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Income Tax Appellate Tribunal, DELHI BENCH: ‘F’: NEW DELHI
Before: SHRI J.S. REDDY & SHRI LALIET KUMAR
This appeal filed by the Revenue is directed against the order of the ld. CIT(A)-XXIII, New Delhi dated 20.06.2012 pertaining to A.Y 2008-09.
The only issue involved in this appeal reads as under:
“On the facts and in the circumstances of the case, the ld. CIT(A) “has erred in directing the AO to assess the income as income from capital gain as disclosed by the appellant, as against assessed as business income by the AO.”
3. Briefly stated, the facts giving rise to this appeal as enumerated in the first appellate order are that the assessee filed his return of income for the Assessment Year 2008-09 on 29.07.2008 disclosing a total income of Rs. 52,78,229/-. The assessee has offered income under the heads income from business or profession, income from house property, income from capital gains, and income from other sources. The assessee is a financial consultant engaged in the sale of fixed deposits, bonds, mutual fund units and life insurance products as an agent/broker. During the scrutiny assessment proceedings, the Assessing Officer examined the details of transactions on which capital gains had been earned. From the details filed by the assessee, the Assessing Officer observed that the transactions in different kinds of financial instruments, including shares, commodities, and futures and options, had resulted in short term capital gains/short term capital loss and long term capital gains. The Assessing Officer held that the assessee had held the securities for very short periods of time and the motive behind investment was to earn profit through trading. The transactions of purchase and sale were voluminous and frequent, besides being connected with the declared business of selling securities on commission basis. The dividend earned of Rs. 51,399/- was very nominal compared to the capital gains of Rs. 77,71,184/-. The Assessing Officer, therefore, held that the assessee was engaged in the business of trading in shares and securities and the Assessing Officer brought the sum of Rs. 84,18,798/- to tax as income from business as against the income disclosed as short term capital gains of Rs. 47,12,342/- and long term capital gains of Rs. 30,58,841/-. Aggrieved, the assessee went in appeal before the ld. CIT(A) .
4. Before the ld. CIT(A), the ld. AR submitted that the assessee is a financial consultant engaged in the sale of fixed deposits, bonds, mutual fund units and life insurance products as an agent/broker. The assessee is also a distributor of mutual funds of various companies and no tax is deducted on the commission received from mutual fund companies in view of the provisions of section 194H of the Income-tax Act, 1961 ['the Act' for short] which stipulates that no such commission or brokerage is liable to TDS. The ld. AR further contended taht the assessee’s investment activities are not ancilliary activities and cannot be regarded as commercial activities.
5. After considering the submissions of the assessee, the ld. CIT(A) came to the conclusion as given hereinbelow:
“{4.1} The appellant has also credibly argued that the investment in shares was invariably disclosed in the books of accounts as investment and not as stock-in-trade. The shareholding as on 31.03.2008 of Rs. 92,25,827/- was substantially higher than the holding as on 31.03.2007 of Rs. 55,03,897/-. Examination of the balance sheets, audit reports, and returns of income of the A.Ys. 2006-07 and 2007-08 shows that the method of accounting of the shares as investment was consistently followed. The appellant has further shown that his own funds of Rs. 1.20 crores were utilized to make the investment of Rs. 92 lakhs, and there was no utilization of borrowed money or payment of interest for the purchase of shares. The appellant has also submitted an analysis in terms of period of holding of the shares, from which it can be seen that shares sold within a period of seven days comprised only 38 out of 272 total transactions, and amounted to only 11.71 percent of the total capital gains disclosed. Shares held for between 8 to 60 days accounted for 24.32 percent of the total gains. By comparison, shares held for more than one year resulted in 39.57 percent of the capital gains disclosed. The appellant has credibly argued that the Income Tax Act recognizes shares held for less than 12 months as short term capital assets, and provides for favourable tax treatment under section 111A. Thus, the statute categorically allows that shares may be capital assets, and specifically short term capital assets, even if held for a duration of 1 day or just under 12 months.
{4.2} It has further been argued on behalf of the appellant that circular No. 4 dated 15.06.2007 of the CBDT provides that an assessee may be both an investor and a trader in shares and may have two portfolios, i.e. an investment portfolio comprising of securities which are to be treated as capital assets, and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets. Thus, an assessee may have income under both heads i.e. capital gains as well as business income. The appellant has relied on a number of decisions of the Courts, wherein it has been held that whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee who holds the shares. It is the substantial nature of the transactions which should form a guide to determine whether the transactions are in the nature of capital investments or of trading. The appellant has also furnished evidence that the physical shares purchased were converted to the demat account and in the case of Gopal Purohit vs. JCIT (supra), it was held that delivery based transactions should be treated as in the nature of investment transactions and the profit received therefrom should be treated as capital gains. The appellant's argument that the shareholding had been accepted as capital investment in the preceding years, and the Department ought to have maintained a consistent view on the issue, also bears merit.
{4.3} As in earlier years, the appellant has treated the securities as investments, and not as stock-in-trade, in his books of accounts. The appellant has also valued the securities at the end of the year at cost and not by the method of valuation at market price or cost, whichever is less. The appellant has not claimed any interest payment relating to this activity, and it is verified that no borrowed funds have been utilized for the purchase of shares. So far as the frequency of transactions carried out is concerned, the entire transactions were carried out by the portfolio managers, and the appellant was not engaged in either purchase or sale. Thus there was no regular or day-to-day activity of trading on the part of the appellant. Undoubtedly, the appellant embarked on this activity of purchase and sale of shares with the intention to realize the appreciation in the value as well as to earn dividends, but it cannot be concluded that he was carrying on trading of shares as a business activity. In view of the above discussion, the appellant succeeds in his grounds of appeal and the Assessing Officer is directed to assess the said income as income from capital gains, as disclosed by the appellant.
6. Before us also, the ld. AR reiterated the submissions made before the ld. CIT(A) and relied on the recent CBDT Circular No. 6/2016 dated 29th February 2016 and contended that the ld. CIT(A) was right in directing the AO to assess the income of the assessee as income from capital gain.
Per contra, the ld. DR relied on the orders of the AO. However, he fairly conceded that the CBDT Circular No. 6/2016 dated 29th February 2016 supports the case of the assessee.
We have heard the arguments of both the sides and carefully perused the relevant material placed on record before us. For ready reference, we reproduce the CBDT Circular which reads as under: “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.
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.
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.
It is however clarified that the above shall not apply to such transactions in shares/securities where the genuineness of the transaction is itself questionable such as bogus claims of long term capital/short term capital loss or any other sham transactions.
It is reiterated that the above principles have been formulated with the sole object of reducing the 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.”
Since the assessee has treated the securities as investment and not as stock in trade in all the earlier A.Ys as found by the ld. CIT(A), therefore, in view of the CBDT Circular [supra], the revenue cannot be permitted to take a contrary stand this year and claim the securities as “stock in trade”. Therefore, we have no hesitation to uphold the order passed by the ld. CIT(A).
In the result, the appeal of the Revenue stands dismissed.
The order is pronounced in the open court on 10.03.2016.