The DCIT, Central Circle-1, Surat v. M/s. Vowel Securities
[Citation -2016-LL-0919-66]

Citation 2016-LL-0919-66
Appellant Name The DCIT, Central Circle-1, Surat
Respondent Name M/s. Vowel Securities
Court ITAT-Ahmedabad
Relevant Act Income-tax
Date of Order 19/09/2016
Assessment Year 2006-07
Judgment View Judgment
Keyword Tags profit on sale of share • long term capital loss • system of accounting • business of trading • regular assessment • share transaction • trading of shares • business loss • closing stock • opening stock • demat account • capital gain • market value • co-partner • cost price • ill-health
Bot Summary: The Assessing Officer was of the view that the assessee had entered into frequent transactions in sale of shares and mutual funds qua the impugned short term capital gains hereinabove. The short term capital gains statement indicated sale of shares of Rs. 11,23,79,611/- and shares purchased of Rs. 11,67,53,260/-. We proceed further to find that the assessing authority took into account assessee s partnership deed clause already containing stipulation qua trading in derivatives, the fact that shares in question had been purchased from secondary market, it operated from two demat accounts, shares in question were easily marketable and liquid I.T(SS). The investment in shares, from the very beginning has been reflected at cost price in the balance sheet under the head Investment and vi/as never reflected in trading and PL account even if the market value of shares went below the cost. A trader in shares would purchase and sell shares frequently within a period of time. In any case, even this circular is not adverse to the assessee firm, Considering the purchase and sales of shares, the period of share holding, delivery of shares, payment for purchase of shares, registry of shares in its name etc. A 529 530/Ahd/2011 CO 53 54/Ahd/2012 Page No 10 DCIT vs. M/s Vowel Securities 5.5 The Assessing Officer in his order has stated that some portion of shares can be said to be acquired from borrowed funds, whereas the fact is that during the year there is increase in own; capital to the tune of Rs. 3.21 crore as against increase in investment of Rs. 3.08 crore, which suggests that no part of interest bearing funds were used in investment in shares.


IN INCOME TAX APPELLATE TRIBUNAL AHMEDABAD C BENCH Before: Shri S. S. Godara, Judicial Member and Shri Manish Borad, Accountant Member IT(SS)A 529 & 530/Ahd/2011 & CO 53 & 54/Ahd/2012 Assessment Year 2006-07 & 2007-08 DCIT, M/s. Vowel Securities Central Circle-1, B-502, Nova Apex, Surat Vs B/h Sneh Sankul (Appellant) W adi, Anand Mahal Road, Surat-395009 PAN: AADFV8808Q (Respondent) Revenue by: Shri Prasoon Kabra, Sr. D.R. Assessee by: Shri S.N. Soparkar with Ukti Parikh, A.R. Date of hearing : 27-07-2016 Date of pronouncement : 19-09-2016 ORDER PER : S. S. GODARA, JUDICIAL MEMBER:- These two Revenue s appeals and assessee s cross objections therein for A.Y. 2007-08 & 2008-09, arise from order of CIT(A)-II, Ahmedabad dated 01-07-2011 in appeal nos. CIT(A)-II/CC-1/70 & 71/2010-11, in proceedings under section 143(3) r.w.s. 153C of Income Tax Act, 1961; in short Act . I.T(SS).A 529 & 530/Ahd/2011 & CO 53 & 54/Ahd/2012 Page No 2 DCIT vs. M/s Vowel Securities 2. We notice at outset that assessee s cross objection nos. 53 & 54/Ahd/2012 suffer from delay of 118 days in filing. Its partner Shri Navin Kikubhai Desai has filed condonation affidavit(s) giving details about ill-health of his co-partner wife forming main reason for impugned delay. Learned Departmental Representative is fair enough in not disputing correctness thereof on facts. We accordingly condone about said delay in filing of assessee s cross objections. same stands admitted for adjudication. 3. We come to rival pleadings now. Revenue s identical sole substantial grounds in its two appeals challenges CIT(A) s order reversing Assessing Officer s action in treating assessee s short term capital gains of Rs. 1,31,40,000/- and Rs. 1,04,29,349/- as its business income. assessee on other hands assails legality of section 153C proceedings in both of its cross objections. Both parties agree that relevant facts and issues arising therefrom are identical in two impugned assessment years. We therefore take up Revenue s appeal ITA 529/Ahd/2011 and assessee s CO therein 53/Ahd/2011 as lead cases. 4. assessee is partnership firm. It is trader in derivatives as well. department conducted search in group cases of M/s. Garden Silk Mills on 12-08-2008. It seized alleged incriminating material belonging to assessee in course thereof. Assessing Officer issued section 153C notice dated 31-12-2008. I.T(SS).A 529 & 530/Ahd/2011 & CO 53 & 54/Ahd/2012 Page No 3 DCIT vs. M/s Vowel Securities assessee filed its return on 31-03-2009 declaring income of Rs. 4,24,19,263/-. same was summarily processed. Assessing Officer thereafter took up scrutiny. 5. assessee had declared business income of Rs. 3,19,89,914/- along with impugned short term capital gains of Rs. 1,04,29,349/- arising from sale of shares/mutual fund units. It had also disclosed long term capital loss of Rs. 12,61,877/- from similar transactions. Assessing Officer was of view that assessee had entered into frequent transactions in sale of shares and mutual funds qua impugned short term capital gains hereinabove. Its opening stock, closing stock inter alia read respective figure of Rs. 3,35,57,138/- and Rs. 4,83,60,136/-. short term capital gains statement indicated sale of shares of Rs. 11,23,79,611/- and shares purchased of Rs. 11,67,53,260/-. This made Assessing Officer to issue show cause dated 18-04-2010 proposing to treat above short term capital gains as business income. 6. assessee appears to have filed its reply on same day i.e. 18-04-2010 itself stating therein inter alia that all of its transactions had been entered into with intention of investment only as same was duly reflected in books at cost reading Rs. 9,74,20,776/-, these transactions satisfied all parameters to be treated as short term capital gains and there was no adventure in trading element in these short term capital gains. Assessing Officer in assessment order dated 07-06-2010 observed that I.T(SS).A 529 & 530/Ahd/2011 & CO 53 & 54/Ahd/2012 Page No 4 DCIT vs. M/s Vowel Securities assessee s motive in deriving impugned short term capital gains was to make quick profits as shares concerned had holding period ranging between one month to three months since time span of 1 to 30 days, 31 to 90 days, 91 to 180 days and 181 to 365 days involved 29, 31, 17 and 18 transactions; respectively totaling to 95 involving majority of them to have holding period of less than 90 days. assessing authority thereafter came to frequency of sale of shares. It noticed that assessee entered into regular share transaction on 92 days whereas it made sales on 59 days. Assessing Officer further stated in assessment order that assessee had no sold its shares for need of funds but on regular basis indicating its profit motive. It took note of fact that assessee was already in share business. Assessing Officer further observed inter alia that assessee s accounting treatment was no sufficient of all these factors, it had availed loans of Rs. 5,54,83,096/- and own capital of Rs. 3,88,88,381/- in beginning of year as against corresponding figure of Rs. 6,81,33,890/- and Rs. 7,14,83,401/-; respectively at time of closing of year. His opinion was that some portion of investment could be said to have been acquired from borrowed funds. We proceed further to find that assessing authority took into account assessee s partnership deed clause already containing stipulation qua trading in derivatives, fact that shares in question had been purchased from secondary market, it operated from two demat accounts, shares in question were easily marketable and liquid I.T(SS).A 529 & 530/Ahd/2011 & CO 53 & 54/Ahd/2012 Page No 5 DCIT vs. M/s Vowel Securities giving rise to presumption of trading, magnitude of its sales/ purchases of shares already demonstrated trading intentions, low dividend amounts qua impugned investments to come to conclusion that short term capital gains in question were in fact its business income. He accordingly proceeded in same direction whilst finalizing regular assessment in question. 7. assessee preferred appeal raising two substantive grounds. First one challenged validity of section 153C proceedings. Latter ground assails correctness of Assessing Officer s action treating impugned short term capital gains and business income on merits. We notice that CIT(A) declines former plea and accepts latter one. His findings on merits read as under:- 5.1 I have given careful consideration to basis given by Assessing Officer for his findings as also detailed submissions made on behalf of appellant-firm and perused decisions cited by learned R. In my view question in present case has to be considered and determined on basis of factual position which emerges from records and from discussion given above. In written submissions appellant has commented on various grounds indicated by Assessing Officer for treating short term capital gain as business income. most important point which can be said to be relevant for deciding issue is motive and intention of appellant at time of purchase of shares. Assessing Officer has mentioned that shares were purchased with motive of selling within short period of time ranging from one month to three months with motive to earn quick business profit. In this regard he has also brushed aside stipulation in partnership deed debarring firm to engage in trading of shares and mutual funds. Having regard to clear facts of this case, I do not find any substance in this assumption of Assessing Officer. From detail of capital gain furnished for A.Y. 2006-07 and 2007-08, which are part of record, it is clear that on sale of such shares which have been held by appellant-firm for I.T(SS).A 529 & 530/Ahd/2011 & CO 53 & 54/Ahd/2012 Page No 6 DCIT vs. M/s Vowel Securities various periods ranging from 1 day to 180 days in A.Y. 2007-08, appellant has incurred loss of around Rs. 37.50 lacs and there could have been no motive to incur such loss by way of short term capital loss and get set off against short term capital gain which would save tax @ 10%. appellant could have very well shown above loss as business loss and could have set off this loss against other business income which would have saved substantially more tax. These facts prove that Appellant has consistently shown profit on sale of shares as income from capital gain and has hot obtained any benefit of set off of loss treating partial loss as business loss when holding period is not significant. Further, terms and conditions of partnership deed reproduced above are clear and categorical. While firm is permitted to carry on trading in bonds, debentures and derivatives, it is debarred from engaging in tracing, in shares and mutual funds. partnership deed is legal document and is bidding on all partners. There are two partners in appellant-firm and stipulations of partnership deed are binding on them. If partnership firm flouts monetary provisions of partnership deed which is legal contractual agreement, opposing partners can always challenge and all legal consequences would follow. Further, legal document has to be read as whole and not in piecemeal and selective basis. While Assessing Officer accepts authenticity of one part of partnership deed he has brushed aside another part which is not fair. 5.2 Another important feature which has to be noted here is that separate books of account have been maintained for business activity and for investment activity. investment in shares, from very beginning has been reflected at cost price in balance sheet under head Investment and vi/as never reflected in trading and P&L account even if market value of shares went below cost. This policy is being followed by appellant-firm for past several years. Assessing Officer has not rejected these books of account and he has not disturbed quantum of income. He has only treated short term capital gain as business income. Another important point is that appellant has been following same system of accounting much prior to insertion of section 111 in IT. Act with effect from 1.4.2005. This shows that there was no motive or intention on part of appellant to take any undue advantage of newly inserted provision to reduce its tax liability. Right from very beginning shares are shown I.T(SS).A 529 & 530/Ahd/2011 & CO 53 & 54/Ahd/2012 Page No 7 DCIT vs. M/s Vowel Securities as investments and not as stock-in-trade. Even prior to search in case of Appellant, Assessment Order under Section 143(3) was passed in A.Y. 2005-06 wherein Assessing Officer has accepted treatment given for profit on sale of share as income from capital gain by Appellant. On this ground also, principle of consistency is required to be followed particularly when facts are similar. 5.3 I also find that transactions cannot be said to be frequent transactions of purchases and sales with view to earn quick profit. trader in shares would purchase and sell shares frequently within period of time. In present case, as per ddetails given in paper book, it is also significant to note that shares of companies were accumulated without any sales having taken in place in between purchase transactions. Thereafter, shares were held for sufficiently long period of time. In my view there can be no assumption that motive was to trade in shares of this company. Summary of some transactions are as under Statement Gain on investments during year 2007-08 of capital scrip Date of Date Acq. Acq. Sale Sale STCG purchase of Nos. Rs. Nos. Value Rs. sale Nos. Rs. Nos. Rs. Helois & MTH 26 Apr 05 250 492045 0 3 jun 05 150 36336 0 5jul 05 100 33184 0 30 Sept 500 l 05 0 23 5000 1074 I.T(SS).A 529 & 530/Ahd/2011 & CO 53 & 54/Ahd/2012 Page No 8 DCIT vs. M/s Vowel Securities Dec 358 05 18 5000 1211 109886 Jan 765 7 06 Financial 4 Mar 05 100 323543 Technology 0 1 Apr 05 500 135884 25 jul 05 949 788273 26 jul 05 551 44532 26 Aug 500 482778 05 27Nov05 500 630141 2 Dec 05 500 619153 26 1000 1281 Sep 941 05 29 1000 1245 sep 840 05 7Oct 880 1018 05 279 11 620 6654 Oct 05 05 18 1000 1291 207758 I.T(SS).A 529 & 530/Ahd/2011 & CO 53 & 54/Ahd/2012 Page No 9 DCIT vs. M/s Vowel Securities Jan 223 4 06 ABB Limited 23Nov04 239 219185 24Nov 04 761 7168l0 8 Dec 04 500 453473 13 Dec 500 449668 04 18 2000 2541 702403 Apr 538 04 Crompton 6 Jul 05 200 955730 Greaves 0 7 Jul 05 300 142785 0 5 17 3062 679032 Oct 5000 618 05 5.4 I also feel that Assessing Officer was not| justified in drawing any adverse inference from Board's circular referred to above. circular only stipulates certain guidelines which can be applied to particular facts and circumstances of given case. In any case, even this circular is not adverse to assessee firm, Considering purchase and sales of shares, period of share holding, delivery of shares, payment for purchase of shares, registry of shares in its name etc. etc. I.T(SS).A 529 & 530/Ahd/2011 & CO 53 & 54/Ahd/2012 Page No 10 DCIT vs. M/s Vowel Securities 5.5 Assessing Officer in his order has stated that some portion of shares can be said to be acquired from borrowed funds, whereas fact is that during year there is increase in own; capital to tune of Rs. 3.21 crore as against increase in investment of Rs. 3.08 crore, which suggests that no part of interest bearing funds were used in investment in shares. Even Appellant has already disallowed interest on by Rs. 17.99 lacs in return of income, which suggests that Appellant is carrying investment activity in shares and had it been trader, it would have claimed such interest. Even otherwise, recently Hon'ble Gujarat High Court in case of CIV V/s Niraj Amidhar Surti referred supra, has held that merely because shares had been purchased from borrowed funds, it would not change nature of transaction from investment to business. 5.6 I also find that shares which have been purchased by appellant-firm have been delivered and registered in name of firm through demat account and transactions have not been settled through broker without registration in name of firm. Further, different broker-codes have been used for F & O transactions and for purchases and sales of shares. In any case, there is no connection between F & O transactions and share transactions as assumed by Assessing Officer. F & O transactions are only in derivatives and not actual purchases or sales take place. In F & O transactions even at time of entering into contract there is no intention on part of concerned parties to purchase or sell shares and transactions are ultimately settled without actual purchases and sales. 5.7 Regarding ITAT Ahmedabad decision in case of Sugamchand C. Shah (supra), in my view observations of Hon'ble Tribunal have to be carefully applied to given case after considering all relevant facts of that case. findings of Hon'ble Tribunal contained at para-19 of order are reproduced below:- "19. Considering totality and peculiarity of facts of this case, we find that assessee is neither fully acting as trader nor as fully investor. Demarcation is quite hazy; though in |the books he is showing all purchases as investment but frequency of transaction in several cases is so large and holding period in many cases is so small - from 0 to week or I.T(SS).A 529 & 530/Ahd/2011 & CO 53 & 54/Ahd/2012 Page No 11 DCIT vs. M/s Vowel Securities so that assessee is de facto and purchasing shares as trader. He is also holding shares for long period - including that they are held as investment. Therefore, criteria has been fixed for determining as to when he is acting as trader and when as investor. Accordingly, we decide following criteria to hold when gains are to be taxed as profit to be earned under business or to be taxed as short term capital gain, we hold that if shares are not held even say for month, then intention is clearly to reap profit by acting as trader and he did not intend to hold them in investment port-folio. We believe that if person intends to hold his purchases of shares as investment, he would watch fluctuation of rates in market for which minimum time is necessary, which we estimate at one month. Where shares are held for more than month, they should be treated as investment and on their sale short term capital gain should be charged. When shares are held for less than month, gain on them should be treated as profit from business." 5.8 peculiar facts of above case were that appellant was neither fully acting as trader nor as investor. frequency in several cases was large and period of holding was zero to week. In these peculiar facts Hon'ble Tribunal thought it proper to lay down some formulae to j resolve controversy. These formulae cannot have universal application having regard to provisions of IT. Act especially definition of short term capital asset contained in section 2(42A) of IT. Act. Another important point to be noted in present case is that there is clear prohibition in partnership deed debarring appellant-firm from indulging in business of trading in shares and mutual funds. Another feature is that, as already mentioned above, in respect of shares which have been held for short period of up to 6 months, appellant has incurred net loss and not profit. Therefore, case of Sugamchand C. Shah cannot be applied to facts of present case. 5.9 Considering entire facts and circumstances as mentioned above, I have no hesitation in holding that on sale of shares appellant has earned only short term capital gain and not business income. Assessing Officer is accordingly directed to treat same as short term capital gain and levy tax u/s.111 A. I.T(SS).A 529 & 530/Ahd/2011 & CO 53 & 54/Ahd/2012 Page No 12 DCIT vs. M/s Vowel Securities 8. We have heard both parties. Relevant facts narrated in preceding paragraphs are repeated for sake of brevity. There is no dispute on facts and figures stated hereinabove. Revenue s only endeavour is to treat assessee s short term capital gains in question as its business income. We put up specific query as to whether it has ever been treated as share trader in order to assess similar capital gains as business income in preceding or succeeding assessment years. Shri Soparkar takes us to page 65 of paper book demonstrating that Assessing Officer himself has accepted assessee to be investor in course of regular assessment framed on 23-03-2007 in assessment year 2003-04 and 2004-05. He invites our attention to page 69 of paper book indicating assessee s dividend income of Rs. 10,89,493/- and that too, pertaining to impugned short term capital investments. 9. There is further no issue that assessee firm has been set up vide its partnership deed at pages 49 to 50 of paper book. This deed contains specific clause barring it from trading in equity shares and units issued by mutual funds. Revenue does not dispute in course of hearing before us that assessee has valued its investments at cost price, maintain separate portfolio for impugned investments as followed by fact that it has transacted on 92 days and 59 days for sale and purchase of shares. 10. We have already narrated that relevant holding period of assessee s investments in any case more than 30 days on most of I.T(SS).A 529 & 530/Ahd/2011 & CO 53 & 54/Ahd/2012 Page No 13 DCIT vs. M/s Vowel Securities occasions. Assessing Officer nowhere doubts assessee s specific plea that there has been no usage of borrowed funds. We further find that co-ordinate bench of this tribunal in assessee s group concern cases IT(SS)A No 531 and 532/Ahd/2011 decided on 22-03-2016 DCIT vs. M/s Tejas Securities has already considered identical facts to decide very issue against Revenue. Leaned Departmental Representative fails to point any distinction on facts or law. We further notice that hon ble jurisdictional high court in tax appeal 77 to 81/2010 CIT vs. Vaibhav Shah decided on 27-06-2012 holds this issue as purely factual one to be adjudicated in view of various relevant parameters i.e. nature and intention of assessee at time of investment, accounts treatment, frequency and magnitude of transactions, source of funds, holding period, to name few. We make it clear that Revenue s arguments do not satisfy even single parameter in order to conclude that assessee s short term capital gains are in fact its business income. We accordingly find no reason to interfere in lower appellate findings on consistency principle as well as merits. Revenue s sole substantive ground fails. So is its appeal ITA 529/Ahd/2011 11. After arguing for some time, learned counsel representing assessee submits that it no longer wishes to press its challenge to legality of impugned section 153C proceedings. assessee s CO 53/Ahd/2012 is dismissed as not pressed. I.T(SS).A 529 & 530/Ahd/2011 & CO 53 & 54/Ahd/2012 Page No 14 DCIT vs. M/s Vowel Securities 12. Same order to follow in latter assessment year ITA 530/Ahd/2011 and assessee s CO 54/Ahd/2012. 13. Revenue s both appeals are dismissed whereas assessee s cross objections therein are dismissed as not pressed. Order pronounced in open court on 19-09-2016 Sd/- Sd/- (MANISH BORAD) (S. S. GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad : Dated 19/09/2016 ak Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order DCIT, Central Circle-1, Surat v. M/s. Vowel Securitie
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