IN INCOME TAX APPELLATE TRIBUNAL BENCH, MUMBAI BEFORE SHRI MAHAVIR SINGH, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER . I.T.A. No.7248 Mum 2010 and 2352 Mum 2011 ( Assessment Year : 2006-07 and 2007-08) Shri Amar H. Patel(HUF) Deputy Commissioner of 601 B, Amrut vill a, Dr. Income Tax Range 17(3 ) v. Ambe dkar Road ,Matunga(E) Mumbai. Mumbai-400 019 . PAN : AAAHA2411B ( Appellant) .. ( Respondent) Assessee by Sh Vipul Joshi Revenue by : Shri A. Ramachandran Date of Hearing : 21-6-2016 Date of Pronouncement : 14-09-2016 O R D E R PER RAMIT KOCHAR, Accountant Member These two appeals, filed by assessee-HUF, being ITA No. 7248 Mum 2010 and 2352 Mum 2011, are directed against separate appellate orders both dated 8th July, 2010 passed by learned Commissioner of Income Tax (Appeals)-29, Mumbai (hereinafter called CIT(A) ), for assessment years 2006-07 and 2007-08 respectively, appellate proceedings before learned CIT(A) arising from separate assessment orders dated 20th November, 2008 and 30th November 2009 respectively passed by learned Assessing Officer (hereinafter called AO ) u s 143(3) of Income Tax Act,1961 Hereinafter called Act ). 2 ITA 7248 Mum 2010 and 2352 Mum 2011 2. First we shall take up assessee s appeal for assessment year 2006- 07 being ITA no. 7248 Mum 2010 . grounds of appeal raised by assessee HUF in memo of appeal filed with Income Tax Appellate Tribunal, Mumbai (hereinafter called Tribunal ) read as under:- 1. Learned Commissioner of Income tax(Appeals) -29, Mumbai Ld. CIT(A)] has erred in confirming Assessing Officer s action to treat Short Term Capital Gain on sale of shares amounting to Rs.13,10,760 - as Business Income. It is respectfully submitted that appellant is investor and in past also, he has shown profit or loss on sale of shares as Short or Long term capital gain or loss. Also appellant has made application in IPO under category of Retail Investor. Appellant was having shares as investment only. Appellant has shown investment in shares for A.Y. 2002-2003 and for A.Y. 2005-2006 i.e. in previous year and has STCG and LTCL out of investment activities. Appellant intention was never of trading in shares .He was investor all along year and has shown shares as investment in his Balance Sheet and never shown that said is stock in trade. Past history of appellant also shows that he is investor and his income or loss was offered for taxation as Short term or Long term Capital gain or loss. assessee HUF has raised additional ground of appeal for which application is moved contending in application that additional ground goes to root of matter and does not require verification of any additional facts and prayed that same may be admitted. additional ground raised by assessee is as under: 1. assessment framed by Assessing Officer A.O. ] was bad, illegal and void as mandatory and statutory notice under section 143(2) of Income Tax Act,1961 was not served upon Appellant. 3 ITA 7248 Mum 2010 and 2352 Mum 2011 3.The brief facts of case are that assessee is engaged in activity of purchase and sale of shares and during assessment year under consideration , assessee has offered short term capital gains of Rs.13,10,760 - for taxation in return of income filed with Revenue. It was observed by AO during course of assessment proceedings u s. 143(3) read with Section 143(2) of Act after verification of details of short term capital gains, that 90% of short term capital gains have been earned by assessee from one transaction i.e. on sale of 12971 shares of FCS Software Solutions Limited which were allotted to assessee in IPO which were allotted on 17-09-2005 and sold on 22-09-2005 and 23-09-2005 within gap of 5 days which led to earning of short term capital gains of Rs. 16,48,237 - out of total short term capital gain of Rs.17,26,855 - earned by assessee. It was observed by AO that assessee applied for shares in IPO of FCS Software Solutions Limited with help of loan finances taken from various sources on which interest was paid by assessee and added to cost of purchase of shares. assessee was show caused by AO as to why share transaction activity under taken by assessee be not treated as business activity and assessee in reply submitted that assessee is investor . In earlier years also assessee was investor and declared capital gains loss on sales and purchase of shares. assessee submitted that market is very volatile and being prudent investor assessee booked profit. assessee submitted that keeping in view transactions of assessee , it could not be said that assessee is in business of shares and hence assessee be treated as investor. AO rejected contentions of assesssee by observing that assessee has applied for 35 lacs shares of FCS Software Solutions Limited in IPO by obtaining finance of Rs. 8.75 crores from M s Merit Credit Corporation Limited and also from Masat Texturisers and Twisting Private Limited for which finance charges were paid fro availing loan finance from these two 4 ITA 7248 Mum 2010 and 2352 Mum 2011 entities. assessee was allotted 12971 shares on 17.09.2005 and amount adjusted against allotment was Rs.6,48,550 - @ Rs. 50 per share. assessee sold these shares on 22.09.2005 and 23.09.2005 for Rs.28,02,721 - and earned Rs.21,54,171 - out of these transactions. assessee showed profit of Rs.16,07,596 - from these transactions. AO observed that assessee showed cost of acquisition at Rs.11,95,125 - as against Rs.6,48,550 -. Thus, as per AO profit will increase to Rs. 21,54,171 - as against Rs.16,07,596 - declared by assessee. It was also observed by AO that assessee purchased 11018 shares of Kernex Microsystem Limited on 16.12.2005 for amount of Rs. 40,73,575 - and sold same on 20.12.2005 for Rs.37,08,200 - incurring loss of Rs.3,65,375 - .The assessee put stoploss so that loss does not increase where there is further fall in price of shares which also indicates that investment or transactions were not made with intention of long term investment to earn dividend and capital appreciation. It was also observed by AO that there is one more transaction which is intra day trading in share of Nandan Exim scrip which were purchased and sold on same day i.e. 01-06-2005. It was also observed that shares of certain shares as detailed in assessment order were sold within period of less than one month from date of purchase of shares. Thus, AO concluded that intention of assessee is to make profits by reselling at earliest point in time. assessee did not had intention to keep shares for longer period and to remain invested in these shares to earn dividend and capital appreciation. assessee has also availed loan and paid interest on loans finance obtained for purchasing 5 ITA 7248 Mum 2010 and 2352 Mum 2011 shares which assessee included in purchase cost of shares. It was observed by AO that assessee is found to be involved in full time share transaction activity which is carried on by assessee on day to day basis as continuous and regular transactions with intention of making profits and assessee did not have any other activity to earn livelihood. AO considered instruction no 1827 of CBDT dated 31-08-1989 which was supplemented with latest instruction dated 16.05.2006 to come to conclusion that assessee is undertaking purchase and sale of share as business activity to earn livelihood . transactions are huge running into crores in more than 20 scrips in which assessee dealt with. assessee has dealt with in on day to day basis in stock market and undertaken intra day trades as well stop loss was applied for which reflect indica of trade. value of purchase and sale are matching meaning thereby that assessee did not had intention of holding shares. Thus, AO held that assessee has dealt in shares as business and short term capital gain declared by assessee of Rs. 13,10,760 -was treated as income from business . assessee showed cost of acquisition of shares of FCS Software Solutions Limited at Rs.11,95,125 - as against allotment cost of Rs. 6,48,550 - and hence Rs. 5,46,575 - was also added to income of assessee under head income from business by AO vide assessment order dated 20-11-2008 passed by AO u s. 143(3) of Act. 4.Aggrieved by assessment order dated 20-11-2008 passed by AO u s 143(3) of Act , assessee filed first appeal with learned CIT(A) and reiterated its submissions. learned CIT(A) dismissed appeal of assessee and confirmed sustained that gains from sale of shares is to be brought to tax as income from business. learned CIT(A) held that assessee is entitled for deduction of interest paid on financing loan obtained for applying for IPO and assessee got relief of Rs.5,46,575 - towards interest paid by assessee for purchase of shares against business 6 ITA 7248 Mum 2010 and 2352 Mum 2011 income on matching principles vide appellate order dated 08-07-2010 passed by learned CIT(A) . 5. Aggrieved by orders dated 08-07-2010 passed by learned CIT(A),the assessee filed second appeal with Tribunal. 6. learned counsel for assessee contended that investment through IPO showed intention of assessee to make investment , that utilization of borrowed funds was no bar to make investment in capital assets, that frequency of shares transaction was low , that assessee was investor in shares for past many years and has been assessed as such . It was submitted that identical issue has been decided in case of brother of Karta of assessee namely Sh Dhruv H Patel in ITA no. 7857 Mum 2010 dated 05-12-2004 as also by decision of Tribunal in case of Karta of assessee namely Sh. Amar H Patel in ITA no 6568 Mum 2010 vide orders dated 05-04-2016 where in Tribunal followed decision of Tribunal in ITA no. 7857 Mum 2010 as facts were identical. It was submitted that facts in instant case are also identical and hence issue is squarely covered by aforesaid decisions of Tribunal . ld DR relied on orders of learned CIT(A). 7. We have heard rival submissions and perused material before us . We find that in case of Sh. Amar H. Patel (supra) Tribunal has decided appeal by following decision in case of Sh.Dhruv H. Patel(supra) wherein issue was deliberated in detail and decided, as under: Challenging order,dated 30.06.2010,of CIT (A) 29, Mumbai, assessee has filed present appeal. Assessee, individual, filed his return of income on 31.07.2007, declaring income of Rs. 94,46,168 -. Assessing Officer (AO) completed assessment under section 143(3) of 7 ITA 7248 Mum 2010 and 2352 Mum 2011 Act on 30.11.2009,determining income of assessee at Rs.94,46,170 -. 2.Effective ground of appeal is about treating short term capital gain on sale of shares, amounting to Rs. 94.46 Lacs, as business income. During assessment proceedings AO found that assessee was engaged in activity of purchase and sale of shares, that he had earned most of its income by way of investment in shares which were taken on loan from various parties, IPO funding and investment in mutual funds, that most of share transactions were either squared up in very short duration of time. Considering facts of case, AO held that transactions undertaken by assessee were not in nature of investment, that he had earned short term capital gain through his business activities.. He called for explanation from assessee in that regard and after considering same he held that most of investments had been made out of borrowed funds, that loans had been invested in three companies, that he was holding shares for very short duration, that frequency of such transactions was extremely high, that motive of assessee was to earn quick profit,that income of assessee had to be taxed under head business adventure in nature of business and not under head short term capital gain, as claimed by him. 3.Aggrieved by order of AO, assessee preferred appeal before first appellate authority (FAA).Before him, it was argued that assessee was investor, that in earlier years similar income by shown under head short term capital gain, that he had made application in IPO as retail investor, that he had made investments with borrowed funds knowing that investment will give good return. After considering assessment order and submission of 8 ITA 7248 Mum 2010 and 2352 Mum 2011 assessee, FAA held that assessee had purchased shares with borrowed funds for quickens, that IPO applications were made with borrowed funds and shares were offloaded after listing, that major profit had been earned on trading of one scrip only, holding period of scrips was only for few days and mostly below 30 days, that assessee was engaged in structured and organised business activity. Finally, he upheld order of AO. 4.During course of hearing before us,the authorised representative(AR)stated that investment through IPOs showed that intention of assessee was to make investment, that utilisation of borrowed funds was no bar to make investment in capital assets, that frequency of share transactions was very low, that average period of holding was approximately 40 days, assessee was investor in shares since past many years and had been assessed as such.He further stated that identical issue had been decided by tribunal while adjudicating appeal of brother of assessee namely Dhruv H Patel (ITA 7857 MUM 2010,dated 05 12 2014).The departmental representative (DR) supported order of FAA. 5.We have heard rival submissions and perused material before us we find that in case of Dhruv H. Patel (supra tribunal has deliberated issue and has decided same as under: 3. return for year was filed on 28.7.2006 declaring total income of Rs. 14,54,100 -. return was selected for scrutiny assessment. During course of scrutiny assessment proceedings,the Assessing Officer noticed that assessee has declared Short Term Capital Gain of Rs. 17,26,855 -.The AO further noticed that 90% of income has been derived from one 9 ITA 7248 Mum 2010 and 2352 Mum 2011 transaction which was on allotment of shares in IPO of FCS Softwares Solutions Ltd. AO also noticed that application in IPO was made out of borrowed funds and shares were sold within 5 days from date of allotment. AO was of firm belief that assessee has carried out business activities. assessee was asked to explain why Short Term Capital Gain should not be treated as business profit. It was explained that assessee is investor and was investor in past years also. profit was booked on allotment of shares of FCS Softwares Solutions Ltd as assessee has taken cautious view like prudent investor. explanation of assessee did not find favour with AO. AO observed that assessee has applied for IPO of FCS Softwares Solutions Ltd., by taking finance from M s. Merit Credit Corpn. Ltd. and also from Masat Texturisers & Twisting Pvt. Ltd. application amount was for 35 lakhs shares amountinto Rs. 8.75 lakhs. assessee was allotted 12971 shares on 17.9.2005 and shares were sold on 22.9.2005 and 23.9.2005 at average rate of Rs. 228 - as against purchase price of Rs. 50 - per share. AO proceeded by considering CBDT circular qua Instruction No. 1827 dt. 31.8.1989 and instruction dt. 16.5.2006 and treated share transaction of assessee as business income. 4. assessee carried matter before Ld. CIT(A) but without any success. 5. Before us, Ld. Counsel for assessee claimed that assessee was investor and during year under consideration he has applied for shares of FCS Softwares Solutions Ltd through IPO. assessee explained that after he has sold 10 ITA 7248 Mum 2010 and 2352 Mum 2011 shares at average rate of Rs. 228 - per share share price came down to Rs. 93.60 within one month and therefore being prudent investor, assessee's decision for selling shares at right time has earned him Short Term Capital Gains. Ld. Counsel further stated that utilization of borrowed funds is no bar to make investment in capital asset. Ld. Counsel further stated that assessee has dealt only in 19 scrips therefore considering facts of case, findings of Ld. CIT(A) are erroneous and deserves to be reversed. 6. Per contra, Ld. Departmental Representative strongly supported orders of lower authorities. 7. We have carefully perused assessment order and order of First Appellate Authority. It is admitted fact that around 90% of total gains is from sale of shares of FCS Softwares Solutions Ltd. It is also undisputed fact that assessee had applied in shares of IPO of said company from borrowed capital. Merely because shares were applied through borrowed capital cannot be ground for treating capital gains as business income. IPO funding availed by assessee was to get more allotment but fact of matter is that assessee was investor and sole intention of applying in shares through IPO was to get higher allotment of shares. We also find that there are no repetitive purchase and sale of same script which means that there is no churning of shares. total number of days utilized by assessee for investment in shares is 32 days. Considering all these facts in totality, we do not find any reason to treat assessee as trader. We, therefore set aside findings of Ld. CIT(A) and direct AO to treat Short 11 ITA 7248 Mum 2010 and 2352 Mum 2011 Term Capital Gain on sale of shares amounting to Rs. 17,26,855 - as declared by assessee. 8. In result, appeal filed by assessee is allowed. We find that facts of above mentioned case are more are less similar to facts of case under consideration-the amounts involved are different.So,following above order of Tribunal,we decide effective ground of appeal in favour of assessee. We find that facts of above mentioned appeals are more or less similar to facts of case under consideration . So following above order of Tribunal, we decide effective ground of appeal in favour of assessee. additional ground raised by assessee is not argued before us and has also become academic now in view of our decision to allow appeal on merits and hence same is dismissed. We order accordingly. 8. In result, appeal filed by assessee in ITA No. 7248 Mum 2010 for assessment year 2006-07 is allowed. 9. Now we take up appeal of assessee in ITA No. 2352 Mum 2011 for assessment year 2007-08. issue involved in this appeal is identical as was in ITA no. 7248 Mum 2010 for assessment year 2006-07 which is adjudicated by us in preceding para s of this order , as to treatment of short term capital gains of Rs. 37,65,775 - as income from business by authorities below. However, in this year it was noticed by authorities below that assessee has not only availed loan for making application in IPO but has also made most of 12 ITA 7248 Mum 2010 and 2352 Mum 2011 investments in shares out of borrowed funds, transactions are also on higher scales spread through out year and period of holding is very short. AO treated said short term capital gains of Rs. 37,65,775 - as income from business which was confirmed by learned CIT(A) in first appeal . Aggrieved , assessee filed second appeal and reiterated submissions as were made while arguing appeal in ITA no. 7248 Mum 2010 for assessment year 2006-07 while learned DR relied upon orders of learned CIT(A). In our considered view keeping in view factual matrix of case which is different from preceding assessment year 2006-07 as detailed above in preceding para ( viz. assessee has not only availed loan for making application in IPO but has also made most of investments in shares out of borrowed funds, transactions are also on higher scales spread through out year and period of holding is very short), this issue needs to be set aside and restored to file of AO for de-novo determination of issue on merits in accordance with law after examining entire spectrum of share transactions and factual matrix of case in details in accordance with principles laid down by Hon ble Bombay High Court in case of CIT v. Gopal Purohit (2011) 336 ITR 287(Bombay) wherein decision of Tribunal was upheld by Hon ble Bombay High Court as under: 1. following questions of law have been formulated in appeal filed by revenue against judgment of Income-tax Appellate Tribunal, dated 10-2-2009 : "(a)Whether, on facts and circumstances of case and in law, Hon'ble ITAT was justified in treating income from sale of 7,59,003 shares for Rs. 5,00,12,879 as income from short-term capital gain and 13 ITA 7248 Mum 2010 and 2352 Mum 2011 sale of 3,88,797 shares for Rs. 6,65,02,340 as long-term capital gain as against "Income from business" assessed by Assessing Officer? (b)Whether, on facts and circumstances of case and in law, Hon'ble ITAT was justified in holding that principle of consistency must be applied here as authorities did not treat assessee as share trader in preceding year, in spite of existence of similar transaction, which cannot in any way operate as res judicata to preclude authorities from holding such transactions as business activities in current year? (c)Whether, on facts and circumstances of case and in law, Hon'ble ITAT was justified in holding that presentation in books of account is most crucial source of gathering intention of assessee as regards to nature of transaction without appreciating that entries in books of account alone are not conclusive proof to decide income?" 2. Tribunal has entered pure finding of fact that assessee was engaged in two different types of transactions. first set of transactions involved investment in shares. second set of transactions involved dealing in shares for purposes of business (described in paragraph 8.3 of judgment of Tribunal as transactions purely of jobbing without delivery). Tribunal has correctly applied principle of law in accepting position that it is open to assessee to maintain two separate portfolios, one relating to investment in shares and another relating to business activities involving dealing in shares. Tribunal held that delivery based transactions in present case, should be treated as those in nature of investment transactions and profit received therefrom should be treated either as short-term or, as case may be, long-term capital gain, depending upon period of holding. finding of fact has been arrived at by Tribunal as regards existence of two distinct types of transactions namely, those by way of investment on one hand and those for 14 ITA 7248 Mum 2010 and 2352 Mum 2011 purposes of business on other hand. Question (a) above, does not raise any substantial question of law. 3. Insofar as Question (b ) is concerned, Tribunal has observed in paragraph 8.1 of its judgment that assessee has followed consistent practice in regard to nature of activities, manner of keeping records and presentation of shares as investment at end of year, in all years. revenue submitted that different view should be taken for year under consideration, since principle of res judicata is not applicable to assessment proceedings. Tribunal correctly accepted position, that principle of res judicata is not attracted since each assessment year is separate in itself. Tribunal held that there ought to be uniformity in treatment and consistency when facts and circumstances are identical, particularly in case of assessee. This approach of Tribunal cannot be faulted. revenue did not furnish any justification for adopting divergent approach for assessment year in question. Question (b), therefore, does not also raise any substantial question. 4. Insofar as Question (c ) is concerned, again there cannot be any dispute about basic proposition that entries in books of account alone are not conclusive in determining nature of income. Tribunal has applied correct principle in arriving at decision in facts of present case. finding of fact does not call for interference in appeal under section 260A. No substantial question of law is raised. appeal is accordingly dismissed. assessee is directed to appear before AO and produce all necessary and relevant evidences and explanations in support of its contentions . Needless to say proper and adequate opportunity of being heard shall be provided by AO to assessee in accordance with principles of natural justice in accordance with law. We order accordingly. 15 ITA 7248 Mum 2010 and 2352 Mum 2011 10. In result, appeal filed by assessee in ITA No. 2352 Mum 2011 for assessment year 2007-08 is allowed for statistical purposes. 11. In result, appeal filed by assessee in ITA No. 7248 Mum 2010 for assessment year 2006-07 is allowed while assessee appeal in ITA No. 2352 Mum 2011 for assessment year 2007-08 is allowed for statistical purposes. Order pronounced in open court on 14th September, 2016. 14-09-2016 Sd - sd - (MAHAVIR SINGH) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated 14-09-2016 . . . R.K., Ex. Sr. PS Copy of Order forwarded to : 1. Appellant 2. Respondent. 3. ( ) CIT(A)- concerned, Mumbai 4. CIT- Concerned, Mumbai 5. , , DR, ITAT, Mumbai Bench 6. Guard file. BY ORDER, True Copy (Dy. Asstt. Registrar) , ITAT, Mumbai Amar H. Patel(HUF) v. Deputy Commissioner of Income-tax Range 17(3) Mumbai