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Shri Amar H. Patel DCIT-17(3) 601/B, Amrut Villa, Dr. ambedkar Road, Mumbai. Vs. Matunga(E), Mumbai-400 019. PAN:AADPP 0653 R (अपीलाथ� /Appellant) (��यथ� / Respondent) Revenue by: Shri Arvind Kumar Assessee by: Shri Nishit Gandhi सुनवाई क� तारीख / Date of Hearing: 05.04.2016 घोषणा क� तारीख / Date of Pronouncement: 05.04.2016 आयकर अिधिनयम अिधिनयम,1961 क� क� धारा धारा 254(1)केकेकेके अ�तग�त अ�तग�त आदेश आदेश आयकर आयकर आयकर अिधिनयम अिधिनयम क� क� धारा धारा अ�तग�त अ�तग�त आदेश आदेश Order u/s.254(1)of the Income-tax Act,1961(Act) अनुसार Per Rajendra A.M.- लेखा सद�य सद�य राजे�� राजे�� केकेकेके अनुसार लेखा लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the order,dated 30.06.2010,of CIT (A) – 29, Mumbai, the assessee has filed the present appeal. Assessee,an individual,filed his return of income on 31.07.2007, declaring income of Rs. 94,46,168/-. The Assessing Officer (AO) completed the assessment under section 143(3) of the Act on 30.11.2009,determining the income of the assessee at Rs.94,46,170/-. 2.Effective ground of appeal is about treating the short term capital gain on sale of shares, amounting to Rs. 94.46 Lacs, as business income. During the assessment proceedings the AO found that assessee was engaged in the activity of purchase and sale of shares, that he had earned most of its income by way of investment in shares which were taken on loan from various parties, IPO funding and investment in mutual funds, that most of the share transactions were either squared up in a very short duration of time. Considering the facts of the case, the AO held that transactions undertaken by the assessee were not in the nature of investment, that he had earned short term capital gain through his business activities.. He called for an explanation from the assessee in that regard and after considering the same he held that most of the investments had been made out of the borrowed funds, that the loans had been invested in three companies, that he was holding the shares for a very short duration, that frequency of such transactions was extremely high, that the motive of the assessee was to earn quick profit,that income of the assessee had to be taxed under the head business/adventure in nature of business and not under the head short term capital gain, as claimed by him. 3.Aggrieved by the order of the AO, the assessee preferred an appeal before the first appellate authority (FAA).Before him, it was argued that the assessee was an investor, that in earlier years similar income by shown under the head short term capital gain, that he had made application in IPO as a retail investor, that he had made investments with borrowed funds knowing that the investment will give good return. After considering the assessment order and the submission of the assessee, the FAA held that the assessee had purchased the shares with borrowed funds for quickens, that the IPO applications were made with borrowed funds and the shares were offloaded after listing, that major profit had been earned on trading of 6568/M/10-Amar HPatel one scrip only, the holding period of the scrips was only for a few days and mostly below 30 days, that the assessee was engaged in a structured and organised business activity. Finally, he upheld the order of the AO.
4.During the course of hearing before us,the authorised representative(AR)stated that investment through IPOs showed that intention of the assessee was to make investment, that utilisation of borrowed funds was no bar to make investment in a capital assets, that frequency of share transactions was very low, that the average period of holding was approximately 40 days, the assessee was an investor in shares since the past many years and had been assessed as such.He further stated that the identical issue had been decided by the tribunal while adjudicating the appeal of the brother of the assessee namely Dhruv H Patel (ITA/7857/MUM/2010,dated 05/12/2014).The departmental representative (DR) supported the order of the FAA.
5.We have heard the rival submissions and perused the material before us we find that in case of Dhruv H. Patel (supra the tribunal has deliberated the issue and has decided the same as under: “3. The return for the year was filed on 28.7.2006 declaring total income of Rs. 14,54,100/-. The return was selected for scrutiny assessment. During the course of the scrutiny assessment proceedings,the Assessing Officer noticed that the assessee has declared Short Term Capital Gain of Rs. 17,26,855/-.The AO further noticed that 90% of the income has been derived from one transaction which was on allotment of shares in IPO of FCS Softwares Solutions Ltd. The AO also noticed that the application in the IPO was made out of borrowed funds and the shares were sold within 5 days from the date of allotment. The AO was of the firm belief that the assessee has carried out business activities. The assessee was asked to explain why the Short Term Capital Gain should not be treated as business profit. It was explained that the assessee is an investor and was investor in past years also. The profit was booked on the allotment of the shares of FCS Softwares Solutions Ltd as the assessee has taken cautious view like a prudent investor. The explanation of the assessee did not find favour with the AO. The AO observed that the assessee has applied for the IPO of FCS Softwares Solutions Ltd., by taking finance from M/s. Merit Credit Corpn. Ltd. and also from Masat Texturisers & Twisting Pvt. Ltd. The application amount was for 35 lakhs shares amountinto Rs. 8.75 lakhs. The assessee was allotted 12971 shares on 17.9.2005 and the shares were sold on 22.9.2005 and 23.9.2005 at the average rate of Rs. 228/- as against the purchase price of Rs. 50/- per share. The AO proceeded by considering the CBDT circular qua Instruction No. 1827 dt. 31.8.1989 and instruction dt. 16.5.2006 and treated the share transaction of the assessee as business income.
The assessee carried the matter before the Ld. CIT(A) but without any success.
Before us, the Ld. Counsel for the assessee claimed that the assessee was an investor and during the year under consideration he has applied for the shares of FCS Softwares Solutions Ltd through IPO. The assessee explained that after he has sold the shares at an average rate of Rs. 228/- per share the share price came down to Rs. 93.60 within one month and therefore being a prudent investor, the assessee's decision for selling the shares at the right time has earned him Short Term Capital Gains. The Ld. Counsel further stated that utilization of borrowed funds is no bar to make an investment in capital asset. The Ld. Counsel further stated that the assessee has dealt only in 19 scrips therefore considering the facts of the case, the findings of the Ld. CIT(A) are erroneous and deserves to be reversed.
Per contra, the Ld. Departmental Representative strongly supported the orders of the lower authorities.
We have carefully perused the assessment order and the order of the First Appellate Authority. It is an admitted fact that around 90% of the total gains is from sale of the shares of FCS Softwares Solutions Ltd. It is also an undisputed fact that the assessee had applied in the shares of the IPO of the said company from borrowed capital. Merely because the shares
6568/M/10-Amar HPatel were applied through borrowed capital cannot be a ground for treating the capital gains as business income. The IPO funding availed by the assessee was to get more allotment but the fact of the matter is that the assessee was an investor and the sole intention of applying in the shares through IPO was to get higher allotment of shares. We also find that there are no repetitive purchase and sale of the same script which means that there is no churning of shares. The total number of days utilized by the assessee for investment in shares is 32 days. Considering all these facts in totality, we do not find any reason to treat the assessee as a trader. We, therefore set aside the findings of the Ld. CIT(A) and direct the AO to treat the Short Term Capital Gain on sale of shares amounting to Rs. 17,26,855/- as declared by the assessee.
In the result, the appeal filed by the assessee is allowed.” We find that the facts of the above mentioned case are more are less similar to the facts of the case under consideration-the amounts involved are different.So,following the above order of the Tribunal,we decide the effective ground of appeal in favour of the assessee.