INCOME-TAX OFFICER, AHMEDABAD vs. JHAVERI SANDEEP BIPINCHANDRA (HUF), MUMBAI

As the assessee has contended that the basic motive of investment in shares is not to earn dividend income and hence as per para 8(ii) of CBDT circular dt. 15-06-2007 “when the purchase and sale of shares with the motive of earning profit would result in the transaction being in the nature of trade, but where the object of the investment in shares is to derive income by way of dividend, then the profits will yield capital and not revenue receipts” He treated as intention was not to yield capital gain.

In the instant case, the assessee maintains a P & L A/c wherein it shows profit from share trading as Short Term Share Profit (STT Paid) and debits related expenses such as bank commission, demat charges etc. to the P & L A/c. This reflects the manner of maintaining books of a/cs. Further, total sale and purchase transactions are numbered at 290 which amounts to nearly 1 transaction every day and some days 2,3 and even 4 transactions. This shows that transactions are substantial. It also shows magnitude of purchases and sales and the ratio b/w purchase and sales. Also, the submission of the assessee reflects that the holding period is not more than 3-4 months. 5.4 As mentioned above, as per the submissions made by the appellant, his intention of investment is for earning dividend income and not profit. This is evident from the fact that the appellant has consistently declared investment in shares under the head Investment and not as stock-in-trade. 5.5 The AO has relied upon the fact that in the earlier year i.e. A.Y. 2015-16, the appellant has shown gains from sale of shares as Business Income and therefore in this year also it has to be considered as Business Income. In my opinion, this is no ground to treat income from sale of shares as Business Income especially when the appellaiM.in all years prior to A.Y. 2015-16 (including the year in appeal) has been consistently showing purchase of shares as “Investment” and not as “Stock in Trade”. If at all the appellant had been showing as Stock in Trade in all these years, then the position would have been different. Moreover, the appellant categorically stated that it was because of oversight that only in that earlier year such gains were shown as Business Income. None other years have been treated differently. 5.6 The AO has gone by the nomenclature given in the accounts which shows the income as Short Term Share Profit (STT Paid). The AO disregarded the fact that in the very same accounts just as Long Term Share Profit (STT Paid) which was offered as LTCG and claimed as exempt was acceptable to him, the very same Profit and Loss account wherein the income is shown as Short Term Share Profit (STT Paid) is to be treated as Business Income. The nomenclature given in the books of accounts cannot be rejected for one item and acceptable for another item. Even there is no intention which can be gathered that only because gain is described as Short Term Share Profit (STT Paid), it becomes business income. The gain truly describes the nature of income but taxability thereof should have been in accordance with the provision of the Act. Thus, merely by showing Short Term Share Profit (STT Paid) in the profit and Loss account does not empower the AO to tax the same as business income. ITO Vs Jhaveri Sandeep Bipinchandra HUF AY : 2016-17 4 5.7 It is noted by the AO that there are four to five transactions every day. This is factually incorrect. As can be seen from the details of purchase and sale of shares, the no. of transactions are only 145. There are repeat entries in respect of certain scripts because either corresponding cost is different or because the scrip was transacted by the broker in piecemeal as per availability of buyer as counter party. Thus, the total no. of transactions are not more than 145 which comes to less than 1 per day. The same cannot be considered to be “Substantial' so as to hold the same as in the nature of business. The karta of the appellant being occupied full time with other full time activities, cannot be considered to be carrying on business of share trading. For earlier years such activity is considered as giving rise to capital gains only. Even during the year under appeal, the LTCG is accepted as such. For STCG, the holding period is 3-4 months and not a day trader who square-off the transactions on same day. For each purchase, delivery is taken, by making full payment and delivery is given on sale. The investment in shares is out of own funds and no amount is borrowed for such investment. Moreover, the expenses which have been debited in the P & L A/c as mentioned by the AO are only for the purpose of giving accounting treatment. They were never claimed as deduction while calculating 5.8 CBDT circular no. 6 of 2016 has given guidelines to treat the profit from share transactions as either business income or capital gains. Para 3(b) thereof states “In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer.” Applying the same further, if the shares are held for less than one year but shown as investment, the same will give rise to capital gain only as opted by the appellant and same shall not be put to dispute by the AO. Precisely this is the stand taken by ITAT Jaipur Bench in the case relied by the appellant (supra). The Ld. Tribunal held that since the assessee has treated the securities as Investment and not stock- in-trade, in view of CBDT Circular, the revenue is not permitted to take a contrary view. 5.9 For the reasons mentioned above, this ground is allowed. The income from sale of shares of Rs. 65,49,765/- is to be treated as Short Term Capital Gains as shown by the appellant and not as Business Income.”

A perusal of the order of the ld. CIT(A) reveals that he deleted the addition, noting the fact that the assessee had been investing in the share market for more than 10 years, and declaring income therefrom under the ITO Vs Jhaveri Sandeep Bipinchandra HUF AY : 2016-17 5 head “capital gains”. He noted the fact that the assessee had held the shares as ‘investment’ and not as ‘stock-in-trade’, which was accepted by the Assessing Officer also. He found that the only basis with the Assessing Officer for treating the income as business income was the fact that the assessee had returned the said income under the head ‘business income’ in the immediately preceding year. The ld. CIT(A) held that this is no ground for determining the nature of income; that the same had to be determined on the facts of the case and it could be treated as business income only if the shares were shown as stock-in-trade of the assessee. He further noted that the assessee had pointed out that while it was returned income from the trading activity in shares as capital gain in all the preceding years, in the immediately preceding year, the assessee had inadvertently returned the income under the head “business income”. He noted that in none of the other years the assessee had returned income as business income. The ld. CIT(A) noted that the Assessing Officer had merely gone on the basis of the nomenclature given in the accounts to determine the nature of the income. He found that the income shown as short term share profit was treated as business income, while that shown as long term share profit was offered as long term capital gain by the assessee, claimed as exempt and accepted by the Assessing Officer. The ld. CIT(A) held that nomenclature would not determine the nature of the income. Further, on facts, he found that while the Assessing Officer noted the assessee to have carried out four to five transactions every day of trading in shares while treating the income earned therefrom to be in the nature of business income, ld. CIT(A) found that this was factually incorrect. He found the total number of transactions to be 145 of which quite a number were repeat entries in respect of certain scrips, because either corresponding cost was different or it was transacted by the broker in piecemeal as per availability of buyer. The ld. CIT(A) found, as a ITO Vs Jhaveri Sandeep Bipinchandra HUF AY : 2016-17 6 matter of fact, that the total number of transactions, therefore, was not more than 145 which came to less than one per day. On the basis of this fact, he held that it cannot be said the activity of trading in shares carried out by the assessee was by way of business transactions. Relying on the CBDT Circular No. 6 of 2016 dated 29.02.2016 which gave guidelines to treat the profit from the share transactions either as business income or capital gains, he set aside the order of the Assessing Officer treating the income earned from the trading activity in shares as business income and held that the income returned by the assessee by way of Short Term Capital Gains was correct.

The ld. DR, before us, was unable to controvert any of the factual findings of the ld. CIT(A) based on which he held the transactions to have been rightly returned under the head “capital gains”. The ld. DR was unable to controvert the findings of the ld. CIT(A) that similar transactions in shares in earlier years was identically returned by the assessee as income from capital gains and accepted by the Department also, except for the immediately preceding year. He was unable to controvert the factual findings of the ld. CIT(A) that the assessee had shown all investments in shares under the head ‘investments’ and not as ‘stock-in-trade’. It is also an admitted fact on record that the Assessing Officer’s findings treating the income earned as income from business was based merely on the fact that in the immediately preceding year, the assessee had returned the said income under the head ‘business income’ and also on the basis of nomenclature given by the assessee in its books of accounts. We are in complete agreement with the ld. CIT(A) that the above two cannot be the basis for determining the character of the income earned by the assessee - whether business or income from capital gains; and considering the fact noted by the ld. CIT(A) that the assessee had consistently from year to year shown shares as investments and ITO Vs Jhaveri Sandeep Bipinchandra HUF AY : 2016-17 7 not stock-in-trade in its books and returned income therefrom under the head ‘income from capital gains’, we are in complete agreement with the ld. CIT(A) that the income earned therefrom had been rightly returned by the assessee under the head ‘capital gains’, and there was no case with the Assessing Officer for treating the same as income from business and profession. In view of the same, we uphold the order of the ld. CIT(A). Ground No.1 raised by the Revenue is, therefore, dismissed.

Ground No.2 raised by the Revenue reads as under:-

The issue relates to denial of claim of exemption of capital gains earned by the assessee on the sale of Long Term Capital asset u/s 54F of the Act on account of investment of the capital gains in a residential house property. The facts of the case reveal that the reason for the denial of exemption was that the assessee had failed to fulfill one of the conditions necessary for claiming the said exemption. As per the Assessing Officer, there were two conditions required to be fulfilled by the assessee for claiming exemption u/s 54F of the Act;

As per the Assessing Officer, the assessee had fulfilled the first condition of having invested the entire net consideration received on sale of the original asset by way of purchasing a new asset within two years of the sale of the original asset; but, however, the assessee failed to fulfil the second condition, that is of investing only small amount by the due date of filing of the return of income and not keeping the balance by way of deposit in the Capital Gains Account Scheme in the prescribed bank. The ld. CIT(A), however, did not agree with the Assessing Officer and held that as long as the assessee had fulfilled the basic condition of investing in a new asset the net consideration received on the sale of the original asset within the period prescribed as per law, i.e. within two years from the sale of the original asset, there was no case for disallowing the assessee’s claim of exemption u/s 54F of the Act. In this regard, he relied upon the decision of the Bangalore Bench of the ITAT in the case of Ramaiah Dorairaj Vs. ITO, reported in [2021] 124 taxmann.com 243 (Bangalore - Trib.) and Chennai Bench of ITAT in the case of Smt. M.K. Vithya Vs. ITO, reported in [2018] 91 taxmann.com 102 (Chennai - Trib.). He also noted the fact that the assessee had invested the entire amount for the new asset under the extended period of filing of return of income u/s 139(4) of the Act and, therefore, also his claim for exemption u/s 54F of the Act was allowable as per law. He referred to various decisions of the Hon’ble High Courts holding that return filed u/s 139(4) of the Act, for all purposes, is equivalent to return filed u/s 139(1) of the Act. His findings in this regard are at paragraph Nos. 6.2 to 6.6 of his order as under:-

We have perused the order of the ld. CIT(A) and also that of the Assessing Officer. We do not find any infirmity in the order of the ld. CIT(A). ITO Vs Jhaveri Sandeep Bipinchandra HUF AY : 2016-17 10 It is not disputed that the assessee had fulfilled the basic condition for claiming exemption u/s 54F of the Act of investing the net consideration received on the sale of original asset, in a new asset/residential house within the prescribed period of two years of the sale of the original asset. Even the Assessing Officer admits to this fact and notes in his assessment order. Having fulfilled this basic condition, it is highly illogical to deny the claim of exemption during the impugned year, merely for the reason that the majority of the investment was made subsequent to the due date of filing of return of income for the impugned year u/s 139(1) of the Act, and which was not deposited in the Capital Gains Accounts Scheme of the prescribed bank as required by law. Admittedly, the law permits investments in a new asset to be made within two years from the sale of the original asset, which the assessee has complied with. There is no dispute about this fact. The other condition which the Assessing Officer has referred to as per law is merely procedural and a safeguard for ensuring compliance with the basic condition that the entire net consideration received by the assessee is utilized for investment in a new asset within the prescribed time. By requiring the assessee to claim deduction in the year of earning capital gain, by either investing the entire amount of net consideration in a new asset before the due date of filing of return of income or otherwise depositing the balance unutilized amount in the Capital Gains Accounts Scheme of the prescribed bank, the purpose is only to ensure that the net consideration so deposited is utilized for the purpose of investing in a new asset. As long as the basic criteria for claiming exemption of having invested in a new asset within the prescribed time is fulfilled, there can be no case for denying exemption merely for not having put aside the amount unutilized in the impugned year, for utilization subsequently. At the end of the prescribed time, when the assessee is found to have fulfilled the condition, the assessee admittedly is ITO Vs Jhaveri Sandeep Bipinchandra HUF AY : 2016-17 11 entitled to exemption. There cannot, therefore, be denial of exemption therefore merely for not having put aside the unutilized amount of capital gain in the Capital Gain account scheme of bank. The ld. CIT(A), we find, has followed the decision of ITAT in the case of Ramaiah Dorairaj (124 taxmann.com 243) and Smt M.K. Vithya (91 taxmann.com 102) while allowing assessee’s claim of exemption u/s 54F of the Act on the aforestated reasoning. The ld. DR was unable to distinguish the said case before us. In view of the same, we see no reason to interfere in the order of the ld. CIT(A), deleting the disallowance of deduction/exemption claimed u/s 54F of the Act amounting to Rs.2,50,24,909/-. Ground No.2 raised by the Revenue is accordingly dismissed.

In effect, the appeal of the Revenue is dismissed.