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Income Tax Appellate Tribunal, MUMBAI BENCH “A”, MUMBAI
Before: SHRI G.S. PANNU & SHRI SANJAY GARG
Per Sanjay Garg, Judicial Member:
With this common order we will dispose of three different appeals preferred by the assessee against the orders of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] dated 29.10.10, 29.10.10 & 21.10.11 respectively relevant to assessment years 2005-06, 2007-08 & 2008-09 respectively. The appeals of the assessee for A.Y. 2005-06 and A.Y. 2007-08 are barred by limitation period of 157 days. The assessee had filed affidavits stating therein the reasons for the delay and requested for the condonation of delay in filing the captioned appeals. The assessee is no more in this world now. He is represented through his legal heir/wife Smt. Gunjan A. Desai. We have gone through the affidavit of the late Shri Anirudh K.
Desai. In view of the submissions made therein, the delay in filing the appeals for A.Y. 2005-06 and A.Y. 2007-08 is hereby condoned and the matter is being disposed of on merits. For the sake of convenience, the facts have been taken from the appeal relevant to A.Y. 2005-06. (A.Y. 2005-06) 2. The sole issue raised in this appeal is as to whether the income earned by the assessee for sale and purchase of shares is to be taxed as short term capital gains as claimed by the assessee or as business income as assessed by the lower authorities. At the outset, the Ld. A.R. of the assessee has submitted that the assessee was an individual and partner in a firm which carried on business of export of embroidered fabrics under the name and style of ‘Creation by Shangar’. The firm did not have any key employees and the entire business was mainly handled by the assessee and his brother being the partners. The main source of income of the assessee was by way of share of profit from the above firm from the day to day running of the business. The surplus arising out of the said business activity was invested by the assessee in diversified areas, such as RBI and UTI bonds, term deposits balance with banks, other government bonds, mutual funds scheme and equity shares. The share transactions in equity shares were carried out by the assessee through portfolio managers and the assessee did not personally deal in buying and selling of the shares and no skill or effort of the assessee was involved in the said transactions. The main motive of the assessee was to invest surplus funds. During the year under consideration, the assessee earned long term capital gains and short term capital gains. Whenever there were chances of diminishing in the value of shares, the shares were sold for the purpose of saving of the capital and the amount so received was further invested in buying another safer scrips. The assessee had not indulged in day to day trading. No borrowed funds had been used but only the surplus lying with the assessee was used. The assessee during the year declared short term capital gains at Rs.91,85,432/- and long term capital gains at Rs.97,39,172/-. The Assessing Officer (hereinafter referred to as the AO), though, admitted the claim of long term capital gains as such but treated the short term capital gains of Rs.91,85,432/- as business income of the assessee holding that the assessee was involved in share trading and not investment. The Ld. A.R. has brought our attention to the pattern of investment, volume and frequency of transaction average holding period etc. to show that the assessee had earned short term capital gains from 220 transactions. The assessee had invested in 80 different companies. The AO, inter alia, had treated the said income as business income observing that out of the 220 transactions, in 50 transactions the holding period was one month or less. The Ld. A.R. has submitted that almost identical transactions were done by the brother of the assessee namely Mr. Chetan K. Desai who was also a partner in the firm M/s. Creation by Shangar. Even the investment pattern, the nature of transactions, the brief transactions and the name of the scrips and their number had been identical as that of the assessee. The only difference was relating to the amount of investment. The matter in the case of the brother of the assessee had travelled to the Tribunal. The Tribunal, considering the overall facts and circumstances of the case, the nature of investments, the holding period of transactions etc. allowed the claim in the case of the brother of the assessee Mr. Chetan K. Desai vide for A.Y. 2005-06 vide order dated 05.12.12. The relevant findings of the Tribunal are given in paras 11 to 14 which are reproduced as under: “11. We have heard both the parties and perused the record, judgments and paper books filed before us. There is no dispute on facts and assessee declared capital gains Rs. 1,07,35,512/- on sale of shares and securities and as
per the assessee the Short Term Capital Gains are Rs.84,88,017/- and Long Term Capital Gains are Rs.22,46,495/-. Considering the facts relating to turn over, volume, number and magnitude of transactions etc, the AO came to the conclusion that the assessee is in the business of share trading only and held that the said gains constitutes 'profits and gains from the business of profession'. In the process, the AO ignored the fact that the assessee held some shares for the period longer than 12 months and reflected the shares in the books as the investments. The CIT(A) in his order dealt with both the issues of (a) long term capital gains - LTCG issue and (b) short term capital gains issues and granted relief on the both the counts.
We shall take up the LTCG issue and the case of the assessee is that when the assessee purchase the units of Reliance Vision Fund and Kotak Floater Dividend Fund and held them for more than 12 month period and also earned the dividend income before redeeming the units, by no stretch of imagination, the gains cannot be profits from business income. It is a undisputed fact that the units are accounted in the books as the 'investments'. On the other hand, the revenue rejected all the arguments of the assessee and taxed them as 'business profits'. Further, Revenue is of the opinion that the assessee offered the impugned gains as long term and short term capital gains only to avail the concessional tax rates of 20% and 10% respectively. In this regard, we have perused the contents of para 2.2 of the impugned order and find that the CIT(A) is fair in holding that the units of MFs held for the period of more than 12 months must be taxed as 'long term capital gains'. In our opinion, AO is unfair in negating the claims of the assessee when the provisions of the proviso to section 2(42A) of the Act provides for taxation of gains on sale of units of MF5 as long term capital gains at the concessional rate of taxation if they are held for 12 months or more. Therefore, the order of the CIT(A) on this issue does not call for interference. Accordingly, relevant grounds are dismissed.
The second issue relates to the taxation of gains of Rs 84,88,017/- earned on sale of securities held for the period less than 12 months: Briefly, relevant facts are that the purchase turnover of securities of the assessee for the year is Rs 8.07 crores and sale turnover is Rs 9.14 cr. Number of scrips are 80 and all of them are listed in the stock exchanges. Total number of transactions are 205. There is no speculative activity recorded in the year. Assessee has not used any borrowed funds for acquiring the shares. There are no intra-day trading. Assessee traded for 90 days out of the 200 and odd trading days in the year. Shares were always entered as investments in the books of accounts consistently like in the past years. AO accepted the claim of the assessee without any disturbance in the earlier years and this is for the first time, AO raised objections to the claims of the assessee. Assessee never held the impugned shares as stock in trade. In the factual matrix of the above, we need to decide if the AO is justified in disturbing the claim of the assessee that Rs. 84,88,017/- constitutes the short term capital gains.
The above precise data shows that the securities involved are the ones regularly traded ones in the stock exchanges. Considering the listed nature of the scrips and their higher values and magnitude, the purchase turnover of Rs Rs 8.07 crores and sale turnover of Rs 9.14 crores cannot be termed very high. Considering the transactions number of 205 in the year, they same do not account for at least one transaction per day and therefore, the same cannot be termed very high too. It is also not the case of the revenue that the assessee purchased or sold the shares everyday or multiple times in a trading day. There is neither speculation activity nor an intra-day trading activity recorded in the year. All the share transactions are delivery based and the impugned shares purchased are entered in the books of accounts as 'investment' and the shares purchased for business are entered as stock in trade separately. It shows the original intention of the assessee to treat certain securities as capital assets with intention to hold them for longer period. It is not the case of the revenue that the shares entered in the books as stock in trade are reclassified in books as investment with the intention of tax avoidance. It is the claim of the assessee that the assessee redeemed them as when there is threat of further erosion of the value of the shares. It is also not the case of the revenue that some of such shares are shown as stock in trade and others are shown as the short term capital assets only for tax benefits. All these features suggest that the assets in question are the investments and not the stock in trade. Further, it is an undisputed fact that the assessee has not borrowed funds for acquiring the shares in question and assessee purchased the shares out of own funds only. It is a feature of the investment activity. Normally, the act of borrowing funds for purchase of shares is the facet of a business activity, which is absent in this case. Assessee relied on the decision of ITAT, Mumbai Bench in the case of Janak S Rangwalla vs. ACIT [11 SOT 627] for the proposition that the magnitude of investment does not decide the nature of investment. Holding of 80 different stocks which are listed in the stock exchanges shows the diversified portfolio and intention of the assessee for long term holding. As seen from para 4.1 of the impugned order, CiT (A) discussed about the applicability of the CBDT Circular No.4 of 2007 which refers to various parameters and discussed the assessee conduct of not borrowing any funds for the business purposes which is one of the criterion of the Circular which was relied upon by the CIT (A) in the case of JCIT vs. Dinesh Kumar Gupta [2005] 2 SOT 126 (Del). It is a settled issue that the matters of this kind are mixed question of law and fact and the issue has to be decided based on the facts of each case. None of the lower authorities has gone into the relevant facts relating to the impugned issue involving many years and therefore we cannot give finding on the applicability of the rule of consistency to the instant case as held by the Apex court in the case of Gopal Purohit (supra). Therefore, we are of the opinion, the impugned order of the CIT(A) on this issue is proper and it does not call for any interference. Accordingly, relevant grounds of the revenue are dismissed.”
The Ld. A.R. has further invited our attention to another order of the Tribunal dated 14.01.13 in the case of the brother of the assessee Mr. Chetan K. Desai in for A.Y. 2008-09 wherein the Tribunal, observing that there was minor difference in the nature and pattern of transactions done by the brother of the assessee for A.Y. 2008-09 and hence relying on its order for earlier assessment year 2005-06 dated 05.12.12, has treated the brother of the assessee as investor and hence directed the AO to treat the income earned from the share transactions as capital gains.
We have perused the orders of the Tribunal dated 05.12.12 (supra) and dated 14.01.13 (supra) and have also examined the facts and circumstances of the case of the assessee. We find that the nature of activity and investment pattern of the assessee as discussed above is more or less identical to the case of Mr. Chetan K. Desai. Both were partners in the same firm and doing the same business. The nature of income of both the brothers was the same. The number of scrips and the name of companies invested in were also identical. The only difference was relating to the quantum of investment, otherwise, the entire investment pattern was the same. Hence, the orders of the co-ordinate bench of the Tribunal in the case of the brother of the assessee are squarely applicable to the facts and circumstances of the assessee’s case. We, therefore, are in agreement with the observations made by the Tribunal in the case of brother of the assessee. Accordingly, the assessee is also required to be treated as investor and the income earned by the assessee from the sale of shares is to be treated as capital gains. Moreover, in the case of the assessee, the long term capital gains offered by the assessee have been accepted. Once the assessee has been accepted as an investor in respect of long term capital gains, then the assessee is also to be treated as investor in case of short term capital gains. The assessee has maintained only one portfolio. The holding period in case of some scrips was less whereas in case of others, it was more. Once the assessee is to be treated as an investor, then the income earned from the share transactions is to be treated as capital gains. We, therefore, direct that the income earned by the assessee from the sale and purchase of share transactions be treated as capital gains. The facts and issues raised in assessee’s appeal for A.Y. 2007-08 and 2008-09 are identical, hence in view of our observations made above and in view of the decision of the co-ordinate bench of the Tribunal on identical facts and circumstances in the case of the brother of the assessee namely Mr. Chetan K. Desai, the income earned by the assessee from share transactions relevant to A.Y. 2007-08 & 2008-09 is also directed to be treated as capital gains.
In the result, all the three appeals filed by the assessee are hereby allowed. Order pronounced in the open court on 30.10.2015.