JASWANT A. PARIKH (HUF),MUMBAI vs. ITO 16(3)(1), MUMBAI

The sole issue involved in both these appeals is as to whether the income earned by the assessee out of share transactions is to be treated as capital gains or business income.

The brief facts of the case are that the assessee HUF had shown short term capital gains to the tune of Rs.1,82,10,741/- out of which net amount of Rs.1,81,2009/- was offered for taxation. The AO noted that the assessee HUF had borrowed funds from its Karta and from a concern in which the Karta was a partner. The total borrowed funds received by the assessee during the year were Rs.1.54 Crores and out of which a sum of Rs.64.00 lacs was returned . The assessee had received dividend income from fived companies amounting to Rs.2,67,981/-. The AO further noted that the assessee had indulged in trading of shares pertaining to 36 companies. He observed that the volume of the transactions was very high whereas the dividend income was very low. Apart from that, the AO had observed that the period of holding in respect of certain scrips was even less than ten days and there was churning of portfolios in respect of some scrips i.e. there was repetition of purchase and sale of the same scrips. He also considered the fact that the assessee used borrowed funds for the above share transaction activities. He, therefore, held that the intention of the assessee was to purchase and sell the shares and was not that of an investor and the said activities were carried out as business activities. He, therefore, treated the short term capital gains claimed by the assessee as “business income” of the assessee. However, he did not disturb the claim of the assessee regarding long term capital gains. Being aggrieved by the above order of the AO, the assessee preferred appeal before the learned CIT (A), who after considering the overall facts and circumstances of the case, observed that the stock of shares was always reflected by the assessee as “investment” in its books of account and the same was valued at cost and not at the market value. He also considered the submissions of the assessee that the funds were not borrowed from & 3815/Mum/2014 3 any outside party but, from the Karta of the HUF itself and no interest was paid to the Karta in this respect. Only a small amount was borrowed from the firm in which the Karta was a partner upon which interest was paid but, the same was never claimed as expenditure. The learned CIT (A) also observed that the assessee had consistently been treated by the Revenue as an investor. The long term capital gains and short term capital gains offered by the assessee for earlier assessment years 2008-09 and 2009-10 were accepted as such by the Department. Even, the assessee had earned substantial long term capital gains of Rs.22.00 lacs during the year which showed that the intention of the assessee was that of an investor. All the share transactions were on delivery basis and there was no speculative trading. He, therefore, relying upon the decision of the Hon’ble Bombay High Court in the case of Gopal Purohit reported in 336 ITR 287 (Bom) wherein it has been held that the facts and circumstances being identical in the subsequent assessment year, the Department should maintain rule of consistency in its approach regarding treatment of income from the same activity. He in this respect also relied upon the decision of the Hon’ble Bombay High Court rendered in the case of CIT Vs. Suresh R. Shah (2013) 258 CTR 376 (Bom). He, however, also observed that in certain transactions, there was churning of the portfolio, i.e. there were purchase, sale, re-purchases and re-sales of the same scrip within a short span of time. He, while relying upon the decision of the ITAT, Mumbai in the case of ‘ACIT Vs. Veena S. Kalra’ in ‘ITA No.2403/Mum/2012 Order dated 10-07- 2013’ held that the intention of the assessee in relation to the transactions wherein he had re-entered in sale and purchase of the same scrips within a short span of time was not that of an investor, but for making quick profits. He, therefore, directed the AO to treat & 3815/Mum/2014 4 a sum of Rs.10,17,065/- earned by the assessee out of the transactions where there was churning of portfolios as business income of the assessee and to treat the balance income as capital gains. Being aggrieved by the above order of the learned CIT (A), the Revenue has come in appeal agitating the action of the learned CIT (A) in holding the assessee as an investor except in relation to the transactions in which there was churning of portfolios. On the other hand, the assessee has come in appeal agitating the action of the CIT(A) in holding that income from repetitive transactions of Rs.10,17,065/- is taxable as business income of the assessee.

We have heard the rival submissions and have also gone through the records. The learned CIT (A) has categorically observed that the assessee in the past has consistently been treated as investor. The assessee during the year under consideration has earned Rs.22.59 Crores and during the previous assessment year 2009-10, the assessee has shown short term capital loss of Rs.2,18,87,930/- and long term capital loss of Rs.4,01,474/- . Even, in the earlier assessment year 2008-09 the assessee claimed short term capital loss of Rs.8,09,178/-. It is only in this year that the assessee has shown short term capital gain of Rs.1,82,10,741/-and long term capital gain of Rs.22,59,403/-. In the earlier years when the assessee had shown losses, the AO had treated the assessee as an investor. However, during the year under consideration, the assessee having earned positive income from share transactions, the AO treated the same as business income. This inconsistent approach of the AO, in our view, cannot be appreciated. The Hon’ble Bombay High Court in the case of Gopal Purohit (supra) has categorically held that the Department should take a consistent approach if the nature of the activity is identical in the subsequent years. In our view, there should be uniformity in the approach & 3815/Mum/2014 5 when the facts and circumstances are identical. The change of stand every year regarding the treatment of income from a particular activity will not only create uncertainty in the mind of the assessee but also deprive the assessee from claim of eligible carry forward capital loss or business losses. The assessee has explained that it had sufficient own funds for making investment. However, due to the losses during the earlier assessment years, the assessee in this year needed the funds and the funds were obtained from its Karta and from a firm in which Karta was a partner. There was no outside borrowing of funds.

However, it may be noted that the learned CIT (A) has observed that there was churning in the portfolio in some transactions. He had called upon the assessee to explain the explanation given by the assessee was not found satisfactory. He, accordingly held that the transactions in which churning of the scrips within a span of less than a month was made, were to be held out of the business activity of the assessee. He therefore held that such income from repetitive transactions is to be treated as business income of the assessee. It has been held time and again by various Courts of Law that the assessee can hold both the portfolio i.e. that of the investor and that of the trader. Although, the assessee in this case had not kept separate accounts regarding its business activity but has treated all the purchases as its investment, however, the learned CIT (A) after going through the transactions in question and considering the explanation of the assessee has held that the intention of the assessee in respect of the transactions in which churning of portfolio was done within a period of less than a month was to earn quick profits. The order of the learned CIT (A) is thus well reasoned order and we do not find any infirmity in the same.

Resultantly, both the cross appeals, one by the assessee and the other by the Revenue stand dismissed.

In the result, appeal of the assessee and the appeal of the Revenue, both are dismissed. Order pronounced in the open court on 20 July, 2016