ASHA ASHAR,MUMBAI vs. ITO 19(2)(2), MUMBAI

1 On the facts and in the circumstances of the case and in law, the Commissioner of Income Tax (Appeals) erred in upholding the action of the Income Tax Officer in assessing short term capital gains on sale of shares under the head "Profits and Gains from Business or Profession instead of Income under the head "Short Term Capital Gains" as per the return of income filed for the year under reference.

2 In doing so, the Commissioner of Income Tax (Appeals) erred in the following respects:

1 In not appreciating the fact that the appellant is an investor holding investment in shares and securities over a period of years as investment in capital assets and has consistently offered to tax profit on sale of shares under the head Capital Gains which is accepted by the department and not a trader in shares holding shares as stock in trade of business.

2 In not appreciating the fact that major portion of the shares sold during the year were held by the appellant for a period of 3-4 years and the income under the head Long term Capital Gains far exceeds the amount of profits under the head Short term Capital gains and even in the case of shares short term capital gains on sale of shares held for period less than one year, the major portion of gains is attributable to shares held for period exceeding one month and upto twelve months.

RESTRICTING THE DEDUCTION IN RESPECT OF SOCIETY MAINTENANCE CHARGES TO THE EXTENT OF MUNICIPAL TAXES AMOUNTING TO RS. 62,175/- WHILE COMPUTING INCOME UNDER THE HEAD "INCOME FROM HOUSE PROPERTY"

1 On the facts and in the circumstances of the case and in law, the Commissioner of Income Tax (Appeals) erred in upholding the action of the Income Tax Officer in restricting the deduction in respect of Society maintenance charges amounting to Rs. 62,175/- while computing income under the head "Income from House Property"

2 In doing so, the Commissioner of Income Tax (Appeals) erred in the following respects.

1 In not appreciating the fact that rent received during the year under reference and offered to tax is inclusive of society maintenance charges and also the fact that the rent received during the year under reference, after excluding the society maintenance charges received was more than the letting value fixed by the Municipal Corporation/Standard Rent.

2 In not appreciating the fact that the deduction on account of Society maintenance Charges are claimed u/ s 23 of the Act and not u/ s 24(a) of The Act.”

The case of the assessee was selected for scrutiny u/s 143(3) of the Income Tax Act,1961(hereinafter called “the Act” ) read with Section 143(2) of the Act .During the previous year, the assessee has declared short term capital gains of Rs. 6,76,915/- from the sales of shares. The assessee was asked to furnish explanation by the learned assessing officer (Hereinafter called “the AO”) as to why the profits out of such transactions of purchase and sale of shares should not be treated as business income of the assessee. In reply, the assessee submitted that the assessee is an investor who invests in shares & securities over a period of years and the same are held as investment and major portion of the scrips sold during the year have been held for over 3-4 years, with investment being subject motto. The purchase and sale of shares are duly accompanied by delivery of such shares, which shows that the assessee is an investor and not a trader. The assessee submitted that the assessee has been investing in shares and securities over a period of years and the same has been accepted by the Revenue in all the preceding years. The assessee is an investor with the main intention to earn capital gains on the sale of shares and to earn dividend income and not a trader in shares and hence the assessee requested that the profit on sale of the shares is in the nature of capital gains. The A.O., however, rejected the contentions of the assessee by relying upon the CBDT Circular No. 4/2007 dated 15-6-2007, which reads as under:-

The second issue in this appeal relates to the restriction of the deduction in respect of society maintenance charges and municipal taxes of Rs.1,80,000/- claimed by the assesee in the return of income filed with the Revenue, to the amount of municipal taxes amounting to Rs. 62,175/- and denial of claim of deduction of society maintenance charges of Rs.1,17,825/- u/s 23 of the Act, by the AO which was confirmed by the CIT(A).

The assessee has declared income from house property at Rs. 8,82,000/-. The assessee has shown rent received at Rs. 14,40,000/- and against such rent, the assessee has claimed an amount of Rs. 1,80,000/- on account of society Maintenance & Other Charges and declared the net annual value at Rs. 12,60,000/-. The assessee was asked by the AO to furnish justification in this regard. In reply, the assessee stated that the maintenance & other charges comprised of municipal taxes of Rs. 62,175/- and other society charges of Rs. 1,17,825/-, which was claimed deduction u/s 23 of the Act. The assessee submitted that that the rent was inclusive of the maintenance charges and municipal taxes and the net rent received after deduction of the society charges is more that municipal valuation. The assessee also placed reliance on the decision of the Tribunal, Mumbai in case of Nandita Banerjee v. ITO. The A.O. held that as per the proviso to section 23 of the Act, for the purpose of computation of annual value, the assessee is allowed deduction only for payment of taxes levied by the local authority in respect of the property. The said proviso speaks specifically about taxes levied in respect of the property. It is not for anyone to stretch the meaning further and includes society charges in the ambit of the proviso. Hence, the A.O. made addition of Rs. 1,17,825/- and added the same to the income of the assessee under the head income from house property vide assessment orders dated 30.12.2008 passed by the AO u/s 143(3) of the Act. However, the AO allowed the standard deduction to the assessee as provided u/s 24(a) of the Act, vide his orders dated 30.12.2008. 6. Aggrieved by the assessment orders dated 30.12.2008 passed by the AO u/s 143(3) of the Act, the assessee filed his first appeal before the CIT(A).

Before the CIT(A), the assessee submitted that the assessee is an investor and has consistently invested in shares and securities over a period of years and the same are held as investments/capital assets. It was submitted that during the previous year relevant to the assessment year, the assessee has earned income from sale of shares amounting to Rs. 676,915/- which has been offered for taxation under the head short term capital gain. The assessee submitted that the assessee has duly submitted during the course of assessment proceedings , statement of short term capital gains on sale of shares with complete bifurcations along with sample copy of contract notes . The assessee also submitted that the detailed note on justification for treatment of the gain as short term capital gain and not profit and gain of business was also submitted along with details of holding of shares as investment of Rs.64,66,060/- as on 31.03.2005 and Rs.1,58,25,064/- as at 31.03.2006. The assessee submitted that out of short term capital gain on sale of shares amounting to Rs. 6,76,915/-, a sum of Rs. 2,13,702/- only pertains to the capital gain on sale of shares held for a period of less than one month and the balance of capital gains on sale of shares amounting to Rs.

With respect to the other issue regarding claim of the assessee for deduction of society maintenance charges and municipal taxes of total amount of Rs.1,80,000/- , the assessee submitted that the claim was restricted by the AO to the extent of municipal taxes to the tune of Rs.62,175/- . The assessee submitted that the annual rent amounting to Rs. 14,40,000/- was offered to tax is arrived at after taking into account the municipal taxes and society maintenance charges to be borne by the assessee. The assessee contended that the A.O. while passing the order u/s 143(3) of the Act has restricted the deduction claimed in respect of maintenance charges to the extent of only municipal taxes paid amounting to Rs. 62,175/- while computing income chargeable under the head “income from house property”. The assessee relied on the following decisions:-

Aggrieved by the orders dated 02.12.2011 of the CIT(A), the assessee is in appeal before the Tribunal.

The ld. Counsel for the assessee submitted that the short term capital gain of Rs. 6,76,915/- earned by the assessee is treated as business income of the assessee by the Revenue which is confirmed by the CIT(A). The ld. Counsel submitted that the assessee earned long term capital gain of Rs. 42,24,638/- which is exempt from tax and the same is accepted by the Revenue, the details of the same are placed in the paper book filed before the Tribunal at pages 6-8 while details of short term capital gain earned on sale of shares is placed at paper book page 2-5. The assessee submitted that the assessee has substantial holding of shares, details of which is placed at paper book page 9 &10. The ld. Counsel of the assessee submitted that in the earlier years, the Revenue has accepted similar transactions of short term capital gain vide intimation u/s 143(1) of the Act , for the assessment year 2005-06 is placed at paper book page No. 13 and for the assessment year 2003-04, is placed at paper book page 16 and principles of consistency need to be followed. The ld. Counsel of the assessee relied upon the decision of the Mumbai Tribunal in the case of Gopal Purohit v. JCIT, ITA No. 4854/Mum/2008 for the assessment year 2005-06, vide orders dated 10-2- 2009 [2009] 122 TTJ (Mumbai) 87 to contend that the assessee has maintained separate portfolios of shares for offering the same to tax as capital gains or business income. The ld. Counsel submitted that the assessee is regularly dealing in shares for several years to earn capital gain and dividend. The assessee is dealing in shares based upon the delivery taken or given both at the time of purchase and sale of shares. The ld. Counsel made statement before us that own funds are utilized by the assessee for the purpose of making investments and stated that no borrowed funds were utilized for making investment in the shares. The assessee also submitted that in case the shares are sold without effecting delivery, then in that case the assessee has offered the gains (loss) to tax as speculative income. The ld. Counsel also relied upon the decision of the Mumbai Tribunal in the case of Mrs. Shikha Gupta v. ACIT in ITA No. 7711/Mum/2011 for the assessment year 2007-08 order dated 8-5-2013 and also in the case of ACIT v. Mrs. Vineet Sethi in ITA No. 4324/Mum/2010 for the assessment year 2006-07 vide orders dated 24- 1-2014.The ld counsel of the assessee also submitted that decision of the Mumbai Tribunal in the case of Gopal Purohit(supra) has been approved by Hon’ble Bombay High Court in CIT v. Gopal Purohit (2010) 188 Taxman 140(Bombay). The ld. Counsel submitted that rule of consistency has to be followed as in the earlier years and also subsequent years, the Revenue has accepted the said income to be from capital gains and based on the rule of consistency the said income is to be treated as short term capital gains.

The ld. D.R., on the other hand, submitted that the assessee has entered into repetitive transactions of sale and purchase of shares. The ld. D.R. referred to page 2-5 of the assessee’s paper book whereby the period- wise details of short term capital gains on sale of shares by the assessee shows that assessee has indulged in repetitive transactions of purchase and sale of shares. The Ld DR pointed out the instance that shares of Zee Telefilms Limited were first purchased on 21.10.2005 and sold on 27.10.2005 and thereafter the assessee again purchased shares of Zee Telefilms Limited on 27.01.2006 which were then sold on 13.02.2006. The Ld. DR also pointed out that the period of holding of the shares in large number of cases is even less than 30 days and ld. DR pleaded that the AO has rightly treated the gains on sale of shares sold within period of 12 months as business income as the motive of the assessee is to make profits and not to earn dividend, period of holding is short, transactions are repetitive with an intent to make profits. The ld DR relied upon the order of the CIT(A).

We have considered the rival contentions and also perused the material available on record. We have observed that the assessee has been consistently dealing in shares for past several years. The Revenue has accepted the gains offered on shares based on delivery as capital gains in the earlier years and subsequent years albeit vide intimation’s u/s 143(1) of the Act which are placed in paper book page13 & 16 for assessment year 2005-06 and 2003-04. The details of shares held by the assessee are placed in the paper book filed by the assessee with the Tribunal at page number 9-10. The assessee has filed details of short term capital gains and long term capital gains earned on shares in the paper book, page 2-8. We have also observed that the assessee has classified the transactions in shares in various heads whereby in case the assessee is not effecting delivery of shares at the time of purchase or sale of shares, the same is categorized as speculative income and while where the delivery based transactions of sale and purchased are categorized as long term or short term capital gains based on period of holding of the shares as per the Act. The Revenue has accepted long term capital gains of Rs 42,24,638/- offered to tax by the assessee as long term capital gain chargeable to tax , while short term capital gains of Rs.6,76,915/- offered for tax , is treated as business income by the Revenue. From the perusal of the statement of short term capital gain, it is observed that the assessee has entered into over 200 transactions of purchase and sale of shares in the previous year relevant to the assessment year. We have observed that the assessee is regularly dealing in shares whereby the period of holding in some cases is even one day. The A.O. observed that out of the total transactions, the period of holding in over 100 instances is less than three months and in 65 instances, the holding period is less than one month. The transaction in the shares are also repetitive like in the shares of Zee Telefilms Limited, Garware Ship, Gammon,Carborundum Universal, Simbholi Sugar etc. whereby the assessee indulged in repetitive transactions and also sold the shares after holding for short period . Under these circumstances in order to do complete justice in the instant case based on facts and circumstance of the case, we hold that the gains arising from sale of shares held by the assessee up to one month be classified as income from business despite being delivery based transactions, while the gains arising from sale of shares held for more than one month and up-to twelve months should be classified as short term capital gain. We have come to the above decision keeping in view the peculiar facts and circumstances of the instant case as we have observed that in large number of transactions of purchase and sale of shares, period of holding is from 1 day to 30 days, the transactions of purchase and sale of shares being repetitive and the assessee has dealt in large number of companies, the prime objective of such transactions which are concluded within one month in our considered view is to earn and maximize profits in shortest period of time which is akin to intention of doing business by maximizing profits while dealing in sale and purchase of shares rather to hold shares as investment with a vision to earn dividend and other benefits attached to holding of shares such as entitlement to right shares, bonus shares etc.. We order accordingly.

Regarding the second issue, the ld. Counsel for the assessee submitted that the issue is squarely covered by the decision of Mumbai Bench of the Tribunal in the case of Sharmila Tagore v. JCIT, (2005) 93 TTJ (Mumbai) 483 and also in the case of Bombay Oil Industries Ltd. v. DCIT reported in (2002) 82 ITD 0626(Mum.). The ld. Counsel for the assessee submitted that the rental income of Rs. 14,40,000/- received by the assessee from the tenant includes the society maintenance charges and Municipal Corporation taxes and hence the assessee has rightly reduced the said charges on account of society maintenance charges and Municipal Corporation taxes amount to Rs.1,80,000/- from the gross rental received . The ld. D.R. supported the orders of authorities below.

We have considered the rival contentions and also perused the material available on record. We have observed that the assessee has paid society maintenance charges of Rs. 1,17,825/- which is stated to be the obligation of the lessee and the same is duly included in the rent received by the assessee. In our considered view, this issue is squarely covered by the decisions of the Tribunal in the cases of Sharmila Tagore (supra) and Bombay Oil Industries (supra). Respectfully following the decisions of the Tribunal in the cases cited (supra), we hold that assessee is entitled for deduction of Rs. 1,17,825/- u/s 23 of the Act apart from the standard deduction u/s 24(a) of the Act. We direct the AO to verify the claim of deduction of the assessee of the said society maintenance charges of Rs.1,17,825/- paid by the assessee but stated to be obligation of the lessee and stated to be duly included in the gross rent received by the assessee before allowing the claim of the assessee. We Order accordingly.

In the result, the appeal filed by the assessee in ITA N0. 1810/Mum/12 for the assessment year 2006-07 is partly allowed.

""यथ" / The Respondent. 3. आयकर आयु"त(अपील) / The CIT(A)- concerned, Mumbai 4. आयकर आयु"त / CIT- Concerned, Mumbai "वभागीय ""त"न"ध, आयकर अपील"य अ"धकरण, मुंबई / DR, ITAT, Mumbai H Bench 5. 6. गाड" फाईल / Guard file. आदेशानुसार/ BY ORDER, स"या"पत ""त //// उप/सहायक पंजीकार (Dy./Asstt.