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Income Tax Appellate Tribunal, KOLKATA BENCH ‘C’, KOLKATA
Before: Shri N. V. Vasudevan,J.M. & Shri M. Balaganesh, A.M.)
ORDER Per Shri N. V. Vasudevan, J.M.
This is an appeal by the Revenue against the order dated 18/03/2013 passed by the CIT(A)-Central-1,Kolkata relating to assessment year 2006-07.
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.
-M/s. Purvanchal Leasing Ltd. A.Y.2006-07 2
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
carried out indicate systematic and organized activity with profit motive then it becomes business profit not capital gain. From the details of share transactions submitted by the assessee, it is evident that the assessee has carried out as many as 490 transactions of purchase and 646 transactions of sale during the period relevant for assessment year under consideration. It is pertinent to note that none of the script has been retained by the assessee up to one year and most of the securities which were purchased by the assessee during the year were sold within the year . The holding period of scripts in around 207. The A/R’s argument that the assessee has been showing gain arises on share transactions as short term capital gain or long term capital gain for the past several years and the Department has accepted the assessee’s treatment of the transactions is also not acceptable. The principal of resjudicata is not strictly applied to Income Tax proceedings. Each case has to be decided on the basis of its facts and circumstances. In this case assessee was doing huge number of transactions and none of the securities were retained even for one year. The frequency of purchase and sale and the short duration of the holding of the shares clearly establish that the activity of the assessee was for trading in shares. The A/R for the asessee has relied upon several decisions of ITAT and Courts as mentioned above to support his contention that the transactions of purchases and sales were not business activity. But the facts of this case and those referred by A/R are not identical. Rather in the similar facts and circumstances, the Hon’ble ITAT, Mumbai Bench in the case of ACIT vs. Trupuraprasad N Pandya in has held that when the assessee is doing huge number of transactions and none of the securities is retained even for one year then the income derived by the assesee from share transactions is a business income. In view of the above discussion, it is held that the profit of Rs.5,57,30,140/- earned by the assessee on sale and purchase of shares and mutual fund is business income of the assessee and not short term capital gain.”
5. Aggrieved by the order of the AO, the assessee preferred appeal before the CIT(A). Before the CIT(A), the Assessee contended that in the past similar transactions were considered as giving raise short term capital gain in the assessment of the assessee. The assessee also pointed out merely because there was large volume and frequency of transaction, it cannot automatically make the nature -M/s. Purvanchal Leasing Ltd. A.Y.2006-07 4 of the transaction as trading in shares. In this regard the Assessee relied on the decision of the Hon’ble ITAT (Mumbai) in the case of Janak S. Rangawala 11 SOT 627. The assessee also placed reliance on the decision of Hon’ble ITAT (Mumbai) in the case of Gopal Purohit 122 TTJ 87 wherein it was held that in Income Tax assessment the principle of consistency should be followed. The Tribunal held that the Revenue, if it accepts similar transaction as giving rise to short term capital gain, cannot take a contrary view in assessment for a subsequent assessment year on the same set of facts. It was pointed out that the Hon’ble Mumbai High Court has also confirmed the order of the Tribunal as reported in 336 ITR 287. The assessee also pointed out that for assessment year 2007-08 proceedings u/s. 263 of the Act were initiated by the CIT, Circle-1, Kolkata. In those proceedings the assessee pointed out that profit on sale of shares were accepted by the Revenue as giving raise to short term capital gain. The CIT in assessment year 2007-08 accepted the claim of the assessee and dropped the proceedings u/s.263 of the Act for that year.
The CIT after considering the submissions of the assessee held as follows:
“I have considered the submissions of the appellant and perused the assessment order. I have also gone through the judicial pronouncements on the issue involved relied upon by the appellant. It is observed that in the original order passed u/s.143(3), the AO had accepted that the profit earned by the appellant on sale of shares and mutual funds is taxable under the head ‘Capital Gain’ as declared in the return of income. However, the assessment on this point was set aside by the CIT, Central-1, Kolkata for the reason that the AO had not examined this point -M/s. Purvanchal Leasing Ltd. A.Y.2006-07 5 from the angle of its taxability under the head ‘business income’. Consequently, the AO passed the impugned order u/s263/143(3) wherein he assessed the profit on sale of share and mutual funds as business income instead of short term capital gain. Apparently, this decision was taken by the AO only for the reason that the original order was set aside by the CIT u/s.263. However, it is observed that in the subsequent year i.e. in the assessment year 2007-08 also, the CIT, Central-1, Kolkata had initiated the 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. In that order the CIT observed as under:
“The issue whether short term capital gain shown by the assessee was assessable under business head or not is covered by the decision of jurisdictional High Court in the case of Himalaya finance & Investment Co. in of 2008, G. A. No. 1271 of 2008. The aforesaid decision of the jurisdictional High Court is squarely applicable in the instant case. Hence, the proposal to revise the assessment order on the aforesaid issue is also dropped.
The facts and the issue involved in the year under appeal are identical to those in the assessment year 2007-08; and consequently, in the year under appeal, the short term capital gain cannot be assessed as business income. Moreover, on perusal of the Balance Sheet of the year under appeal, preceding years and subsequent years, it is observed that the appellant company had regularly made the investments in shares and mutual funds which was accordingly reflected in the balance sheet under the head “Investments”. There was no stock in trade of shares and there is no evidence that the appellant had converted its investment into stock in trade. In all the preceding and subsequent years, the appellant had declared the income under the head capital gain depending on the period of holding. The capital gain so declared by the appellant was accepted by the AO in the assessment orders passed by him. In the year under appeal, there is no change in the facts, and therefore, the AO cannot take a different view unless he proves that the facts had been changed. Merely for the reason that there were several transactions of purchase and sale of shares, the income under the head capital gain cannot be assessed as business income. The various judicial decisions relied upon by the appellant including that of the Hon’ble Supreme Court in the case of Gopal Purohit(Supra) support its case that the prift arising from sale of investment shares is taxable under the head Capital Gain and not business income. Moreover, the jurisdictional CIT has also accepted the same view following the decision of the Hon’ble Calcutta High Court in the case of Himalaya Finance & Investment Company (Supra). In view of the above, it is held that the AO was not justified in assessing the short term capital gain shown by the appellant as its business income. The AO is directed to assess the same as short term capital gain. Ground No.1 is allowed.”
-M/s. Purvanchal Leasing Ltd. A.Y.2006-07 6
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).
-M/s. Purvanchal Leasing Ltd. A.Y.2006-07 7
(d) Purchase without an intention to resell where they are sold under changed circumstances would be capital gains. CIT Vs. PKN, 60 ITR 65 (SC). Purchase with an intention to resell would render the gain profit on sale business profit depending on the circumstances of the case like nature and quantity of article purchased, nature of the operation involved. Saroj Kumar Mazumdar Vs. CIT, 37 ITR 242 (SC). (e) No single fact has any decisive significance and the question must depend upon the collective effect of all the relevant materials brought on record. Janki Ram Bahadur Ram Vs. CIT, 57 ITR 21 (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.
-M/s. Purvanchal Leasing Ltd. A.Y.2006-07 9
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.
Order Pronounced in the Open Court on 19.10.2016
Sd/- Sd/- (M. Balaganesh) (N. V. Vasudevan) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 19 /10/2016 S. Sinha(PS) Copy of the order forwarded to: 1. M/s. Purvanchal Leasing Ltd., 31, Shibtolla Street, Kolkata-700007. 2 D.C.I.T., Central Circle-VIII, Kolkata 3. The CIT-Central-I, 4. The CIT(A)-Central-I, 5. DR, Kolkata Benches, Kolkata