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Income Tax Appellate Tribunal, MUMBAI BENCHES “C”, MUMBAI
Before: Shri Joginder Singh, & Shri Ashwani Taneja
Per Joginder Singh (Judicial Member) The assessee is aggrieved by the impugned order dated 26/04/2012 of the ld. First Appellate Authority, Mumbai. The first ground raised by the assessee pertains to confirming/treating profit on sale of shares as business 2 Occasion Impex Pvt. Ltd. income and not as short term capital gains without appreciating the facts.
2. During hearing, Shri A. K. Ghosh, ld. counsel for the assessee, advanced his arguments, which are identical to the ground raised
by contending that the assessee sold shares of only one scrip, which was allotted on conversion of preferential warrant by M/s Valecha Engineering Ltd. It was also contended that M/s Valecha Engineering Ltd. allotted 2,25,000 shares upon conversion of preferential warrant during the F.Y. 2007-08, which were credited in the de-mat account of the assessee during F.Y. 2007-08 itself. The ld. counsel further contended that out of the allotted shares, the assessee sold 2,24,980 equity shares on ten different trading session during the period 18/09/2007 to 206/03/2008 and further received 66510 bonus shares on 13/11/2007 and also purchase 1,33,000 shares on 19/03/2008 and 27/03/2008 through stock exchange. On the issue of consistency, it was argued that the assessee always offered gains from investment under the head capital gains and accepted by the Department for which our attention was invited to pages 6, 11, 17 & 18 and 25 of the paper book. Reliance was placed upon the decision from Hon’ble Bombay High Court in Gopal Purohit 228 CTR 582 (Bom.) and SLP of the Department, filed before Hon’ble Apex Court, was dismissed in 334 ITR (St.) 308. On the issue of frequency of transaction, it was contended that the assessee acquired shares only on four different dates which were transferred on 3. Occasion Impex Pvt. Ltd. ten different dates by arguing that the frequency of the transaction is very low. The average holding for shares, acquired through conversion of preferential warrants was argued to be ranging between 3 to 194 days. So far as, investor behavior is concerned, it was argued that the assessee retained 47% of the total shares, acquired during the year and such shares were shown as investment in the financial statements for which our attention was invited to pages 3 & 5 of the paper book. The ld. counsel claimed that dividend income of Rs.2,25,000 was earned by making the investment in shares and such shares were valued at cost and not at cost of market price whichever is less. So far as, maintenance of establishment is concerned, it was claimed that there was no employee, thus, there was no cost to the salary and merely expenditure of Rs.28,301/- was incurred (Rs.2500 as auditors fee, Rs.8569 as bank charges and some other minor legal and administrative expenses for which our attention was invited to schedule –H of the profit & loss account. It was also explained that the assessee used interest free funds and no cost of interest was incurred for which our attention was invited to profit & loss account and the relevant schedule. Reliance was placed upon the decision in the case of Smt. Rupal Sumegh Modi vs ACIT (ITA No.5758/Mum/2013) order dated 28/10/2015.
2.1. On the other hand, the ld. DR, Shri Pradeep Kumar Singh, relied upon the conclusion arrived at in the impugned 4 Occasion Impex Pvt. Ltd. order by contending that borrowed funds were used by the assessee.
2.2. We have considered the rival submissions. If the observation made in the assessment order, leading to addition made to the total income, conclusion drawn in the impugned order, material available on record, assertions made by the ld. respective counsel, if kept in juxtaposition and analyzed, we note that M/s Valecha Engineering Ltd. allotted 2,25,000 preferential warrants at the rate of Rs.199.55 per warrant to the assessee. As per the terms of the issue, the assessee paid Rs.99.95 (10%) per warrant and the balance amount of Rs.179.60 was payable on conversion. As per the terms of the issue, each warrant was to be converted into one equity shares of Rs.10 each, fully paid on conversion. Accordingly, a sum of Rs.44,89,875/- was paid by the assessee towards allotment of preferential warrants during the previous year relevant to A.Y.2006-07. M/s Valecha Engineering Ltd., thus, allotted 2,25000 warrants to the assessee during F.Y. 2005-06. The preferential warrants were converted into 2,25,000 equity shares during the financial year 2007-08. It is noted, as canvassed by the assessee, shares of only one scrip, which were allotted on conversion of preferential warrant by M/s Valecha Engineering Ltd. were sold. M/s Valecha Engineering ltd. allotted 2,25,000 shares upon conversion of preferential warrants during F.Y. 2007-08, which were credited in the de- mat account of the assessee during F.Y. 2007-08. Out of 5 Occasion Impex Pvt. Ltd. 2,24,980 equity shares only on ten different trading sessions during the period from 18/09/2007 to 26/03/2008. Thus, volume of transaction is not very high. It is also noted that the assessee offered gains out of the investment under the head capital gains and the same were accepted by the Department in A.Y. 2009-10, 2010-11, 2011-12, though u/s 143(1) of the Act as is evident from pages, 9, 11 & 12 (A.Y. 2009-10), pages 15, 17 to 19, A.Y. 2010-11 and pages 23, 25 and 26 for A.Y. 2011-12. The number of scrips sold and resultant capital gain for A.Y. 2008-09 to 2011-12 are available at pages, 6,11,17-18 and 25 of the paper book, thus, we find merit in the contention of the assessee, which is further fortified by the decision from Hon’ble jurisdictional High Court in the case of Gopal Purohit (228 CTR 582)(Bom.). The relevant portion from the aforesaid order from the Hon’ble High Court is reproduced hereunder for ready reference:
By the Court-The following questions of law have been formulated in the appeal filed by the Revenue against the judgment of the Tribunal, dt. 10th Feb., 2009 :
(a) Whether, on the facts and circumstances of the case and in law, the Hon'ble Tribunal was justified in treating the income from sale of 7,59,003 shares for Rs. 5,00,12,879 as an income from short-term capital gain and sale of 3,88,797 shares for Rs. 6,65,02,340 as long-term capital gain as against the income from business" assessed by the AO ?
(b) Whether, on the facts and circumstances of the case and in law, the Hon'ble Tribunal was justified in holding that principle of consistency must be applied here 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 6 Occasion Impex Pvt. Ltd. operate as res judicata to preclude the authorities from holding such transactions as business activities in current year ?
(c) Whether, on the facts and circumstances of the case and in law, the Hon'ble Tribunal was justified in holding that presentation in the books of account is the most crucial source of gathering intention of the assessee as regards to the nature of transaction without appreciating that the entries in the books of accounts alone are not conclusive proof to decide the income ?"
The Tribunal has entered a pure finding of fact that the assessee was engaged in two different types of transactions. The first set of transactions involved investment in shares. The second set of transactions involved dealing in shares for the purposes of business (described in para 8.3 of the judgment of the Tribunal as transactions purely of jobbing without delivery). The Tribunal has correctly applied the principle of law in accepting the position that it is open to an assessee to maintain two separate portfolios, one relating to investment in shares and another relating to business activities involving dealing in shares. The Tribunal held that the delivery based transactions in the present case, should be treated as those in the nature of investment transactions and the profit received therefrom should be treated either as short-term or, as the case may be, long-term capital gain, depending upon the period of the holding. A finding of fact has been arrived at by the Tribunal as regards the existence of two distinct types of transactions namely, those by way of investment on one hand and those for the purposes of business on the other hand. Question (a) above, does not raise any substantial question of law.
Insofar as Question (b) is concerned, the Tribunal has observed in para 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 7 Occasion Impex Pvt. Ltd. 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.
Insofar as Question (c) is concerned, again 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 applied the correct principle in arriving at the decision in the facts of the present case. The finding of fact does not call for interference in an appeal under s. 260A. No substantial question of law is raised. The appeal is accordingly dismissed.
It is worth mentioning that SLP of the department, against the aforesaid decision, was dismissed by Hon’ble Apex Court (334 ITR (St.) 308). Therefore, it can be concluded that volume of transactions are not so high as the assessee sold shares of only one scrip.
2.3. If this issue is analyzed with respect to consistency, admittedly, for A.Y. 2009-10 to 2011-12, the claim of the assessee was allowed, though u/s 143(1), as is evident from various pages of the paper book, such as 9,11 and 12 (A.Y. 2009-10), 15, 17 to 19 (A.Y. 2010-11) and 23, 25 and 26 (A.Y. 2011-12), thus, unless and until contrary facts are brought on record on the issue of consistency also, there is a merit in the claim of the assessee.
8 Occasion Impex Pvt. Ltd. 2.4. So far as, frequency of transactions are concerned, as explained by the assessee, the assessee acquired shares only on four different dates, during the year and transferred them on ten different dates, thus, the frequency of transaction is also not very high. At the same time, the holding period, for shares acquired through conversion of preferential warrants is also ranging from 3 to 194 days. The assessee is a very conservative investors, who made, initially, by investing, only 10% of the total cost of equity shares in financial year 2005- 06, at the lowest price and sold the same at the best possible selling price after conversion into equity shares, which is evident from the fact that investment, which was held by the assessee till the end of accounting period i.e. 31/03/2008 and sold in subsequent year. The assessee retained 47% of the total shares acquired during the year. So far as, manner of accounting is concerned the shares were shown as investment (page-3 and 5 of the paper book) in its financial statement. The assessee made the investment through interest free funds and no interest cost was incurred as is evident from profit & loss account.
If totality of facts are analyzed, it is well settled that true nature of transaction has to be determined by considering various factors. The Hon’ble High Courts as well as CBDT has laid down various criteria on the basis of which true nature of transactions could be ascertained. Hence the nature of transaction would be depended upon the facts prevailing in each case. Though, the practice adopted in past years may be 9 Occasion Impex Pvt. Ltd. a guiding factor in determining the true nature of transactions, yet it is not necessary that nature of transactions shall always remain constant. One of the most important criteria is the intention of the assessee, at the time of purchase of shares. If the assessee had purchased the shares as a dealer, then the profit should be assessed as business income of the assessee. On the contrary, if the intention was to hold the shares as investment, then the profit shall be assessed as capital gain. The intention of the assessee may be ascertained by his conduct and other criteria prescribed by courts and CBDT. As explained by the ld. counsel for the assessee that in different assessment years, the claim of the assessee was accepted by the Assessing Officer and further interest free funds were invested by the assessee for making the investment, therefore, considering the holding period and the dividend income, earned by the assessee, there is a merit in the claim of the assessee. In such a situation, the decision of the Coordinate Bench in the case of Smt. Rupal Sumegh Modi vs ACIT (ITA No.5758/Mum/2013) order dated 28/10/2015 and Praful D. Modi (ITA No.1334/Mum/2010) order dated 15/07/2011, Shri Sumegh Modi (ITA No.5599/Mum/2010) order dated 12/10/2011, the benefit can be given to the assessee. More specifically, when the declaration of the assessee as capital gain, arising on sale of shares has been accepted in different years as has been discussed above. It is also noted that assessee has not used interest bearing borrowed funds for the purpose of purchasing shares. Even, the declaration by the assessee, on sale of 10 Occasion Impex Pvt. Ltd. Assessing Officer, under these facts, there is no justification in treating the assessee as a trader in shares. So far as the observation in the impugned order on account of excess claim of purchase price of shares sold is concerned, it is the assessee, who has to watch his interest and in what manner, therefore, the appeal of the assessee is allowed.
Finally, the appeal of the assessee is allowed.
This Order was pronounced in the -open court in the presence of ld. representatives from both sides at the conclusion of the hearing on 02/11/2015.