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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI AMIT SHUKLA & SHRI RAMIT KOCHAR
सुनवाई क� तार�ख /Date of Hearing : 28-01-2016 घोषणा क� तार�ख /Date of Pronouncement : 15-04-2016 आदेश / O R D E R PER RAMIT KOCHAR, Accountant Member
This appeal, filed by the assessee, being 14-03-2012 passed by learned Commissioner of Income Tax (Appeals)- 23, Mumbai (hereinafter called “the CIT(A)” ), for the assessment year 2008-09, the appellate proceedings before the CIT(A) arising from the assessment order dated 20-12-2010 passed by the learned assessing officer(hereinafter called “the AO”) u/s 143(3) of the Income Tax Act,1961(Hereinafter called “the Act”).
ITA 3200/Mum/2012 2
The grounds raised by the assessee in the memo of appeal filed with the Tribunal read as under:-
“1. (a) On the facts and in the circumstances of the case the learned assessing officer erred in treating the Short Term Capital Gain earned of Rs.23,64,191/- on sale of share investment as "Income from business" and CIT(A) erred in confirming the same, which is bad in law and contrary to the facts and evidence on record. (b) The learned CIT(A) erred in observing and held that, the appellant's intention is to trade in shares. (c) The learned CIT(A) erred in observing that the intention to hold the shares as investment in not brought out and erred in stating that such transactions are asking to trading in commodities . (d) On the facts and in the circumstances of the case, the learned CIT(A) erred in observing that, the portfolio Manager does trading on behalf of the appellant and gain learned to be treated as profit from business.
(e) The appellant prays that, the addition of Rs.23,64,191/- made as "business income" be deleted and the same being "Short Term Capital Gain" earned on sale of investment be taxed accordingly. 2(a) The learned CIT(A) erred in directing to treat all gains for placing money with PMS whether declared as STCG or L TCG as income from business which is bad in law and such direction be quashed.
(b) The learned CIT(A) has not issued any such notice or letter before issuing such direction and hence such directions are bad in law contrary to the provisions it be quashed.”
The brief facts of the case are that the assessee is an individual and derived pension, salary, director sitting fees and interest income during the impugned assessment year. During the course of assessment proceedings u/s. 143(3) read with Section 143(2) of the Act, the A.O. observed that the assessee has shown Short Term Capital Gains (STCG) of Rs. 23,64,191/- on the sale of shares. The A.O. after looking at the magnitude, frequency of the share transactions carried out by the assessee directed the assessee to ITA 3200/Mum/2012 3 explain as to why the profit on sale of shares shown as short term capital gain should not be taxed as business income in view of the Board's Circular No. 4 of 2007.
In response to the AO directions, it was stated by the assessee that the intention was only to hold shares as investment and to earn dividend and the assessee took delivery of all shares which are reflected in the demat account maintained by the assessee. The assessee submitted that gains on sale of such shares are incidental to the investment. As a prudent investor, he took advantage of selling his investment at a premium considering the market conditions. The transactions are not repeated and shares are held as investment. The assessee submitted that shares dealt by the assessee are considered as investments in records and as such the income thereof is to be considered as capital gain.
On going through the scrip-wise details, the A.O. noted that the assessee has traded in about 22 different scrips. The period of holding varies from 20 days to 9 months and assessee has dealt in 18,711 shares ranging from 1 share of Reliance Communication Ltd. to 5000 shares of Thomas Cook Ltd. . The total value of shares was Rs.64,77,757/- and the shares have been sold for Rs.88,41,949/- , making profit of Rs.23,64,191/-. The AO held that on the shares, the assessee has received dividend of only Rs.85,182/- whereas STCG is Rs.23,64,191/- which clearly shows the intention of the assessee was to trade in shares and not to earn dividend. The A.O. held that the prime intention of the assessee was to trade in shares and maximize gains and not as investment. The entire activity of the assessee has to be considered as business in trading in shares and the same cannot be termed as investment. The A.O. relied upon the CBDT Circular No. 4/2007 dated 15/06/2007, Hon’ble Supreme Court decision in Commissioner of Income Tax (Central), Calcutta v. Associated Industrial Development Company (P) Ltd. (82 ITR 586)
ITA 3200/Mum/2012 4 and Commissioner of Income Tax, Bombay v. Holck Larsen (160 ITR 67), AAR Ruling in 288 ITR 641. Thus, the A.O. held that the transactions in shares entered into by the assessee cannot be treated as investment in shares and accordingly the resultant income/loss arising out of them cannot be treated as income/loss under the head capital gain keeping in view the substantial volume and frequency of transactions in shares, ratio between purchase and sale vis-a-vis holding of shares and motive of the assessee. The AO held that the assessee has carried the business of trading in shares and all the profits/loss on such trading activity is treated as business income of the assessee, vide assessment order dated 20-12-2010 passed by the AO u/s 143(3) of the Act.
4.Aggrieved by the assessment order dated 20-12-2010 passed by the A.O. u/s. 143(3) of the Act, the assessee filed first appeal before the CIT(A).
Before the CIT(A), the assessee submitted that the assessee is a senior citizen pensioner and derives income from Salary, Pension, Director sitting fees and income from other sources. The assessee submitted that he has no business activities or trading. For his investment in shares and Mutual Fund, the assessee has engaged prominent portfolio manager-Enam Asset and Management Co. Pvt, Ltd(hereinafter called “Enam”). He has no-borrowings or paid any interest, investment was made out of own funds .The assessee submitted that he has been investing in shares since long. His investment in shares in the year ending 31/03/2007, closing balance was Rs.8,49,02,223/- and in that year (assessment year 2007-08) he had earned long term gain of Rs.29,07,511/-and incurred short term loss of Rs.(-) 3,76,1.39/-, which have been accepted by the Revenue. The assessee submitted that all his investment in share are accounted for and held as 'investment' and accordingly shown in balance sheet under the head 'investment'. The assessee has engaged the services of portfolio manager for ITA 3200/Mum/2012 5 his investment in shares and mutual fund. Traders do not engage port-folio managers. It was only investors, who do not have just knowledge, who engage portfolio managers to advise and to do their investment. The numbers of transaction were very limited. Out of total number of 21 scrips which was sold, out of this 17 scrips were sold on 02/07/2007 and 3 scrips were sold on 17/04/2007. Thus, there only two transactions of sale on two days out of 365 days. Similarly there was no frequency of purchase. The investment in shares was done most of it in 2006, the previous calendar year. The holding period in almost all the cases were 108 days to 358 days. Thus, the period of holding is long and not short. The assessee submitted that dividend earned on shares during the assessment year was Rs.85,182/ and dividend earned on Mutual Funds was to the tune of Rs.53,51,295/-. The assessee relied on the decision of CIT v. Gopal Purohit and ITAT Pune Bench decision in the case of ARA Trading & Investment Pvt. Ltd., Janak S. Rangwala v. ACIT.
The CIT(A) after considering the assessment order and the submission of the assessee held that the assessee has mainly transacted in shares through Portfolio Management Schemes (PMS) and all transactions are delivery basis, that the transactions have been shown as investment. The Portfolio Manager acts as agent of the assessee and has been trading on the latter’s behalf. The PMS manager has been charging commission and / or expenses to act on behalf of his principal (the assessee) and will render the profit to the principal (assessee). Since the PMS manager acts in the capacity of an agent who has traded in shares on behalf of his principal, the profits arising there from will be treated as profits from business. The CIT(A) observed that at the time of deposit of moneys with the PMS manager, the intention of the assessee (client) was to maximize profits, and it cannot be said that the intention was to hold shares as investment. The financial statements issued by the PMS are also rendered as Profit and Loss statement for the year as realized profit on equity. The profits have not arisen from the deposit made but out of the ITA 3200/Mum/2012 6 shares/securities purchased from out of such deposits, which were traded by the PMS manager on behalf of the assessee. Merely because the purchase and sales are through a de-mat account will not change the nature of the transaction. The CIT(A) accordingly directed the A.O. to treat all gains from placing moneys with PMS whether declared as Short Term Capital Gains or Long Term Capital Gains as income from business. The provisions of section 10(38) and section 111-A of the Act would also not be applicable to profits derived from moneys placed with PMS, vide orders dated 14-3-2012.
6.Aggrieved by the orders dated 14-3-2012 of the CIT(A), the assessee is in appeal before the Tribunal.
The ld. Counsel for the assessee submitted that the A.O. treated the short term capital gains of Rs. 23,64,191/- as business income and accordingly taxed the same as income from business. The long term capital gain is not in dispute. The dispute is regarding the short term capital gains only. The purchases have been made in the preceding year. Out of 22 different scrips, the period of holding varies from 20 days to 9 months. There are no borrowed fund and the investment was made out of own funds and the same are reflected in the financial statements as investments from year to year. The assessee has placed his financial statements for the financial year 2007-08 in the paper book filed with the Tribunal which are placed at paper pages 1-7. The ld. Counsel submitted that the assessee is a pensioner. In the earlier year and in the subsequent assessment year, these activities have been treated as investment and capital gains declared by the assessee was consistently accepted by the Revenue. Principle of res judicata is not strictly applicable to Income Tax proceedings but principles of consistency is applicable. The assessee has placed on record(paper book page 41-43) assessment order dated 26.12.2007 passed u/s 143(3) of the Act by revenue for assessment year 2005-06 whereby the revenue has accepted the capital ITA 3200/Mum/2012 7 gain declared by the assessee in the return of income filed by the assessee for assessment year 2005-06. The assessee has also placed computation of income for assessment year 2006-07 and also for assessment year 2007-08 on record in the paper book page 44-50 , whereby the assessee has declared long term and short term capital gains earned by the assessee on sale of shares which was stated to be accepted by the Revenue albeit without scrutiny .The ld. Counsel submitted that the assessee has entered into an PMS agreement with Enam on 12-3-2008 which is almost at the fag-end of the assessment year (copy of the same is placed on record vide paper book page 17) while for the rest of the year ,the assessee has dealt directly in the shares of its own without any assistance from any Portfolio-manager. It was submitted that no shares have been sold through portfolio managers during the impugned assessment year and only purchases were made during the previous year relevant to the impugned assessment year by the said portfolio manager Enam for which ledger account copy is placed in the paper book as evidence at page 53-54 . The investment in shares are accounted for and held as investment and also shown in the balance sheet as investment. The investments in shares were done most of it in 2006, the preceding year. The ld. Counsel relied upon the judgment of Hon’ble Bombay High Court in the case of CIT v. Smt. Datta Mahendra Shah [2015] 378 ITR 304 (Bom.) and the judgment of Hon’ble Delhi High Court in the case of CIT v. Devasan Investment P. Ltd. [2014] 365 ITR 452 (Delhi).
The ld. D.R., on the other hand, relied on the order of the CIT(A) and submitted that the assessee has earned short term capital gain of Rs. 23.64 lacs and prime motive of the assessee is to earn profit and A.O. was correct in treating the gain as income from business.
We have considered the rival contentions and also perused the material available on record. We have observed that the assessee is a pensioner and ITA 3200/Mum/2012 8 dealing in sale and purchase of shares since earlier years and the shares have been held and shown as investment in the books of account and the gains arising there from have been offered for taxation as capital gain which has been accepted by the Revenue in the preceding assessment years and only in this impugned assessment year , the Revenue is treating the same as business income. We have observed that the assessee is holding shares for a period of 20 to 354 days before being sold on which short term capital gain has arisen. The shares so sold during the year on which short term capital gain has arisen were bought in the preceding year and deliveries of the shares were taken by the assessee and held in the demat account maintained by the assessee. The assessee is also not indulging in repetitive purchases and sale of the same shares. The shares were mainly sold on three dates during the previous year i.e. on 17-04-2007, 02-07-2007 and 20-12-2007 and it is not that the assessee is frequently trading in shares nor the volumes are too high. The assessee has also not invested any borrowed funds for making investments in the shares and owned funds were deployed in purchasing the shares. Keeping in view the market conditions , the assessee has sold the shares to earn gains knowingly well that markets are volatile, complex and dynamic which is a normal , rational and usual behavior of the investor who deals in the stock market and it is not expected from a rational and prudent investor under the normal circumstances that he will wait for complete erosion in the value of shares or losses to mount before selling the shares as every rational and prudent investor after-all invests in the stock market to maximize gains which is quite a rational , usual and normal behavior of an investor. Thus, keeping in view the entire facts and circumstances of the cases , it cannot lead to the conclusion in the instant appeal that the assessee is a trader in shares rather it is proved beyond shadow of any doubt that the assessee in the instant appeal is an investor. The revenue incidentally has also consistently held in the preceding assessment years in the case of the assessee itself , that the assessee is an investor and not trader in shares for ITA 3200/Mum/2012 9 which necessary evidences have been placed on the record by the assessee in the paper book filed with the Tribunal as detailed in preceding para’s which has remained un-controverted by the ld. DR. The principles of consistency has to be followed in the tax matters unless Revenue is able to demonstrate that there is a marked deviation in facts situation as existing in the relevant assessment year vis-à-vis earlier years which the revenue in the instant case is not able to demonstrate. The assessee has engaged the services of portfolio manager-Enam(copy of the agreement is also placed on record in paper book filed with the tribunal) only at the fag-end of the previous year relevant to the impugned assessment year and no shares have been sold through the portfolio managers during the previous year relevant to impugned assessment year and only purchases of shares were made by the said portfolio manager on behalf of the assessee during the impugned assessment year, thus no gains whatsoever has arisen to the assessee though the dealings with Enam during the impugned assessment year, thus the finding of CIT(A) with respect there-to by holding that the assessee has made gains while buying and selling of shares by engaging services of portfolio manager’s is to that extent erroneous vis-à-vis the facts as emerging from the records. Under these circumstances , we have no hesitation in holding that the assessee is not a trader in shares and the assessee is an investor in shares and the gain arising there-from shall be charged to tax as capital gains and not as business income as held by the AO and confirmed by the CIT(A) in their respective orders and we set aside the orders of the authorities below and holds that short term capital gain earned by the assessee of Rs.23,64,191/- shall be charged to tax as short term capital gains in the hands of the assessee as offered to tax by the assessee in the return of income filed with the Revenue. We order accordingly.
In the result, the appeal filed by the assessee in ITA N0. 3200/Mum/2012 for the assessment year 2008-09 is allowed.
ITA 3200/Mum/2012 10
Order pronounced in the open court on 15th April , 2016. आदेश क� घोषणा खुले �यायालय म� �दनांकः 15 -04-2016 को क� गई ।