DCIT 9(1), MUMBAI vs. ENVISION INVESTMENT & FINANCE P. LTD, MUMBAI

िनधा�रती ओर से/Assessee by : Shri S.C. Tiwari & Ms. Rutuja N.Pawar राज� की ओर से/ Revenue by : Shri Manjunath R. Swamy सुनवाई की तारीख / Date of Hearing : 04-11-2015 घोषणा की तारीख/ Date of Pronouncement: 01.01.2016 आयकर अिधिनयम,1961 की धारा 254(1)के अ�ग�त आदेश Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार PER RAJENDRA, AM- अनुसार Challenging the order dated 22.12.2010 of the CIT (A)-19,Mumbai,the Assessee and the Assessing Officer(AO)have filed cross-appeals for above mentioned Assessment Year(AY.). ITA/1376/Mum/2011-AY.-2007-08: During the course of hearing before us,the Authorised Representative (AR) stated that considering the smallness of tax effect the assessee was not interested in pressing ground no.3. Hence,same stands dismissed as not pressed. 2.Assessee-company,engaged in the business of share trading, filed its return of income on 31.10.2007 declaring total income of Rs.32.06. crores.Later on, a revised return,disclosing income of Rs.31.94 crores was filed on 07.10.2009.The AO completed the assessment on 14. 12.2009, u/s 143(3) of the Act,determining the income of the assessee at Rs.36,63,16,260/-. 2.1.First ground of appeal is about treating the gain on transfer of shares under the head business income in place of Short Term Capital Gains(STCG).During the assessment proceedings,the AO found that assessee has shown STCG of Rs.20.91 crores after deducting transaction tax (STT)of Rs.14.13 lakhs, that the company was trading in shares in securities till 31.03.2006, on last day of March,2006 it had closing stock of shares worth Rs.60.07 crores,that it converted stock in trade into investment w.e.f 01.04.2006, that all purchases of shares made on or after 01.04.2006 were treated as purchase of investments, then profit –loss arising out of intra-day purchase-sale of shares and dealing derivates were shown under the head business income,that profit arising on sale of stock of 31.03.2006 was claimed as capital 1 1376/11 &2322/11(07-08)-Envision gains.After considering the above facts,the AO held that the assessee was a dealer in shares, it had offered its income under the head income from business or profession, that upto 31.03.2006 it had shown the income from share trading as business income,that it had converted its stock in trade into investments to pay taxes at lower rate, that nomenclature given to activity in the books of accounts did not reflect the actual nature of activity, that by converting the stock into investments in the books of accounts did not make trader to an investor.He directed the assessee to explain as to why the income shown as STCG, LTCG should not be treated as income from business of share trading.The assessee file detailed reply in this regard. After considering the explanation of the assessee,the AO observed that the assessee’s own convenient and self categorises of portfolio into trading investment would not affect the reality of the situation.He referred to the circular no.4, 2007 dated 15.10.2007 issued by the Central Board of Direct Taxes along with the cases of associated industrial development company(Private Limited)(82 ITR 586),Holck Larsen(160 ITR 67).He further held that motive of the assessee was appearing from the fact that the shares purchased and sold were part of his trade/business, that it has sold and purchase shares in voluminous quantity,that it had traded in 25.89 lakhs shares of five companies(purchase of Rs.70.39 lakhs and sales of Rs.91.44 lakhs),that under the head LTCG it traded in 68,323 shares of three companies (purchase price Rs.29.25 lakhs and sale Rs.1.23 crores),that all these shares were original purchased as stock in trade,that same were converted to investment later on vide a book entry,that the STCG amounting to Rs.20.91 corres was derived form 49 transactions, that holding period of the shares range from one day to six-seven months,that majority of so called STCG had been earned on shares held for 51-200 days,that the entire shares were sold within a period of one year,that the holding period showed that shares were porches to earn profit and not dividend, that the assessee had borrowed interest bearing funds for purchasing the shares, that use of borrowed funds proved that assessee was trader in shares and not investor.Finally,he held that entire amount of 21.69 crores (STCG of Rs.21.05 crores +LTCG of 64 lakhs) that to be taxed under the head business income. 2.2.Aggrieved by the order of the AO the assessee preferred an appeal before the First Appellate Authority(FAA).Before him,it was argued that there was no legal bar or restriction on conversion of investment into stock in trade or vice versa, that the credibility the conversion was established by entries in the books of account, resolution of the board of direction and the affidavit of the directors,that it was legitimate the plan tax payment,that an assessee could possess trade and investment portfolios simultaneously,that the tax audit report broadly mentioned the nature and character of the business,that the volume of transactions could not form the basis to hold the assessee a dealer in shares,that it had received dividend of Rs. 90.18 lakhs,that the assessee was maintaining two portfolio and the borrowed funds had been utilised for trading purposes and not for investment,that it had adequate own capital for making investment in shares,that the dominant object and purpose of purchasing of shares was retain them for capital appreciation. After considering the submission of the assessee and the assessment order, the FAA held that the nature of transactions had to be determined on the basis of various factors,that no one single factor could be determinative, that till 31.03.2006 the assessee had a closing stock of shares were Rs.60.70,that it has converted the stock in trade into investment, that the assessee conducted itself very much in the same manner as in the earlier years while entering into shares transactions, that the assessee had held the shares under the STCG for a period less than one year, that it could be safely presumed at the time of purchase of said shares the intention was not to hold then for a longer period,that none of the shares traded in had not contributed to dividend income,that the volume of transactions was fairly high, that it had purchased more than Rs.25 lakhs shares , that it had used borrowed funds, that the assessee 1376/11 &2322/11(07-08)-Envision did not produce the evident to show that it had purchased shared from its own funds, that in earlier years income arising out of share transactions was offered as business income,that the accounting entries were not important, that the nature of activity, intention the conduct of the assessee were deciding factors, that the assessee was dealing in the shares as a trader also, that there was not merit in the contention of the assessee the shares were held for investment purposes, that it had continued to indulge in the shares trading like earlier years, that the action of the assessee in presenting impugned shares in the balance sheet as on 31.03.2007 as investment was smokes cream to camouflage the real intent,that the surplus arising out of STCG had to be assessed as business income. He directed the AO to verify and allow the rebate u/s.88E of the Act with regard to STT paid, as per the provisions of law.He further held that shares held by the assessee for more than a period of 12 moths should be accepted as LTCG. 2.3.During the course of hearing before us,the AR argued that lower rate for STCG was effective from 01.04.2004,that the stock in trade was converted into investment form 01.4. 2006,that the assessee was offering income under the head business also, that income arising out of their trading/derivative was offered for taxation under the head business income, that the rest of the income by shown as STCG, that assessee had not borrowed funds from outsiders,that it had taken loans from shareholders only,that borrowing was lower than the overall investments, that no material on record proved that borrowing was for investment and not for business.He referred to case of Niraj A. Surti (tax appeal no.836 of 2009 of Hon’ble Gujarat High Court.He referred pages no.4,5,&6, 78, 79 of the paper book. He further argued that there was capital appreciation and as an prudent investor the assessee sold the shares, that the ratio of purchase and sale had not been seen,that it had not carried out transactions in shares in the AY.s.2010-11,2011-12 and 2012-13,that it had dealt with derivatives only in those years,that except the shares of Reliance Industries Ltd., none of the scripts were common with regard to earning of STCG/LTCG and day trading.The Departmental Representative (DR) supported the order of the FAA. 2.4.We have heard rival submission and we perused the record. We have heard the rival submissions and perused the material before us.In our opinion,no single factor can decide the issue as to whether a particular transaction can be assessed under the head business or capital gains as far as share transactions are concerned.Judgments after judgments have held that the issue has to decided after considering various factors like volume of transaction,holding period, magnitude of purchase of sales,ratio between purchase and sales and the accounting treatment appearing the books of accounts,use of borrowed funds etc.But,the most important factor is intention of the assessee and the intention can be gathered from the different variables.In short,there is no readymade formula to decide the issue and each case has to be decided on its own facts.Treatment given to share transactions by the AO in the earlier and subsequent years can be one of the deciding factors,but in itself it is not the conclusive proof. Unless and until it is not proved that the facts of a particular AY.were identical to facts of other years.Courts have held that a single transaction can be held as business transaction and a series of transactions can be held to a capital gain transaction.In short the facts of a particular year have to be tested on the touchstone of the general principles laid down by various authorities and summarised in the Circular issued by the CBDT. We find that out of the total profit of 21.05 Crores the assessee had earned profit of Rs.20.09 Crores from purchase and sale of one script.In case of Glenmark Pharma Ltd.,Reliance and RCVL there are repetitive transactions (Pg.9-10 of the Paper book).The shares of Reliance were sold on 19.04.2006 for the first time.On 16.01.2006 the assessee purchased 99,000 shares of same company and same were sold on 19.05.2006 and 01.06.2006.Shares of Glenmark were traded more than once.The volume of the shares and repetitive nature of the sale and purchase of shares indicate the intention of the assessee.In our opinion,the assessee 1376/11 &2322/11(07-08)-Envision was dealing in shares as a trader rather than a investor.Considering the upward swing in the share market it purchased shares of a particular company in bulk and within a short span of time sold them and earned a huge profit.The FAA had found that the assessee had purchased shares woth Rs.70.39 Crores and sold the shares worth Rs.91.44 Crores.The surrounding circumstances clearly prove that the assessee was not making investment in these shares.These were pure and simple business transactions.We have also considered the dividend earned by the assessee during the year under appeal.In our opinion, facts of the case of Niraj A. Surti(supra)are not applicable to the case under consideration.Therefore,confirming the order of the FAA,we decide ground no.1 against the assessee. 3.Next ground is alternate ground to ground no.1.As per the assessee the FAA had not directed the AO to allow rebate u/s.88E of the Act on the sum of Rs.11,80,006/-relating to STCG.In our opinion,rebate for the taxes paid cannot be denied.The AO is directed to allow the rebate,after verification,as per the provisions of the Act.Second ground,raised by the assessee,stands allowed for statistical purposes. 4.Last effective ground deals with allowing rebate u/s.88E of the Act on security transaction tax(STT)of Rs.3.65 Crores paid by the assessee.In our opinion,the assessee is entitled to rebate for the tax paid under the head STT.We direct the AO to verify the claim made by the assessee and allow the rebate to it,as per the provisions of law.Ground no.4 is allowed for statistical purposes. ITA 2322/Mum/2011-Assessment Year-2007-08 5.First ground raised by the AO pertains to treatment given by the AO to the gains arising out of the shares sold by the assessee under the head LTCG.While dealing with the ground no.1 of the assessee we have discussed the facts of the case.We find that the FAA had held that the shares held by the assessee for a period of more than one year should be assessed under the head LTCG. 5.1.Before us,the DR stated that the issue could be decided on merits and the AR supported the order of the FAA. We have heard the rival submission and perused the material before us.In the case under consideration the assessee had acquired shares of RNRL,Reliance Capital Ltd.,Reliance Communications Ltd.and Reliance Industries Ltd.and the profit arising out of sale proceeds of these shares was shown under the head LTCG.Shares of first two companies and the last company (i.e.except the shares of Reliance Communications Ltd.)were acquired in the month of January,2006 and were sold in the Month of Sept./July 2007and February 2008 respectively. Shares of Reliance Communications Ltd. were purchased in May,2006 and were sold on 13.02. 2008.In our opinion,the FAA had rightly held that the shares were rightly offered under the head LTCG.The pattern of purchase of sale and holding period clearly prove that the behavior of the assessee was of an investor and not of a businessman.In our opinion the basic ingredients of business are missing in the above referred transactions.Therefore, confirming the order of the FAA,we decide ground no.1 against the AO. 6.Next ground is above disallowed made u/s.14A of the Act.The AO found that assessee had credit in dividend income of Rs.90.18 lakshs in its P&L account that it had shown as exempt u/s.10(34) of the Act,while computing taxable income it had not disallowed any expenditure in respect of the exempt income. He asked the assessee to explain as to why disallowance u/s.14A r.w.Rule 8D of the Income Tax Rules,1962,(Rules).After considering the submission of the assessee the AO referred to the decision of Daga Management Private Limited ITA No.