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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI R.C. SHARMA, AM & RAM LAL NEGI, JM
2 &5974/M/11 Mr. Kamal Kishore Agarwal सुनवाई की तायीख / : 02/06/2016 Date of Hearing घोषणा की तायीख / : 13/07/2016 Date of Pronouncement आदेश / O R D E R Per R.C. SHARMA, A. M.: These are Appeals filed by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)- 34, Mumbai („CIT(A)‟ for short) dated 15.06.2011 for the assessment year (A.Y.) 2006-07, 2008-09 & 2010-11 in the matter of order passed u/s 143(3) of the Income Tax Act.
Common grievance of assessee in all years relate to treatment of short- term capital gain and long term capital gain offered by assessee, as business income by the AO.
Rival contentions have been heard and record perused. Facts in brief are that assessee is a Salaried Employee and he filed the return of income for the assessment year 2006-07 on 28/07/2006 declaring assessable income at Rs.51,83,397/-. His income consisted of income from Salary, House Property, Speculation profit, Income from Long Term & Short Term Capital Gain and Income from other Sources. The assessee, in his return of income, declared the following income related to share transactions:- i. Short Term Capital Gain Rs.46,63,378/- ii. Long Term Capital Gain Rs.10,36,244/- iii. Speculation Income Rs. 9,600/- Total Rs.57,09,222/- 3 ITA No.3515/M/14,4463/M/09 &5974/M/11 Mr. Kamal Kishore Agarwal 4. During the course of scrutiny assessment the AO treated the income from Short Term Capital Gain and Long Term Capital Gain on sale of shares as income from Business and the same has been confirmed the learned CIT(A) which is contested before us.
We have considered rival contentions, carefully gone through orders of authorities below and also deliberated on the judicial pronouncements referred by lower authorities in the respective orders as well as cited by ld. AR and ld. DR. during the course of hearing before us. From the record we found that assessee was purchasing the shares with the intention of investment. He is maintaining regular books of account and the purchase of shares for delivery have always been shown as investment in the accounts. Regarding the book entries, the entries in the books of the assessee clearly establish that the shares have been treated and disclosed as investment and not as stock in trade. The Hon‟ble Courts in numerous cases have consistently held that the intention of an assessee in treating a particular asset as stock in trade or investment has to be gathered from the treatment in the books of account and that the treatment in the books of account is certainly a relevant factor while deciding the same, for this purpose reliance can be placed on the following Court cases:- i. Dy. Commissioner of Income Tax v/s M/s SMK shares & Stock Broking ITA No.799/Mum/2009, Asstt. Year: 2005-06 dated 24th November, 2010.
4 &5974/M/11 Mr. Kamal Kishore Agarwal ii. In the case of Commissioner of Income Tax v/s Rohit Anand 46 DTR (Del)236 the Hon‟ble High Court held that transactions in shares carried out by the assessee could not be said to be with the intention to deal in such shares, rather the transactions were with the intention of earning appreciation from such shares and therefore, the tribunal rightly held that profit was assessable as capital gains and not as profits and gains of business. iii. In the case of Star Investments Pvt. Ltd. v/s DY. CIT ITA No.2116 (AHD) of 2007 the Hon‟ble Ahmedabad Bench “A” of the Tribunal held that whether the asset acquired is investment or stock-in-trade in the hands of the assessee depends upon the intention of the assessee at the time of the acquisition of the said asset i.e. whether it was intended to be acquired as investment or as a trading asset; this intention of the assessee is to be inferred from the attending circumstances of the case, and after properly evaluating all the attending circumstances. iv. In the case of Janak S. Rangwalla v/s Asstt. CIT 11 SOT 627 (Mumbai) held that it is the intention of the assessee which is to be seen to determine the nature of the transactions conducted by the assessee. v. In the case of Addl. CIT v/s Shri Motilal Oswal ITA Nos. 3860,3861,3862&3863/Mum/2001, dated 28/08/2006 Tribunal specifically took cognizance of the fact that in the assessee‟s books, there was clear demarcation of the two activities, namely, the business of broking in shares and investment in shares. Based on such entries in the books of account, the Tribunal categorically 5 &5974/M/11 Mr. Kamal Kishore Agarwal observed that, in the absence of any other compelling evidence, the gain on sale of shares was to be held as capital gain. vi. Furthermore in the case of J.M. Share & Stock Brokers Ltd. v/s Jt. CIT ITA No.2801/Mum/2000 dated 30/11/2007 the assessee was a share broker earning brokerage income. In addition to that the assessee was purchasing and selling shares and debentures etc. both as stock in trade and as investment. Profit/loss on shares and debentures held as stock in trade was offered as business income whereas the profit/loss on sale of shares held as investment was offered as Capital Gain. The AO, however, treated the entire capital gain of Rs.6,56,72,128/- as business income. The Hon‟ble Tribunal held that the surplus of Rs.6,56,72,128/- was to be treated as capital gain and not as business income. While reaching this conclusion, the Tribunal gave serious weight age to the entries passed in the books of account by the assessee, particularly, the way the shares were disclosed in the Balance Sheet. In various High Court decisions, it has been held that there was nothing in law which prohibited a trader in shares to invest in shares. The intention of the assessee was relevant to determine whether he was carrying on the business in shares or investment. vii. In the case of CIT v/s N.S.S. Investments Pvt. Ltd. 277 ITR 149 (Madras) The Hon‟ble Court held that a Company can hold shares as stock in trade for the purpose of doing business of buying and selling of such shares, while at the same time, it can also hold other shares as its capital, that where the findings 6 &5974/M/11 Mr. Kamal Kishore Agarwal was that the shares in question were never treated by the assessee as stock in trade, the profit on sale thereof was to be treated as capital gain. viii. In the case of CIT v/s Associated Industrial Development Co. Ltd. 82 ITR 586 (SC) the observations made by the Hon‟ble Supreme court are quite relevant to the issue under consideration. While deciding that the assessee in this case was a trader and not an investor, the Hon‟ble Court at page 590 made the following observations:- (a) That whether the shares are held as stock-in in trade or as investment is within the knowledge of the assessee and it is in the way the transactions are recorded in the books that determine the question. (b) That there no bar to dealer in shares holding some shares as investment even a dealer in shares can hold some shares as investment. (c) That since, in this case, the assessee did not place any material from which it could be established that those shares had been treated in its books differently from the other shares held by it, the court decided the question against the assessee. The above observations of the Hon‟ble Supreme Court have been noted by CBDT in paragraph -4 of its circular No.4/2007 dated 15/06/2007 and the CBDT has also observed at paragraph-7 thereof, that these observations of the Hon‟ble Supreme Court affords adequate guidance to the AO‟s while determining whether the shares held by an assessee are investment or stock-in trade. Thus by these observations, the CBDT has also accepted that the entries in the books of account regarding the treatment of shares as investment or stock-in trade is decisive factor and that it should afford sufficient guidance to the AO‟s while framing the assessment.
7 &5974/M/11 Mr. Kamal Kishore Agarwal 6. Now, coming to the observation of AO regarding magnitude and frequently of transaction. As per our considered view frequency and magnitude are important but not decisive factors to decide whether the assessee is an investor in shares or trader in shares. In this case, the share transaction are through Demat accounts, hence delivery was taken and given by the assessee in respect all shares and most of the shares were held for reasonably long period. So far as the magnitude of the investment in shares is concerned, total purchase value of shares during the above assessment year was Rs.10.59 cores and the closing value of the investment as on 31/03/2006 was Rs.1.86 crores only. Further out of total sales of Rs.13.35 crores during the year, Rs.2.15 crores of sales was intraday sales and the same was treated by the assessee as speculation business. Hence, assessee‟s delivery based sales were only Rs.11.20 cores and his average investment holding was Rs.1.605 crores. Therefore, his average holding period was 52 days which is sufficient to substantiate that he was an investor and not a trader. 6.1 Regarding the frequency, the investor has to invest in shares at the most opportune time because he has to weigh the risk and the cost of carrying the investment with the returns thereon. It is this factor which determines the frequency of the sale transaction merely because so many shares happened to be sold in one year does not mean that the gain arising there from is in the nature of business income. The courts have held time and again that mere 8 &5974/M/11 Mr. Kamal Kishore Agarwal magnitude and frequency of the transactions of sale and purchase of shares cannot convert the capital gain into business income.
In the case of Janak S. Rangwalla v/s Asstt. CIT 11 SOT 627 (Mum) Tribunal observed that “On the facts of the present case, the assessee is holding the shares as investment from year to year. It is the intention of the assessee which is to be seen to determine the nature of transactions by the assessee. Though the investment in shares is on a large magnitude but the same shall not decide the nature of transactions.” 7.1 The facts of the present case are exactly similar to the above case as the capital gain in the above said case was in the nature of short-term capital gain (apart from long-term capital gain) and the shares in that case were held for very short-period, in some cases for even a week. In that case, the assessee also earned speculation profit in addition to short-term and long-term capital gain.
In the case of H. Holck Larsen v/s CIT 160 ITR 67 (SC) The Hon‟ble Supreme court laid down that the frequency of transactions was not decisive. The assessee in this case was an investor in shares and not a dealer in shares.
Furthermore authority for advance ruling in the case of Fidelity Northsatr Fund & another 288 ITR 641 (AAR) despite number of shares transactions held that the assessee was an investor and not a trader in shares.
9 &5974/M/11 Mr. Kamal Kishore Agarwal 10. In the case we found that period of holding is sufficient long enough to justify the capital gain. It is quite relevant to point out that the gain arising from sale of shares held by an assessee for any period less than a year were to be treated as business income then the Category of “Short Term Capital Gain” and the entire scheme for taxation thereof would become meaningless. In other words, an assessee can have only one class of Capital Gain and that is “Long Term Capital Gain” because all the capital gain arising from holding shares for a period of less than one year would be treated as business income. This can never be the intention of the Legislature.
With regard to the objection of the AO that the assessee is qualified Chartered Accountant and is drawing salary form Joindre Capital Services Ltd., a concern dealing with Share-Market related activities. It was also pointed out by the AO that the assessee is fully related to Share Market either drawing Salary or doing trading on his own account. The findings, of the AO are devoid of any logical force. The contention of the AO that all the transactions are, therefore, in the nature of business or trade which is not justified. The knowledge acquired by the assessee during the course of the deals of the client can be very well used by the assessee for the purpose of his own investment and for his own portfolio management. There is no harm of doing so, nor there is any law prohibiting him from doing so. In this connection reliance can be placed on the Mumbai Tribunal decision in the case of Addl. CIT vs Shri Vallab Bhansali, ITA No.3231/2001, dated 20/09/2004, wherein the assessee was a Share Broker and a well known 10 &5974/M/11 Mr. Kamal Kishore Agarwal Share Analyst and Stock-Broker Expert. He had sold bulk of shares held in his name and in the name of his minor son. He offered the surplus earned as Capital gain and the AO treated the same as business income. The AO was of the view that the assessee was utilizing his expertise in trading in shares and securities and, therefore, the surplus arising from sale of shares was in the character of business income and not Capital Gain. However, even on such facts, the Hon‟ble Tribunal held that the surplus realized by the assessee was in the nature of Capital Gain and not business income. This decision was also followed in the case of the same assessee for the subsequent years.
From the record we find that during the year under consideration, the assessee had invested his own money and did not borrow money/interest bearing funds. The amount shown as borrowed in the Balance sheet was mainly funds of his minor sons as they cannot invest in their own names. This itself substantiate the claim of the assessee that he was investor in shares and not trader there is no dispute to the fact that the assessee had been investing in shares of various companies over number of years in the past. All such shares acquired in his name had been consistently shown as investment in the accounts maintained by him. In the past also, the assessee had sold shares held by him as investments and the surplus was disclosed in the returns as capital gains. It has been held by the courts in various decisions that the examination of this issue whether shares were held as investment or stock-in trade is mixed question of law and fact. The fact relating to the nature of holding need to be examined in the 11 &5974/M/11 Mr. Kamal Kishore Agarwal light of the conduct of the assessee and in the light of the evidences that the assessee had produce. In the present case, the assessee had been acquiring shares of various companies over a period of number of years in the past. The shares so acquired by the assessee had been recorded in the books of account as investments. The assessee is keeping books of account for the investments made by him. The shares acquired by him and sold during the year are through his Demat Account and the details of such shares have been made in the books of account. Thus, the delivery taken of the shares is not in doubt. The assessee had been filing the Balance Sheet of his affairs along with the return of income filed for the assessment years. In all those Balance Sheets the assessee has shown the acquisition of shares as investments. Therefore, the books of account maintained by the assessee and the conduct of the assessee in the earlier assessment years make out a case that shares were held by him as investments.
In view of the above facts and documentary evidences placed on record we do not find any merit on the AO‟s part for treating the long term and short term capital gain offered by assessee as business income.
The facts and circumstances in the year 2008-09 & 2010-11 are similar to the facts and circumstances discussed by us herein above in the assessment year 2006-07, following the same reason we direct the AO to treat the short term and long term capital gain offered by assessee in place of business income. We direct accordingly.