ACIT CIR 16(1), MUMBAI vs. DIPALI N SHAH, MUMBAI

These cross appeals have been filed against the order of Commissioner of Income-Tax (Appeals)-27, Mumbai, dated 22.12.2011 for A.Y. 2008-09. So, they are being disposed of by way of common order for the sake of convenience.

2) The CIT(Appeals) has erred in law and on facts in disallowing interest pertaining to loan taken for the purpose of working capital u/s.14A.

3) Without prejudice to that the Income from sale of shares should be treated as SHORT TERM CAPITAL GAINS and not as Business Income, the CIT(A) has erred in law and on facts in not allowing expenses related to Short Term Capital Gains, treated as Business Income, incurred by the assessee.”

& 1685/Mum/12 A.Y. 2008-09 (Smt. Dipali N. Shah vs. ACIT) Page 3

4. Assessee is an individual and sub-broker in shares having income from brokerage, short term and long term capital gains on sale of shares and income from other sources. Assessing Officer in assessment order treated the short term capital gains of Rs.1,69,67,011/- as assessee’s business income and further disallowed amount of Rs.6,17,810/- u/s.14A r.w. Rule 8D.

5. Matter was carried before the First Appellate Authority, wherein CIT(A) found that while treating short term capital gain earned by assessee as her business income, Assessing Officer observed as under:

3.1 The appellant has shown business income consisting brokerage income and speculation income. This confirms that she deals in shares and fully aware of the functioning of the capital market.

3.2 The total number of transactions resulting STCG are 3216, as per details filed by the appellant. Taking 250 trading days of the stock exchange, the average transactions per day are 12.86. The various periods of holding of shares, ranging from 10 days to more than 300 days is given as below.

S. No. Number of Holding period in days % of total transactions number of transactions 1 299 10 or less than 10 days 9% & 1685/Mum/12 A.Y. 2008-09 (Smt. Dipali N. Shah vs. ACIT) Page 4

2 472 In between 11 to 30 days 15% 3 597 In between 30 to 60 days 19% 4 564 In between 61 to 99 days 18% 5 796 In between 100 to 200 days 25% 6 360 In between 201 to 300 days 11% 7 128 In between 301 to 365 days 04% 8 3216

From the above it is clear that the frequency of trading is too high. The period of holding of share is also small. She is otherwise engaged in the brokerage and speculation business. The quantum of dividend earned is just Rs.3,68,023/-. The appellant cannot be held as investor. The entries made in books of accounts cannot be the conclusive evidence of her being investor, normally the person watches market for a longer period to earn dividend and appreciation in the value of shares. It is only in the case of trader that he earns STCG. When she claims to be an investor basically, that fact is not supported by the evidence. She has shown income/loss from future and options, as well as income from share transactions as STCG /LTCG and dividend income. She has suffered substantial losses in STCG as well as LTCG. If she would have been a pure investor she would have waited for the rise in the share price of that particular shares and would have never suffered a loss, as majority of shares in which she has suffered loss are divided giving companies and this establish the motive of the assessee that her intention was not the appreciation in value of shares or to earn dividend but to switch over to other shares which were on the rise and to earn profit from their sale.

3.3 Some of the shares in which she earned dividend, suffered losses but still sold them are along with their holding period in bracket namely, Glaxo (134 days); Gujarat NRE Coke (38 to 71 days); Gulf Oil (0 to 5 days); Hind Door Oliver (83 to 172 days)' IFCI (14 to 19 days); Indian Bank (24 to 46 days); Indusfila (18 to 45 days); JB Chemical (22 days); JP Associates (0 days); Kalyani Steel (34 to 282 days); LKP Mer (33 to 47 days) ; Magnum (8 to 17 days); Maikaa Fibre (73 tdo 120 days); Mukta Arts (125 days); Mysoor Cement (51 to 82 days); Netco ( 1 to 14 days); OCLIND (53 to 87 days); Paramount Communication (147 to 306 days); Patel & 1685/Mum/12 A.Y. 2008-09 (Smt. Dipali N. Shah vs. ACIT) Page 5 roadways (24 to 34 days); Radico Khaitan (34 to 37 days); RAP Media (50 to 126 days) Reliance Industry Infrastructure (14 to 157 days). This fact confirm that the assessee is not a basically investor only. She is a trader also.

3.4 The assessee's submission that she has earned 92% of STCG from holding of only shares of 10 companies is also does not help her in changing the nature of income. The prices of shares depends upon the SENSEX or vice-versa. One has to look at these gains or losses or turnover keeping in view the SENSEX. Even a person dealing in share of one company can earn business income, because it depends upon the frequency of the transactions and quantum of transaction. In the case of the assessee, the frequency of transaction as well as quantum are too high.

3.5 Yes, it is a well settled principle that buying and selling of shares is the nature of trade or investment is a mixed question of law and facts. In the case of the assessee, the books of accounts do not give any indication as to whether it is an investment. The frequency of trading is too high. The volume of trading is also too high. The assessee is also engaged in the speculation business of shares and showing it as a business income. She has utilized borrowed funds and also claimed deduction towards interest payment on it. She has earned dividend as well as suffered L TCL and STCL.

3.6 Assessee was asked to what is the quantum of disallowance under section 14A of the I.T.Act, read with Rule 8D of the I.T.Rules. Vide a written reply dated 27.10.2010, a figure of disallowance of Rs.ll,55,552/- was furnished. This is incorrect. The correct working is a under.

Under Rule 8D of the I.T.Rule the average value of investment, income from which does not form of the total income is Rs.5,1 0,45,221/- [ (Rs.6,82,51,776/- + Rs.3,38,38,666/-) / 2

The average value of the total assets as shown in the balance & 1685/Mum/12 A.Y. 2008-09 (Smt. Dipali N. Shah vs. ACIT) Page 6 sheet is Rs.6,22,27,868/-. The total amount of interest as claimed as expenditure is Rs.4,42,175/-.

The amount under Rule8D(1) Nil The amount under Rule8D(2)(i) Nil The amount under Rule 8D(2)(ii) 51045221/62227868 x 442175 =Rs.3,63,584/- The amount under Rule 8D(2)(iii) 0.5 x 51045221 = Rs.2,55,226/-

Thus the total disallowance is worked out at Rs.6,17,810/-. This is disallowed and added to the income of the assessee."

During appellate proceeding, various contentions were raised on behalf of both parties and having considered the same, CIT(A) granted part relief to assessee.

7. After going through rival submissions and material on record, we find that assessee is a broker in securities and well versed in stock market operation. The assessee can carry out dual roles of business person as well as an investor and therefore what needs to be seen is the manner which investment activities are carried out. The mere fact that she is & 1685/Mum/12 A.Y. 2008-09 (Smt. Dipali N. Shah vs. ACIT) Page 7 a broker in securities cannot be held against her. In case, assessee is holding some shares as stock and others as investment consistently, then sale of shares held as investment would construe capital gain and other held as stock will be treated as business profit. There is no bar on a stock broker holding shares as an investment. The magnitude of transaction does not change the nature of transaction. The consistent practice of assessee has to be looked into these facts and circumstances. The prudent person can do both investor as well as trader in the shares. It is found that assessee has been an investor in share all along. In the year under consideration, Assessing Officer has arrived at conclusion of high volume and frequency of transactions by relying on number of transactions at 3216. The volume and number of transactions depend upon capital investment and that particular order is split into number of transactions for want of required buyers/sellers of scrips ordered. Once order is executed by broker, it results in a number of transactions. As per guideline of SEBI contract note is to be issued separately for each transaction, whereas in reality it consists of single order as far as assessee is concerned. Assessee before CIT(A) demonstrated this position in her submissions and arrived at 987 transactions as against 3216 adopted by Assessing Officer. Having regard to capital invested by assessee, the number of transactions reported at 987 could not be regarded as excessive. This was not exclusive year in which such large number of transactions were reported. Hence CIT(A) rightly did ITA Nos.1769 & 1685/Mum/12 A.Y. 2008-09 (Smt. Dipali N. Shah vs. ACIT) Page 8 not agree with the observation of Assessing Officer on this issue. The volume and number will depend upon the quantum of investments made. In case, funds invested are huge, obviously the number of transactions and volume will become high. In case large number of transactions were confined within the same year this definitely will give indication that assessee is trading in shares but in case the number of transactions are large but sales made during year are in respect of purchases made long ago then it could not be said that assessee is trading in shares merely because volume are heavy and number of transactions are large. Shares sold in the year under consideration have been acquired in earlier years in which these have already been accepted as investment. Therefore, the nature of investment cannot be changed in the year. This reasoned finding of CIT(A) needs no interference from our side.

7.1 Further, assessee has transacted not more than 15 days in any of the months during the year and for the entire year she had transacted on 164 days out of 250 working days of stock exchange. On average she had carried out 6 transactions per day which cannot be considered as high volume when viewed in the background of the daily transactions carried out in BSE/NSE. These transactions were not entered into frequently, continuously and regularly by assessee. Consistent dealing in particular item is indicative of intention of trade. Considering the fact that assessee has re-entered in only 17 & 1685/Mum/12 A.Y. 2008-09 (Smt. Dipali N. Shah vs. ACIT) Page 9 scrips out of 273 scrips dealt during the year and profit earned there from is Rs.28,98,906/-, which constitutes only 17% of short term capital gain. In this background, CIT(A) rightly held that the entire short term capital gain cannot be held to be business income based on this isolated fact, and however the aforesaid amount of Rs.28,98,906/- could alone be considered as business income held by CIT(A). This reasoned finding of CIT(A) needs no interference from our side. We uphold the same.

7.2 Further, CIT(A) observed from table no.2 filed before him that assessee has earned 88% of total Short Term Capital Gains with a holding period more than 3 months. In other words, only 12% of the overall capital gain for assessee has accrued from stocks where the weighted average holding duration for scripts was up to 3 months. Further 72% of short term capital gain was earned on stocks with a holding period of more than 6 months. In respect of sale of shares within 3 months of holding it was explained to be triggered by an unprecedented volatility in the market between November, 2007 to January, 2008, that assessee had sold shares within a short period of holding at loss in fear of further large fall in market. In fact this position is reinforced by the fact that with 236 transactions in less than a month and 339 transactions during 1 month to 3 months carried out by assessee resulted in a meager profit of 12% of total short term capital gain. In & 1685/Mum/12 A.Y. 2008-09 (Smt. Dipali N. Shah vs. ACIT) Page 10 this back ground, CIT(A) did not accept the stand of Assessing Officer that assessee sold dividend yielding stocks at a loss.

7.3 CIT(A) noted from table no.8 filed before him that assessee has earned a short term capital gain of 72.15 lakhs and long term capital gain of 3.3 crores in 19 common scrips transacted in respective categories. Assessing Officer has accepted long term capital gain on sale of these scrips as returned by assessee whereas treated short term capital gain in same scrips as business income. Assessing Officer has contradicted himself without any reason, and therefore, gains arising from shares purchased in earlier years and treated as Investments could not be suddenly considered as business income.

7.4 Assessee was not transacting frequently for smaller gains as was reflected from total capital gain on cost of investment sold being 47% during the year as can be observed from table no.5. filed before CIT(A). In fact, short term capital gain as percentage of cost of investments sold during the year stood at 16.5% which definitely on higher side when compared to a trader's activity.

7.5 Average capital appreciation was a huge for the top four scrips (Jai Corp, Jindal steels & power, Accentia and Bag films), which together accounted for 49% of the total capital gains. In this background, CIT(A) rightly observed that the & 1685/Mum/12 A.Y. 2008-09 (Smt. Dipali N. Shah vs. ACIT) Page 11 intention was clearly not to frequently trade or churn for smaller returns that are normally traits of traders in business.

7.6 Further, CIT(A) observed that assessee had significant unbooked and unrealized capital gain of Rs1.35 crores in scrips held as closing investments as on 31.3.2008. A trader would have definitely realized the huge profit immediately and not carried out profits to the next year. From table no.1 filed before him CIT(A) observed that assessee had unrealized capital gain for all the years viz., A.Ys. 2004-05 to 2008-09. The presence of such huge unrealized capital gains having longer holding period clearly indicates intention of assessee of trying to seek long term capital gain, rightly observed by CIT(A).

7.7 The stand of assessee as an Investor has been accepted by the Assessing Officer in earlier year under section 143(3). The assessment for A.Y. 2007-08 was completed u/s. 143(3). and capital gains on sale of shares and securities were accepted and taxed as short term at Rs.85,23,821/- and long term capital gain assessed at Rs. 39,17,054/-. Besides, shares were accepted as Investments in the Balance Sheet. The facts of the case were similar in A.Ys. 2007-2008 & 2008-2009 except the transactions relating to repetitive transactions discussed above and no fresh material has been brought on record by Assessing Officer in this year under consideration. The assessee’s claim regarding long term capital gains has not been disturbed by Assessing Officer for the year under & 1685/Mum/12 A.Y. 2008-09 (Smt. Dipali N. Shah vs. ACIT) Page 12 consideration and thus, Assessing Officer himself has accepted that assessee was investor in shares also. In such circumstances, CIT(A) rightly observed that there was no reason for the Assessing Officer to treat investment in shares by assessee as trading in shares for A.Y.2008-09. The uniformity in treatment and consistency under the same facts and circumstances is one of the fundamental judicial principles which cannot be brushed aside in any manner. In view of this, CIT(A) rightly directed the Assessing Officer to consider the amount of Rs.28,98,906/- as business income and Rest of short term capital gain was directed to be assessed as short term capital gain. This reasoned factual finding of CIT(A) needs no interference from our side. We uphold the same.

8.1 Before us, learned Authorized Representative submitted that CIT(A) was not justified in disallowing interest pertaining to loan taken for the purpose of working capital u/s.14A. & 1685/Mum/12 A.Y. 2008-09 (Smt. Dipali N. Shah vs. ACIT) Page 13 Assessee is fairly conceded before us regarding disallowance of 0.5% administrative expenses, we hold accordingly. Further, learned Authorized Representative drew our attention to page 11 and submitted that assessee had sufficient own funds and requested that disallowance in question is not justified. This fact needs verification in its facts and circumstances. So, matter is restored to Assessing Officer with direction to decide this issue as per facts on record and as per law after providing due opportunity of hearing to assessee.

Pronounced in the open Court on this the 09th day of October, 2015.

Sd/- Sd/- (ASHWANI TANEJA) (SHAILENDRA KUMAR YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai: Dated 09/10/2015 True Copy S.K.SINHA आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. राज�व / Revenue 2. आवेदक / Assessee 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड� फाइल / Guard file. By order/आदेश से,

उप/सहायक पंजीकार, आयकर अपील�य अ�धकरण, मुंबई ।