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Income Tax Appellate Tribunal, BENCH “A”, KOLKATA
Before: Hon’ble Shri N.V.Vasudevan, JM & Shri M.Balaganesh, AM]
This is an appeal by the Revenue against the order dated 23.08.2012 and of CIT(A)-XXX, Kolkata relating to A.Y.2007-08.
2. Grounds of appeal
raised by the revenue read as follows :- “(I) That Ld. CIT(A) has erred in law as well as on facts in not considering the magnitude and intention of transaction and the ratio between purchase & sale as per the principles laid down in CBDT'S Circular No 412007 dated 15.06.2007. (2) That Ld. CIT(A) has erred in law as well as in facts in not relying upon the decision of Hon'ble Supreme Court pronounced in the case of Raja Bahadur Visheshwars Singh Vs. CIT(1961)
41. ITR 685 (SC) wherein it was held by the apex court that purchase and sale of shares of substantial amounts at frequent intervals cannot be treated as a change in investment but have to be treated as dealing in shares and treatment of share dealings in earlier year(s) is not a factor. (3) That Ld. CIT(A) has erred in law as well as on facts in not considering that in terms of para II of CBDT Circular No 4/2007 dated 15.06.2007 the purchase and sale of shares shown by the assessee are essentially in the nature of assessee's business activities and as such the claim of Sec. 10(38) allowed by the CIT(A) is unjustified and bad in law.
Sri Sailesh Jalan. A.Y.2007-08 (4) That the petitioner craves leave to adduce further grounds of appeal, if necessary at the time of hearing.”
The Assessee is an individual. He is engaged in the business of purchasing and selling various commodities under the name of the proprietorship concern M/s. Gollu Investments. For A.Y.2007-08 assessee filed return declaring total income of Rs.30,05,377/-. This consisted of business income of Rs.2,81,800/- long term capital gain of Rs.2,35,976/- and short term capital gain of Rs.29,52,178/- besides from other source of Rs.4,817/-. The long term capital gain and short term capital gain declared by the assessee arise out of sale of shares. The total sale value of the shares out of which long term capital gain and short term capital gain was derived by the assessee was Rs.87,97,630/- comprising of Rs.4,20,736/- being the sale value of shares which gave rise to long term capital gain and Rs.83,76,894/- from sale of shares which gave rise to short term capital gain.
The AO firstly held that the assessee failed to prove that he had actually sold the shares. Therefore the AO held that the sale value of Rs.,87,97,630/- was liable to be assessed as undisclosed income of the assessee and taxed accordingly. AO also was of the view that the shares in question were purchased and sold by the assessee not as investments but as stock in trade business carried on by the assessee and was therefore assessable under the income from other sources. In coming to the aforesaid conclusion AO made reference to CBDT Circular No.4/2007 dated 15.06.2007 wherein the guidelines with regard to treatment to be given on profits arising out of sale of shares were laid down by CBDT. The sum of Rs.87,97,630/- was taxed by AO under the head ‘Income from business’ . The following are the relevant observations of the AO in this regard : “ 3. The assessee has introduced in his accounts a total sum [ both of Short Term and Long Term transactions ] of Rs. 87,97,630/- as sale proceeds of shares. Vide para 3 of annexure to notice u/s. 142(1) of the IT Act, the assessee was requested to furnish the following details:- “ Regarding your Capital Gains income, please produce evidence of acquisition and sale of assets to prove the date of acquisition and sale and cost of acquisition and sale consideration. To be specific, please produce contract notes for purchase and sale of shares, copy of your account in the books of broker duly certified by the broker and Sri Sailesh Jalan. A.Y.2007-08 copy of your demat account for the preceding year, current year and the year of acquisition of different shares." However, the assessee neither furnished any contract notes and copy of Demat A/c. nor copy of his accounts in the books of brokers as demanded by the A.O. The assessee also did not produce/furnish any statement of his bank A/c. The assessee was also requested to produce his books of accounts vide para 7 to the notice u/s. 142(1) of the IT Act which requisition of the A.O. was also not complied with by the assessee. Thus the assessee's claim that he has introduced the total sum of Rs. 87,97,630/- as sale proceeds of shares could not be substantiated by him with any evidence. In view of the unproved sales, the sum of Rs. 87,97,630/- is treated as assessee's undisclosed income from his undisclosed sources and the sum is taxed accordingly. Penalty u/s, 271(1) ( c ) of the IT Act is also initiated on this addition as the assessee has concealed his income and also material particulars of income to the extent of addition. 4.A) In respect of the assessee's Short Term Capital Gains [ as stated by the assessee ], the assessee did not explain the sources of investment in shares. In respect of the assessee's Long Term Capital Gains [ as stated by the assessee] , the assessee did not produce any evidence to prove that the shares were purchased in any preceeding year. Accordingly it is held that the assessee has purchased these shares out of his undisclosed income from undisclosed sources in the current year, the sources of which purchase were also not explained by the assessee. Thus, the assessee's total cost of investment in shares for his both Long Term and Short Term transactions is taxable as his unexplained investment in shares. 4.B)As the sum of Rs. 87,97,630/- of unproved sale proceeds which comprises of the assessee's business profit of Rs. 32,23,048/- as discussed in para 3 above and also his unexplained investment in shares as discussed in para 4A above has been taxed as such, his business profit and unexplained investments in shares are not separately taxed in this order. “
Aggrieved by the aforesaid order of the AO the assessee preferred appeal before CIT(A). CIT(A) held that the sale of shares as claimed by the assessee is genuine. The findings of CIT(A) in this regard are contained in para 3.2 and 3.3. of his order. We need not deal with these conclusions. The revenue in the grounds of appeal before the Tribunal has not challenged this finding of CIT(A). The next question before CIT(A) as to whether profit on sale of shares (long term capital gain and short term capital gain) had to be assessed under the head capital gain or income from business. The CIT(A) held that the gain on sale of shares has to be assessed under the head “Capital Gain”. On this aspect the CIT(A) observed as follows :- “ 3.5. The submissions of the Appellant have been considered and at the outset it may be mentioned that the A.O. has considered profit on sale transactions on share which had already been taxed as income from undisclosed sources which has already been decided
Sri Sailesh Jalan. A.Y.2007-08 by me in para 3.2 above to be from genuine share transactions. However, going into the merits of the arguments of the A.O. wherein he has held the Long Term Capital Gains and Short Term Capital Gains disclosed by the Appellant on the share transactions as business income. The A.O. has simply discarded the Appellant's submissions regarding justification for showing the profits from capital gains and has held in a long winding discussion that the Appellant had not made investment in shares but had earned business profit on these transactions. The reliance of the A.D. on the decision of the Supreme Court in Sutlej Cotton Mills Supply Agency Ltd., Dalhousie Investment Trust Co. Ltd. vs. CIT and R. Oalmia vs. CIT is not only misplaced but even the facts in the Appellant's case are different from those in the above decisions of the Hon'ble Supreme Court and even the facts used by the A.O. to arrive at his conclusion are not correct. Although the principle of res judicata does not apply to the Income Tax Law however the A.O. has to follow the principle of consistency specially when there is no change in facts in the Appellant's case from the earlier year when the A.O. accepted the capital gains on share transactions shown by the Appellant. The AO cannot change his view from earlier year without bringing material facts and evidence to support hisdecision. Even on the merits of the case it is seen that the Appellant has satisfactorily established that the shares were being held as investments. The Appellant has consistently been showing the shares as investment and income/loss from them as capital gains for which sufficient justification is there record. The Appellant has also demonstrated the fact that it was holding on to the shares for a fairly long period and that the transactions were in shares of limited Scrips and in the nature of investments. It is also clear that the assertion that it is an investor can only be challenged on the basis of its own records and transactions which could indicate that it is actually doing trading business. This is not there in the appellant's case and the A.O. has failed to do so other than making a winding analysis of the guidelines laid out in CBDT Circular No.4/2007. The reliance of Assessing Officer on the decision of ITO Vs. Lily Exports Pvt. Ltd. of Hon'ble I.T.A.T. 'A' -Bench, Kolkata is based on different facts and cannot be relied on in the appellant's case. In the aforementioned case the Hon'ble LT.A.T. has referred to several factors while holding that the income was normal business profit referring to short period of retention and other factors which are missing in the case of appellant. It is further seen that the Appellant's case is squarely covered by the decision of Delhi High Court in CIT Vs Rohit Anand 327 ITR 445 and the Bombay High Court in CIT 25 Mumbai Vs. Gopal Purohit in 228 CTR 582 which was subsequently upheld by the Hon'ble Supreme Court by dismissing the SLP filed by the Department. It has been held by the Hon'ble High Court in the above decision that -
"The Tribunal has observed in 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 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. There cannot be any dispute about the basic proposition that entries in the books of account alone are not conclusive in determining the nature of income. The Tribunal has Sri Sailesh Jalan. A.Y.2007-08 applied the correct principle of arriving at the decision in the facts of the present case."
Therefore following the decisions in the above mentioned cases it is held that the A.O. was not justified in holding that the Appellant's profit from the share transactions in the current year was business income. Accordingly the A.O. is directed to accept the Long Term Capital Gains and Short Term Capital Gains declared by the Appellant in its return of income and this ground of appeal is therefore allowed. 3.6 The third issue is in respect of claim of Appellant for exemption in respect of Long Term Capital Gains u/s.l0(38) of the Income Tax Act. In this regard, it is seen that the A.O. has simply disallowed the claim of the Appellant without bringing any evidence on record other than by considering the Long Term Capital Gains as business income. Since the Appellant's claim regarding capital gains has been accepted the A.O. is also directed to consider the claim of exemption u/s.l0(38) in respect of the Long Term Capital Gains disclosed by the Appellant. This ground of appeal is therefore also allowed.”
6. Aggrieved by the aforesaid finding of CIT(A) revenue has preferred the present appeal for the Tribunal.
We have heard the submissions of the learned DR, who relied on the order of AO. The learned counsel for the assessee relied on the order of CIT(A). He also filed before us the break up of the details of long term capital gain and short term capital gain. The same is given as annexure to this order.
We have given a careful consideration to the rival submissions. The issue to be decided is as to whether the STCG on transaction of purchase and sale of 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 pronouncements :-
(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 Sri Sailesh Jalan. A.Y.2007-08 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). (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 Circular referred to by the AO in the order of assessment. Keeping in mind, the above broad principles, we shall now examine the case of the assessee. The assessee during the previous year had entered into transactions of purchase of shares giving raise to long term capital gain as well as short term capital gain. The long term capital gain arose out of sale of shares which were held for periods ranging from 9 years to more than 1 year. As far as short term capital gain is concerned, there were in all about 21 purchase and sale transactions in shares of 10 different companies. The period of holding varies between 6 days to less than 1 year. The above transactions were effected by actual delivery of shares at the time of purchase and sale. The factors which go in favour of the Assessee that the income in question is to be assessed under the head “Capital Gain” are the fact that as follows:
The fact that in the earlier AY on identical volume of transaction, the AO in Assessment u/s.143(3) of the Act, accepted the case of the Assessee that income from purchase and sale of shares is not business income.
The Assessee had not borrowed funds to make investment in shares. 3. The volume and frequency of the transactions are not very high. 4. The Assessee held the shares as investment in its books of accounts and not as stock-in-trade.
Sri Sailesh Jalan. A.Y.2007-08
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 declared by the assessee as capital gain has to be accepted as 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.”
The above decision of the Hon’ble Bombay High Court is clearly applicable in this case. For the reasons given above, we uphold the order of the CIT(A) and dismiss the appeal of the Revenue.
Sri Sailesh Jalan. A.Y.2007-08
In the result, appeal by the revenue is dismissed.
Order pronounced in the court on 02.03.2016.