted therefor, and decide accordingly.

10.6 Before parting with our order, we may add that the AO, while making the adjustment, if any, ensure that the liability which is the subject matter of adjustment is qua concluded contracts only, and no part of it is in respect of open contracts, which is thus not in the nature of an accrued liability in respect of a loss. Further, as there can admittedly be no double jeopardy or prejudice caused, he shall, invoking section 154, either suo motu or on an application moved by the assessee, effect corresponding adjustment in the subsequent years as well. (A.Ys. 2007-08 & 2008-09) Anand R Behl For example, where a liability gets disallowed for the current year, i.e., on account of it being unpaid (so that it cannot be regarded as a loss arising for the year), while being not claimed and, thus, not allowed for the following year, whereat it stands paid.