D.C.I.T CC - VIII,KOLKATA, KOLKATA vs. M/S PURBANCHAL LEASING LTD, KOLKATA

The assessee is a company engaged in the business of making investment in shares, mutual funds and debenture for the past several years. For the assessment year 2006-07, the assessee filed return of income on 30.11.2006 disclosing the total income of Rs.4,91,85,610/-. The Assesee had declared short term capital gain purchase and sale of shares and mutual funds of Rs.5,57,30,140/-. An order of assessment u/s.143(3) of the Income-tax Act 1961(Act) was passed on 30/06/2008 in which the short term capital gain declared by the assessee was accepted by the AO.

The CIT,Circle-1, Kolkata in exercise of his powers u/s.263 of the Act passed an order dated 04/03/2011, whereby the CIT held that the AO while concluding the assessment u/s.143(3) of the Act, did not properly examine the question as to whether the gain on purchase of sale of shares and security had to be assessed under the head of “Capital Gain” or “income from business”. The CIT, Circle-1 directed the AO to make an assessment afresh and consider the question in the light of CBDT Circular No.4 dated 15.06.2007.

It is pursuant to the aforesaid order of the CIT, Circle-1, Kolkata dated 04/03/2011 passed u/s.263 of the Act that the AO examined the question as to whether the short term gain declared by the assessee has to be assessed under the head of income from business. The AO held that the gain on sale of shares had to be under the head “Income from Business” and in coming to the above conclusion the AO made the following observations: “The A/R’s argument that the assessee company during the relevant period had been engaged in investment in shares and not trading in shares is not acceptable. In order to determine whether the securities were purchased for investment or for business purposes to get the income in the shortest possible period it has to be seen from the frequency and number of transactions carried out by the assessee during the year. It is pertinent to note that the assessee has carried out the transactions on regular basis and most of the time on daily basis which clearly goes to show that the assessee was actively involved in the purchase and sale of the shares and there cannot be other motive than to earn the profit in the shortest possible period. There was no intention on part of the assessee to make investment and earn dividend. Though the assesee has shown the share transaction as investment, the treatment in the books of an assessee is not conclusive and if the volume, frequency and regularity at which transactions are -M/s. Purvanchal Leasing Ltd. A.Y.2006-07 3

The CIT after considering the submissions of the assessee held as follows:

Agrieved by the order of the CIT(A), the revenue has preferred the present appeal before the Tribunal.

We have heard the submissions of the Ld. DR and the Ld. Counsel for the assessee. The Ld. DR relied on the order of the AO. Ld. Counsel for the assessee reiterated the submissions that were made before the CIT.

We have given a very careful consideration to the rival submissions. We have considered the rival submissions. The issue to be decided is as to whether the STCG on transaction of purchase and sale of units of mutual funds and shares undertaken by the assessee during the previous year is to be assessed under the head ‘income from business’ as claimed by the revenue or income under the head ‘capital gain’ as contended by the assessee. Before we deal with the facts of the case of the assessee, we will briefly narrate the principles applicable in deciding the above issue as laid down in several judicial pronouncement:- (a) Whether a transaction of sale and purchase of shares were trading transactions or whether they were in the nature of investments is mixed question of law and fact. CIT Vs. Holck Larsen, 60 ITR 67 (SC). (b) It is possible for an assessee to be both an investor as well as a dealer in shares. Whether a particular holding is by way of investment or formed part of stock in trade is a matter which is within the knowledge of the assessee and it is for the assessee to produce evidence from his records as to whether he maintained any distinction between shares which were hold by him as investments and those hold as stock in trade. (CIT Vs. Associated Industrial Development co. Ltd., 82 ITR 586 (SC). (c) Treatment in the books by an assessee will not be conclusive. If the volume, frequency and regularity with which transactions are carried out indicate systematic and organized activity with profit motive, then it would be a case of business profits and not capital gain. CIT Vs. Motilal Hirabhai Spg. And Wvg. Co. Ltd., 113 ITR 173 (Guj); Raja Bahadur Viswshwara Singh Vs. CIT, 41 ITR 685 (SC).

The above tests have again been reiterated by the CBDT in its Instruction No.1827 dated 31.8.1989 referred to by the AO in the order of assessment and Circular No.4 of 2007 dated 15 June 2007. CBDT has recently issued Circular No.6/2016 dated 29.2.2016 clarifying on taxability on income earned from sale of shares and other securities and whether to treat it as capital gains or business income. The circular gives a choice to the assessee to define the income earned from share or securities sale as capital gains or business income. The treatment in the books of accounts by the Assessee of the shares/units sold in its books of accounts as investments would be very important factor to be considered and should be sufficient to hold that shares/units held as investments cannot be treated as giving raise to income from business.

Keeping in mind, the above broad principles, we shall now examine the case of the assessee. It is not in dispute that the shares and mutual funds that were sold during the previous year, which resulted in the income in question, were held by the Assessee as “Investments” and not as “Stock-in-trade”. The assessee during the previous year had entered into 490 transactions of purchase and 646 transactions of sale of shares, units of -M/s. Purvanchal Leasing Ltd. A.Y.2006-07 8 mutual funds. Out of the above in respect of 207 transactions the sale was made within 30 days of purchase. The question is as to whether the volume and frequency can for the basis for drawing an inference that the Assessee was engaged in business. The Hon’ble ITAT Mumbai Bench in the case of Janak S.Rangwala Vs. ACIT 11 SOT 627 (mum) has held that magnitude of the transaction does not alter the nature of the transaction. As we have already seen it is not in dispute that the Assessee had treated the shares and units as investments in its books of accounts. Similar transactions have been accepted by the revenue in assessments for AY 2005-06 as giving raise to capital gains and not as business income in the assessment completed u/s.143(3) of the Act after scrutiny. There was no borrowing by the Assessee out of which investment in shares and units were made.

In assessment year 2007-08 also, the CIT, Central-1, Kolkata had initiated proceedings u/s.263 on this issue. The order u/s.263 for the assessment year 2007- 08 was passed on 22.02.2012 wherein the CIT accepted the fact that the profit earned by the assesses on sale of investment shares is taxable under the head “Capital Gain” and not business income. The CIT in the said order expressed the view that the facts of the Assessee’s case were similar to the case decided by the Hon’ble Kolkata ITAT in the case of M/S.Himalaya Finance & Investment Co.Ltd. order dated 17.8.2007. The decision of the Hon’ble ITAT in the case of M/S.Himalaya Finance & Investment Co. Ltd. (supra) has been approved by the Hon’ble Kolkata High Court in ITA No.260 of 2008 order dated 6.8.2008. In the light of the above circumstances prevailing in the case of the assessee, we are of the view that the conclusion of the CIT(A) that the income from sale of shares and units declared by the assessee as capital gain has to be accepted is correct and calls for no interference.

In CIT Vs. Gopal Purohit 228 CTR 582 (Bom), the question of law raised was regarding whether STCG declared by the Assessee was to be assessed as business income or not. Question (b) considered by the Hon’ble Bombay High Court was as follows: “(b) Whether, on the facts and circumstances of the case and in law, the Hon’ble ITAT was justified inholding that principle of consistency must be appliedhere as authorities did not treat the assessee as a share trader in preceding year, in spite of existence of similar transaction, which cannot in any way operate as resjudicata to preclude the authorities from holding such transactions as business activities in current year?” The Hon’ble Bombay High Court held as follows: “3. In so far as Question (b) is concerned, the Tribunal has observed in paragraph 8.1 of its judgment that the assessee has followed a consistent practice in regard to the nature of the activities, the manner of keeping records and the presentation of shares as investment at the end of the year, in all the years. The revenue submitted that a different view should be taken for the year under consideration, since the principle of res judicata is not applicable to assessment proceedings. The Tribunal correctly accepted the position, that the principle of res judicata is not attracted since each assessment year is separate in itself. The Tribunal held that there ought to be uniformity in treatment and consistency when the facts and circumstances are identical, particularly in the case of the assessee. This approach of the Tribunal cannot be faulted. The revenue did not furnish any justification for adopting a divergent approach for the Assessment Year in question. Question (b), therefore, does not also raise any substantial question.” 14. The above decision of the Hon’ble Bombay High Court is clearly applicable in this case. As we have already seen that the AO in AY 05-06 accepted similar income as capital gain. Even for AY 2006-07 the AO accepted the claim of the Assessee and it was only pursuant to the order u/s.263 of the Act, the AO took a different view. It is not disputed by the revenue that the facts and circumstances in the AY 05-06 and the present AY 2006-07 are identical. Though the rule of res judicata is not applicable in income tax -M/s. Purvanchal Leasing Ltd. A.Y.2006-07 10 proceedings but the principle of consistency will definitely apply and on that basis the claim of the Assessee should be held to be proper.

For the reasons given above, we confirm the order of the CIT(A) and dismiss the appeal by the revenue.

In the result, appeal by the revenue is dismissed.