Mohan Kapoorchand Jain v. ACIT, 20(2), Mumbai
[Citation -2016-LL-0930-169]

Citation 2016-LL-0930-169
Appellant Name Mohan Kapoorchand Jain
Respondent Name ACIT, 20(2), Mumbai
Court ITAT-Mumbai
Relevant Act Income-tax
Date of Order 30/09/2016
Assessment Year 2007-08
Judgment View Judgment
Keyword Tags administrative expenditure • disallowance of interest • short-term capital gain • computation of income • taxability of income • method of accounting • rule of consistency • investment in share • business of trading • concessional rate • share transaction • sale of property • sale transaction • trading activity • profit on sale • capital asset • sale of share • letting out
Bot Summary: The CIT(A) has analyzed the frequency of transactions in respect of each and every share and found that in respect of transactions in shares of Coromandel Fertilizers Ltd., Dharani Sugar Chemicals Ltd., Dewan Housing Finance Ltd Heritage Foods Ltd., frequencies were more and transactions were entered repeatedly as if the assessee was a trader in shares. 1033 748 Mum 2010 A.Y.2006-07 on the basis of finding of both the lower authorities that most of the shares were purchased and sold immediately and there were no shares which were acquired prior to 1st April, 2004 and held after 31st January, 2005, the gain arising out of sale of such shares were held to 8 ITA No.3541,3542,3543,4571-2012, be business income. 11.2 We have gone through decision in the case of Jayshree Pradeep Shah as relied by learned DR and found that on the basis of findings recorded by both the lower authorities to the effect that there were high number of transaction in shares with borrowed funds and the sale of shares was the only activity of the assessee within a very short holding period, it was held that the profit arose on sale of such shares were liable to tax as business income. The Mumbai Bench of the Tribunal in the case of Shantilal M Jain vs ACIT vide order dated 27-04-2011 held that despite large volume of shares transactions, the Assessing Officer cannot ignore the rule of consistency to treat the gains on sale of shares as STCG. In that case, the assessee was engaged in the business of trading in shares and also investment in shares and securities offered Rs. 1.54 12 ITA No.3541,3542,3543,4571-2012, crores as short term capital gain and Rs. 2.91 crores from long term capital gain. If the above parameters are applied to the facts of the appellant's case then it is clear that the total transactions of sale of short term shares are 227 with a turnover of 11 Crores which will be high volume and frequency suggestive of the activities like a trader in shares and not an investor It is also noted that on large number of occasions the assessee has purchased or sold the same scrip several time in the same year which suggests that the assessee conducted himself in the manner like trader so far as the short term shares are concerned. So far the question taxability of long term capital gain of Rs.3,20,34,059 on the shares held for more than 12 months is concerned, it is well known ,that the share market is highly volatile and hence no one can be expected 'to be doing trading in shares by holding the same for very long period i.e., more than 12 months. The mere fact that the assessee has been treated as trader for shares held for less than 12 months, doesn't mean that he is required to be treated as trader in shares in respect of shares held for more than 12 months also, if the nature of transaction, period of holing as well as other factors suggest that the assessee has acted like an investor in case of shares held for more than 12 months.


IN INCOME TAX APPELLATE TRIBUNAL B , BENCH MUMBAI BEFORE: SHRI R.C.SHARMA, AM & SHRI SANDEEP GOSAIN, JM ITA No.3541 Mum 2012 (Assessment Year : 2007-2008) Shri Mohan Kapoorchand Vs. ACIT, 20(2), Mumbai Jain C 4, Jeevan Sudha, S.D.Barfiwala Marg, Juhu Lane, Andheri (W), Mumbai 400 058 PAN GIR No. : AABPJ7629P (Appellant) .. ( Respondent) & ITA No.3542 Mum 2012 (Assessment Year : 2008-2009) Shri Mohan Kapoorchand Vs. ACIT, 20(2), Mumbai Jain C 4, Jeevan Sudha, S.D.Barfiwala Marg, Juhu Lane, Andheri (W), Mumbai 400 058 PAN GIR No. : AABPJ7629P (Appellant) .. ( Respondent) & ITA No.3543 Mum 2012 (Assessment Year : 200 9-2010) Shri Mohan Kapoorchand Vs. ACIT, 20(2), Mumbai Jain C 4, Jeevan Sudha, S.D.Barfiwala Marg, Juhu Lane, Andheri (W), Mumbai 400 058 PAN GIR No. : AABPJ7629P ( Appellant) .. ( Respondent) & ITA No.4571 Mum 2012 (Assessment Year : 2009-2010) ACIT, 20(2), Mumbai Vs. Shri Mohan Kapoorchand Jain C 4, Jeevan Sudha, S.D.Barfiwala Marg, Juhu Lane, Andheri (W), 2 ITA No.3541,3542,3543,4571-2012, Mumbai 400 058 PAN GIR No. : AABPJ2629P ( Appellant) .. ( Respondent) Assessee by : Shri S.L.Tiwari and Ms. Rutuza N. Pawar Revenue by : Neil Philip Date of Hearing : 11 07 2016 Date of Pronouncement 30 09 2016 O R D E R PER R.C.SHARMA (A.M): These are cross appeals filed by assessee and revenue against order of CIT(A) for Assessment Year 2007-2008, 2008- 2009 & 2009-2010. 2. Common grievance of assessee in all years pertains to treatment of gains arising out of sale of shares, whether short term capital gains or business profit. 3. At outset, learned AR placed on record order of tribunal for assessment year 2006-2007 dated 21 02 2014 in assessee s own case wherein Tribunal observed as under:- 11. Rival contentions have been heard and record perused. We have also deliberated on judicial pronouncements referred by lower authorities in their respective orders as well as decision cited by learned AR and DR during course of hearing before us in context of factual matrix of case. question as to whether assessee has earned capital gain or business profits on shares sold by him depend on facts and circumstances of each case. Such decision is Shri Mohan K.Jain, Mumbai 27 I.T.A.No. 1033 & 748 Mum 2010 A.Y.2006-07 to be arrived at by taking into account intention of assessee while purchasing shares, as to whether same was acquired for holding as investment or for doing business therein. treatment given by assessee in its books of account is also one of decisive factors to find out whether shares were held as investment or stock in trade. If shares are bought with 3 ITA No.3541,3542,3543,4571-2012, intention of earning capital gains thereon and also dividend income by keeping same as investment, gain arising there from is required to be treated as capital gains. On other hand, if shares are purchased with intention to earn profit thereon and same is treated as stock in trade in books of account, profit arising out of sale of such shares are liable to be treated as business income. Volume and frequency of transaction is also one of guiding factors to find out whether assessee is engaged in business of purchase and sale of shares or making investment to have capital gains thereon. In instant cases before us, we found that assessee has invested in shares of Indian Companies in earlier assessment years, which is clear from statement of shareholding of assessee, such treatment of capital gains was accepted by department and there is no material change in method of accounting and manner of earning of income during year under consideration as compared this earlier years. Thus, fact of assessee investing in shares in earlier years is not in dispute.There is also no dispute to fact that assessee has treated Shri Mohan K.Jain, Mumbai 28 I.T.A.No. 1033 & 748 Mum 2010 A.Y.2006-07 equity shares of Indian Companies as investment i.e. capital asset all along. assessee has also valued shares at cost thus given particular treatment to shares held as investment, therefore, without brining on record contrary material, AO cannot change intention and manner of investment being made by assessee. Had assessee valued shares at cost or market price whichever is lower, gain arising out of sale of shares could easily be treated as business income. Assessee had not valued shares as stock but valued same as investment. Thus, what was capital asset will remain capital asset unless person holding asset himself changes nature by specific action like conversion of capital asset into stock in trade. In instant cases before us, assessee has not treated investment in equity shares of Indian Companies as stock in trade. In view of decision of Hon'ble Supreme Court in case of Ram Kumar Agarwal & Brothers, 205 ITR 251, AO and ld. CIT(A) was not justified in treating capital gain earned from sale of these shares, as business profits, which were entered by assessee as investment in books of account. There is also no dispute to well settled legal proposition that res judicata do not strictly apply to income tax proceedings, but at very same time, it is well settled that principle of consistency under same facts and circumstances is fundamental of judicial principle, which cannot be brushed aside without proper reasoning. In this regard, reliance can be placed on 4 ITA No.3541,3542,3543,4571-2012, decision in case Shri Mohan K.Jain, Mumbai 29 I.T.A.No. 1033 & 748 Mum 2010 A.Y.2006-07 of S.M.K. Shares and Stock Broking Private Limited, I.T.A.No.799 Mum 09 order dated 24.11.2010. For this proposition, decision of Hon'ble Supreme Court in case of Gopal Purohit, 228 CTR 582, is very much relevant and important. From record, we found that assessee was investing in shares as well as trading in shares. He has maintained two portfolios of share transactions i.e delivery based share transactions and non-delivery based share transactions. non-delivery based share transactions were in respect of F&O and intra-day share transactions, profit of which has been shown under head income from business. In respect of delivery based share transaction, profit has been shown as STCG or LTCG, depending upon period of holding. However, profit or loss earned on non delivery based transactions are shown as his business income. assessee has maintained separate ledger accounts. Transactions were recorded separately at time of purchase of shares. In respect of shares held as investment assessee had valued same at year end at cost and in respect of shares held in is trading portfolio, he has valued same at cost or market price, whichever is lower. In assessment year under consideration assessee had consistently followed same system of accounting as followed in preceding years. profit earned on investment was disclosed as STCG LTCG, depending upon period of holding. In scrutiny assessment, AO has accepted assessee s status as investor in assessment year 2005- 06. Only Shri Mohan K.Jain, Mumbai 30 I.T.A.No. 1033 & 748 Mum 2010 A.Y.2006-07 during year under consideration by referring to volume of transaction, number of shares, frequency of transaction, AO disallowed assessee s claim of capital gains and treated same as business income. CIT(A) has analyzed frequency of transactions in respect of each and every share and found that in respect of transactions in shares of Coromandel Fertilizers Ltd., Dharani Sugar & Chemicals Ltd., Dewan Housing Finance Ltd & Heritage Foods Ltd., frequencies were more and transactions were entered repeatedly as if assessee was trader in shares. CIT(A) discussed various judicial pronouncements and guidelines laid down therein with regard to treatment of gains arising out of sale of shares. CIT(A) applied to facts and circumstances as found during year, proposition laid down in various judicial pronouncements and reached to conclusion that profit earned in respect of shares of companies discussed above, amounting to Rs.18,41,027 - were business income and liable to be taxed as such, in place of assessee s claim for 5 ITA No.3541,3542,3543,4571-2012, treating same as capital gains. CIT(A) also discussed amendment brought in byFinance Act, 2004, introduction of Security Transaction Tax(STT) on sale & purchase of shares and other derivative transactions. CIT(A) also discussed exemption brought in under Section 10(38) in respect of LTCG and levy of taxation on STCG at concessional rate of tax of 10% by this Finance Act. CIT(A) observed that along with these amendments, Revenue has also Shri Mohan K.Jain, Mumbai 31 I.T.A.No. 1033 & 748 Mum 2010 A.Y.2006-07 levied security transaction tax to effect that only after suffering burden of security transaction tax, such gain was held to be exempt or liable to lower rate of tax. By referring to decision in case of Gopal Purohit (supra), which was affirmed by Hon ble jurisdictional High Court and SLP filed against same by Revenue was also dismissed by Hon ble Supreme Court, held that AO was prompted to take different view on same sets of facts and types of transactions entered into by assessee in relevant assessment year and as found in its earlier assessment year. CIT(A) also elaborately dealt with consistency in treatment of profit arose on similar transaction of sale and purchase of shares. CIT(A) also considered volume, frequency and continuity of transactions, average holding period in respect of each and every shares entered into by assessee during year under consideration. CIT(A) found that no interest was paid on amount borrowed from associates. CIT(A) had also considered different ratios viz. capital gain ratio, quantity ratio, number of transaction ratio, purchase cost ratio, so as to establish that gains on sale of shares is to be assessed as capital gains or business profits. So far as frequency of purchases and sale of shares is concerned, same is due to electronic system of stock exchange.A single order placed for purchases may be completed by way of small equities of shares available for sale to meet out demand of purchaser. Therefore, single order is not necessary to be completed Shri Mohan K.Jain, Mumbai 32 I.T.A.No. 1033 & 748 Mum 2010 A.Y.2006-07 by single transaction of entire quantity of shares. Likewise, in case of sales, same may be divided as per requirement of purchaser at stock exchange; fact that in all preceding years, where assessee had liquidated his investment in equity shares in Indian Companies, Department has accepted position except assessment year in question, wherein Department treated gain from purchase and sale of shares as business income. decision to dispose of investment at short interval is being taken by assessee keeping in view eventuality of down 6 ITA No.3541,3542,3543,4571-2012, trend in market sentiments over particular script. Merely because assessee was able to realize better prices of its investment at short interval, cannot be solitary yardstick for treating such action as adventure in nature of trade, giving rise to business profits, when all surrounding circumstances, indicate otherwise. No where AO has indicated any transaction of purchase of shares without taking delivery and making full payment of such investment. Even in case of investment it is for assessee to decide when to dispose them off so as to have maximum return out of them. There is no theory that shares held as investment should be disposed of only at time of need or in emergency. assessee had all rights to dispose investment to reap maximum benefit when prices of scripts are high so as to earn better gain. It is true that frequency and volume of transaction is one of guiding factors to find out as to whether Shri Mohan K.Jain, Mumbai 33 I.T.A.No. 1033 & 748 Mum 2010 A.Y.2006-07 assessee deal in shares as trading asset or hold shares as investor, but certainly not criteria. prudent investor always keeps watch on market trend and, therefore, not barred under law from liquidating his investment in shares. law itself has recognized this fact by taxing these transactions under head "Short Term Capital gains" being shares which are sold within 12 months of its acquisition. Under these circumstances, if contention of AO is accepted, then it would be against legislative intent itself. Here, it is pertinent to mention intention of Government for introducing security transaction tax and exempt long term capital gain earned from sale of shares and levying 10 % tax on short term capital gain and earned on sale of shares. It is noted that under old provisions of Income-tax Act, profits or gains arising to investor from transfer of securities were charged to tax either as long term capital gains or short term capital gains depending on period of holding of said securities; Short-term capital gains arising from transfer of securities were taxed at applicable rates (normal rate) and Long-term capital gains were taxed @ 20%, after adjusting for inflation by indexing cost of acquisition. For listed securities, taxpayer had option to pay tax on long-term capital gains @ 10% but without indexation. For Foreign Institutional Investors (FIIs), long-term capital gains and short-termShri Mohan K.Jain, Mumbai 34 I.T.A.No. 1033 & 748 Mum 2010 A.Y.2006-07 capital gains were taxed at rate of 10% (without indexation) and 30% respectively. In case of trader in securities, however, gains were taxed as any other normal business income. Thus tax liability on income from purchase & sale of shares as regards to 7 ITA No.3541,3542,3543,4571-2012, STCG & business income was at par. However, issue of treatment of income from share transaction as capital gain or business income has in-fact arisen after amendment brought with Finance Act-2004 by insertion of provisions of section 111A and 10(38) as regards to levy of Transaction tax and exemption concession on capital gain arising from securities entered in recognized stock exchange. With view to simplify tax regime on securities transactions, tax at rate of 0.015 per cent. (see: change in rates on securities transactions, by Finance Acts, at appropriate head) is levied on value of all transactions of purchase of securities that take place in recognized stock exchange in India. This tax is collected by stock exchange from purchaser of such securities and paid to exchequer. provisions relating to securities transactions tax are contained in Chapter VII of Finance (No.2) Bill, 2004, and came into effect from 01.10.2004.Further, clause (38) has been inserted in section 10 of Shri Mohan K.Jain, Mumbai 35 I.T.A.No. 1033 & 748 Mum 2010 A.Y.2006-07 Income-tax Act, so as to provide exemption from long-term capital gains arising out of securities sold on stock exchange. new section 111Ahas also been inserted and section l15AD is amended, so as to provide that short-term capital gains arising from sale of such securities to investor including FIIs shall be charged at rate of ten per cent. These amendments apply to assessment year 2005-2006 and subsequent years. Through Finance Act, 2008, sections 111A and 115AD have further been amended whereby rate of tax on such short-term capital gain has been raised to fifteen percent. Thus, w.e.f. 01.10.2004; on share transactions subjected to STT; concessional tax rate of 10% (which has been increased to 15% from AY 2009-10) are applicable in respect of STCG whereas no tax is chargeable in respect of LTCG. It is also noted that CBDT vide its Circular no.4 2007, dated 15.06.2007 has also recognized possibility of two portfolios, i.e. one 'Investment portfolio' comprising of securities which are to be treated as capital assets and other 'Trading portfolio' comprising of stock in trade which are to be treated as trading assets. 11.1 We have gone through order of Tribunal in case of Smt. Sadhana Navera (supra) as relied by learned DR and found that Shri Mohan K.Jain, Mumbai 36 I.T.A.No. 1033 & 748 Mum 2010 A.Y.2006-07 on basis of finding of both lower authorities that most of shares were purchased and sold immediately and there were no shares which were acquired prior to 1st April, 2004 and held after 31st January, 2005, gain arising out of sale of such shares were held to 8 ITA No.3541,3542,3543,4571-2012, be business income. However, in instant case before us, CIT(A) has appreciated not only frequency of transaction but also period of holding and thereafter recorded finding to effect that except transaction in case of four companies profit so arose were liable to tax as capital gains keeping in view holding period, frequency of transaction etc. Thus, facts of case cited by learned DR are distinguishable from facts of instant case. 11.2 We have gone through decision in case of Jayshree Pradeep Shah (supra) as relied by learned DR and found that on basis of findings recorded by both lower authorities to effect that there were high number of transaction in shares with borrowed funds and sale of shares was only activity of assessee within very short holding period, it was held that profit arose on sale of such shares were liable to tax as business income. However, facts in instant case before us are distinguishable and CIT(A) has appreciated not only frequency and continuity of transactions in each shares dealt with by assessee vis- -vis antecedents of assessee and stand taken by department in earlier year and reached to conclusion Shri Mohan K.Jain, Mumbai 37 I.T.A.No. 1033 & 748 Mum 2010 A.Y.2006-07 that except transaction in shares of four companies, as discussed in his appellate order, balance gain was liable to be taxed as capital gains. 11.3 After considering findings recorded by CIT(A), we found that single criteria will not decide issue but total effects i.e. frequency and volume of transaction, intention of assessee while purchasing and holding shares etc. are to be considered for arriving at conclusion. Thus, it is mixed question of law and fact to find out as to whether assessee has earned capital gain or business income.The gain arising on delivery based share transaction are essentially in nature of STCG and LTCG and not in nature of business income, except where such gains or losses realized in respect of those transactions undertaken repeatedly and consistently for more than four times during year, as discussed by CIT(A). After discussing all factors, CIT(A) has recorded categorical finding that in respect to number of transactions and frequently transaction in respect of shares of these four shares as per Annexure-A enclosed with his appellate order, which was directed to be assessed as business income. In respect of balance of gain arising on delivery based transactions were treated as STCG or LTCG depending on period of holding. Even in respect of transaction in respect of these four companies, CIT(A) 9 ITA No.3541,3542,3543,4571-2012, given specific direction for recomputing profit or loss after revaluing closing stock held therein at cost or market price, whichever is lower. If conclusion drawn in Shri Mohan K.Jain, Mumbai 38 I.T.A.No. 1033 & 748 Mum 2010 A.Y.2006-07 impugned orders, observations made from assessment orders, assertions made by respective counsel and material available on record are kept in juxtaposition and analyzed, we find that assessee had been consistently investing in shares and income arising from delivery based transaction of sale and purchase of shares had been shown as capital gains i.e. LTCG and STCG depending upon period of holding. Analysis of balance sheet of assessee reflects holding of shares as investment. In case of Gopal Purohit, 228 CTR 528 (Bom), SLP was filed by Department against decision of Bombay High Court and same was dismissed by Hon'ble Apex Court vide order dated 15.11.2010. In speech by Hon'ble Finance Minister regarding Direct Tax Cases (Union Budget - 2004-05), especially clause 111, intention of Government for introducing security transaction tax and exempting long term capital gain from sale of share and levying 10% tax on short term capital gain also supports case of assessee. idea behind introduction of security transaction tax is to end litigation on issue, whether profit earned from delivery based sale of shares is capital gains or business profit. 12. Even Hon'ble Apex Court in case of K.P. Verghese Vs ITO, 131 ITR 597 (SC) observed as under:- Shri Mohan K.Jain, Mumbai 39 I.T.A.No. 1033 & 748 Mum 2010 A.Y.2006-07 task of interpretation of statutory enactment is not mechanical task. It is more than mere reading of mathematical formulae because few word possesses precision of mathematical symbols. It is attempt to discover intent of legislature from language used by it and it must always be remembered that language is at best imperfect instrument for expression of human thought and, as pointed out by Lord Denning, it would be idle to expect every statutory provisions to be drafted with divine prescience and perfect clarity. We can do better than repeat famous words of judge Learned Hand when he said. above observations of Hon'ble Judges of Apex Court was reiterated by Hon'ble Apex Court in case of Kerala State Industrial Corporation, 259 ITR 51 (SC) holding as under:- That Finance Minister s Speech can be relied upon to throw light on object and purpose of particular 10 ITA No.3541,3542,3543,4571-2012, provisions introduction by Finance Bill has been recognized by this Court in K.P. Verghese - vs ITO 1981), 131 ITR 597 (SC), at 609. Again in case of R & B Falcon (A) Pvt. Ltd vs CIT (2008) 301 ITR 309 (SC), it was held that (Page 323):- Rules of executive construction in situation of this nature may also be applied. Where representation is made by makers of legislation at time of introduction of Bill or construction thereupon is put by executive upon its coming into force, carries great weight. 13. Hon'ble Delhi High Court in ARJ Security Printers, 264 ITR 276 and Neo Pollypack Pvt Ltd. 245 ITR 492 (Del.) held that even when doctrine of res judicata does not apply to income tax proceedings, where issue has been decided consistently in earlier assessment years in particular manner, same view should prevail in subsequent years unless there is material change in facts, meaning thereby, there must be material change in facts. Shri Mohan K.Jain, Mumbai 40 I.T.A.No. 1033 & 748 Mum 2010 A.Y.2006-07 14. Indore Bench of Tribunal in case of ACIT vs Om Prakash Suri (supra) held as under:- "3. We have considered submissions put forth by learned Senior DR and also perused material available on record. Brief facts are that in past assessee was engaged in road building contractor and was deriving income from contract receipts as well as from sale of gitti and during impugned year, ventured into investment in share market. income arising from F&O transactions and daily trading in shares (without physical delivery) reflected as speculative business whereas income on delivery based transactions of sale and purchase of shares, income was shown from capital gains. learned AO considered income which was based on purchase and sale of shares as business income on grounds as narrated in assessment order as well as at pages 3 and 4 of appellate order. Broadly, learned AO was of view that intention of assessee since beginning was sale of shares as trading activities, as evident from audited profit and loss account by not showing same as short term capital gain and also in Form 3CD assessee has mentioned nature of business as trading dealing in shares securities and mutual funds. frequency of transactions was also considered, consequently he treated amount of Rs.49,81,915 - as business income from share trading. However, before learned Commissioner of Income Tax (Appeals) basis of additions 11 ITA No.3541,3542,3543,4571-2012, was explained as evident from para 3.1.1 onwards. crux of claim of assessee is that in audited accounts, sale of shares amounting to Rs. 9.43 crores in which delivery had been taken, STT was paid and shares were sold after holding for few days few weeks. mutual funds of Rs. 2.91 lacs were sold and were treated as income from short term capital gains. Before learned Commissioner of Income Tax (Appeals) assessee also filed detailed note on purchase process for delivery base shares, details of dividend received on basis of relevant statements by placing reliance on decision of Mumbai Bench of Tribunal in case of JM Shares & Stock Brokers v. JCIT dated January, 2009. Briefly, claim of assessee before learned Commissioner of Income Tax (Appeals) was that delivery based transactions were made with investment motive and as such income therefrom was in nature of short term capital gains whereas income arose from F&O transactions and daily trading in shares were with business motive which were showed as business income only which was mainly through stock broker, Arihant Capital Markets Limited, registered with NSC, NSE and BSE. It is also seen that in impugned order board circular no. 4 2007 dated 15.6.2007 wherein it was emphasized that it is possible for tax Shri Mohan K.Jain, Mumbai 41 I.T.A.No. 1033 & 748 Mum 2010 A.Y.2006-07 payer to have two port folios i.e. investment port folio comprising of securities which are to be treated as capital asset and trading port folio comprising stock in trade which are to be treated as trading asset, was considered. Board further clarifies that no single principle would be decisive and total proposition needs to be considered. assessee has maintained only one port folio and claimed that to be investment folio. Undisputedly, period of holding is less than one year, consequently, there is no infirmity in holding that these transactions would be treated as short term capital gain on which applicable tax is @ 10% only. In view of this uncontroverted fact, there is no merit in appeal of revenue and same is dismissed. Order pronounced in open Court on 4th August, 2010." 15. aforesaid decision was affirmed by Hon'ble M.P. High Court and reported in (2012) 19 ITJ 326 (M.P). Mumbai Bench of Tribunal in case of Shantilal M Jain vs ACIT vide order dated 27-04-2011 (ITA No. 269 Mum 2010) held that despite large volume of shares transactions, Assessing Officer cannot ignore rule of consistency to treat gains on sale of shares as STCG. In that case, assessee was engaged in business of trading in shares and also investment in shares and securities offered Rs. 1.54 12 ITA No.3541,3542,3543,4571-2012, crores as short term capital gain and Rs. 2.91 crores from long term capital gain.The long term capital gain was accepted whereas short term capital gain was held to be business profit. Since in earlier assessment years claim of assessee was consistently accepted as short term capital gain, it was held that rule of consistency as propounded by Hon'ble Bombay High Court in case of Gopal Purohit (supra), it is fairly applicable and income has to be treated as short term capital gain. Identically in case of Nagindas P Seth (ITA Shri Mohan K.Jain, Mumbai 42 I.T.A.No. 1033 & 748 Mum 2010 A.Y.2006-07 No.961 Mum 2010) it was held that despite large number of transactions in shares, profit can be assessed as capital gains under facts of case. case of assessee is further fortified by these decisions more specifically when assessee holds shares in his books as investor, no interest was paid on funds. decision in case of Janak S Ranawala, 11 SOT 627 (Mum.) further supports case of assessee. Likewise, decision from Hon'ble Madras High Court in CIT vs N.S.S. Investment Pvt Ltd. 227 ITR 149 (Mad), CIT vs Associated Industrial Development Company, 82 ITR 526 (SC) supports case of assessee. In present appeal, we note that assessee made investment in shares with intention to earn dividend income on appreciation of price of shares. Therefore, it cannot be said that assessee was doing business. More specifically when, assessee either utilised his own funds family funds associate s funds and did not pay any interest and depicted transactions in shares under investment portfolio. During hearing, it was also explained by learned Counsel for assessee that accounts were maintained by assessee in two separate capacities i.e. trader and investor and never treated same as holdings of shares as stock in trade which clarifies intention of assessee. This assertion was not controverted by Revenue. 16. Board Circular No. 4.2007 dated 15-06-207 also emphasizes that it is possible for tax payer to have two portfolios namely, Shri Mohan K.Jain, Mumbai 43 I.T.A.No. 1033 & 748 Mum 2010 A.Y.2006-07 Investment Portfolio, comprising of Securities, which are to be treated as capital assets and Trading Portfolio comprising of stock in trade which are to be treated as trade assets. No single principle would be decisive and fact has to be considered in entirety. totality of facts plainly indicate that ld. first appellate authority rightly directed Assessing Officer to treat short term capital gain as earned from investment in shares. Instruction No.1827 dated 31st August, 1989 was supplemented by CBDT circular no. F.No.149 287 2005-TPL 13 ITA No.3541,3542,3543,4571-2012, [reported in 210 CTR 29 (St.)], advising Assessing Officers that principles contained in circular should guide them in determining whether, in given cases, shares are held by assessee as investment (and therefore, giving rise to capital gains) or stock-in-trade (and therefore, giving rise to business profit) by further opining that no single principle would be decisive and total effect of all principles should be considered. If number of transactions are analysed, we note that, in computer based trading system e-filing, figures, being split up, give misleading high figures, reflecting individual component of transaction but really, if these figures are synchronised then clear picture oozes out. assessee had also earned dividend income of Rs.19,21,917 - which further fortify assessee s intention of investing in shares for earning fix income. 17. CIT(A) after applying proposition laid down in various decisions as discussed above with respect to facts of instant Shri Mohan K.Jain, Mumbai 44 I.T.A.No. 1033 & 748 Mum 2010 A.Y.2006-07 case and also keeping in view frequency and continuity of transactions, it recorded categorical finding to effect that profit earned in respect of four companies as discussed above amounting to Rs.18,41,027 -was liable to be taxed as business income rather than capital gain.However, in respect to balance of transactions, CIT(A) has categorically recorded finding that these were delivery based transactions, therefore, keeping in view frequency, continuity and volume of transactions, profit arose there from are liable to be taxed as short term or long term capital gains depending on period of holding. findings recorded by CIT(A) are as per material on record, therefore, same do not require any interference.Accordingly, we do not find any infirmity in order of CIT(A), which is being upheld. 18. In result, both appeals filed by assessee as well as Revenue are dismissed. 3. We have considered rival contentions and carefully gone through orders of lower authorities as well as order of Tribunal dated 21 02 2014 in assessee s own case, wherein exactly similar issue with regard to treatment of profit arising out of sales of shares has been dealt with to decide whether it was capital gain or business income. As facts and 14 ITA No.3541,3542,3543,4571-2012, income. As facts and circumstances during years under consideration are same, respectfully following order of Tribunal, we direct AO to allow assessee s claim of capital gain in terms of observation given by Tribunal in its order dated 21st February 2014. However, profit arising out of delivery based transactions are to be considered as capital gains as per observation made by Tribunal in its order. 4. In all years assessee is also aggrieved for disallowance made under Section 14A read with Rule 8D. In assessment year 2007-2008 Rule 8D is not applicable, however, reasonable disallowance is required to be made. However, in assessment year 2008-2009 Rule 8D is applicable. main contention of learned AR was that assessee was holding major shares as stock in trade, profit earned there on was offered for tax, therefore, no disallowance was warranted on investment blocked in these shares. 5. Reliance was placed on decision of Co-ordinate Bench incase of Indian Advantage Securities Limited in ITA No.6711 MUM 2011 order dated 14 09 2012, wherein Tribunal relied on order of Karnataka High Court in case of CCL Limited. In case of CCL Limited (Supra), Hon ble High Court held that disallowance of interest in relation to dividend received from trading shares cannot be made. Respectfully, following order of Co-ordinate Bench be restore this issue to file of AO for recomputing disallowance under Section 14A by excluding amount blocked in shares meant for trading purpose. We direct accordingly. 6. In Assessment year 2009-2010 revenue is aggrieved by action of CIT(A) for treating profits of sales of shares held for more than 12 months as long term capital gains instead of business income. precise observation of CIT(A) was as under:- 15 ITA No.3541,3542,3543,4571-2012, I have considered tile arguments of Ld. AR. decision of AO is primarily, based on findings in assessment orders passed in case of assessee for earlier assessment years. Hence it is important to look into history of the: earlier assessment made in case of appellant. appellant has been held as investor in AY 2003-04, 2004-05 and 2005-06 in scrutiny assessment order passed u s.143(3). In AY 2006-07 on which AO has heavily relied, it is noted that assessee had offered short term capital loss as well as long term capital gain in that year also and AO assessed both short term capital loss and long term capital gains as business income. matter was taken up by assessee before CIT(A) for Ay 2006-07 who vide order dared 27-11-2009 partly allowed appeal of assessee by holding that profit from sale of shares whether short term or long term, was assessable as capital gains except for shares wherein assessee has made purchase and sales for more than 4 times in year for any particular scrip. scrips (whether held as short term or long term) where appellant had made purchase and sales for more than 4 times in year, only such profit was held to be assessable as business income. Similar additions made by AO in AY 2007-08 and 2008-09 also and CIT(A)- 31, Mumbai vide its order dated 23-02-2012 and 24-02- 2012 for AY 2007-08 and 2008-09 respectively after analyzing nature of transactions and once again relying upon its own order for AY-2006-07, held that profit from sale of shares whether short term or long term, was assessable as capital gains except for shares where in assessee has made purchase and sales for more than 4 times. He also directed closing stock of shares in respect of transactions which have been treated as business income to be worked out on basis of cost or market price whichever is lower and also to allow credit of STT paid in respect of such shares, profit from which has been assessed as business income. 3.4. Since there change in address of appellant during relevant assessment year 2009-10, jurisdiction over appellant was transferred from AO of range 20 to AO of range 21 and accordingly appeal for AY 2009-10 came to be decided under jurisdiction of CIT(A)-32, Mumbai. 16 ITA No.3541,3542,3543,4571-2012, 3.5. For deciding question whether profit from sale of shares is capital gain or business income, no single thumb rule can be applied. Some of general principles which are relevant to decide issue are discussed as under:- Courts as well as CBDT in circular no. 4 2007, have held that assessee can be investor as well as trader simultaneously. In case of Raja Bahadur Wisheshwara Singh 41 ITR 685 (SC), it has been held that magnitude, frequency, ratio of purchase & sales and holding will indicate whether assessee was dealing in shares as business. Similar views have been held in 81 ITR 179(Cal), 74 ITR 692(Bom), 42 ITR 743(SC), 41 ITR' 685,692(SC). Hence overall effect of far-t or s like volume and number of transactions, period of holding, high percentage of number of transactions as well as profits in shares held for shorter period, number of transactions where no delivery of shares was taken, repetitive dealing in same scrip, utilization of borrowed funds whether on interest or otherwise, existence of speculative activity, turnover investment ratio, existence of business establishment and infrastructure, etc will be required to be looked into to determine whether assessee is investor or trader. magnitude is not to be seen in absolute terms but only in relative terms i.e it has to be seen W.r.t total capital available, price of shares, etc. Sale and purchase of same share several times within year would be another indication of intention of transactions to be for earning quick profit and not to enjoy appreciation of investments over period. Where delivery is not taken, profit from such transactions would definitely fall in business income as also held in case of Gopal Purohit(supra). However converse may not be true in all cases i.e. all delivery based transactions on which SIT is paid would not be decisive factor alone to suggest that shares were held as investments. This view is supported from observation of page 8 of ITAT order in case of V Nagesh (ITA No 5410 Mum 2008) wherein decision of Gopal Purohit has also been referred, that Merely because transactions in shares delivery based it cannot be said to be investments . observation of Supreme Court in case of G Venkatswami Naidu & Co. 35 ITR 584(SC) on page 610 is relevant presence of all relevant circumstances mention in any of them may hold court to draw similar 17 ITA No.3541,3542,3543,4571-2012, inference but it is not matter of merely counting number of facts and circumstances pro & con; what is important to considered is their distinctive character. In each case it is the' total effect of all relevant factors and circumstances that determine character of transaction; and so, though we may attempt to derive some assistance from decisions bearing on this point, we cannot seek to deduce any rule from them and mechanically apply it to facts before us " . Similarly in case of PM Mohd Mirza Khan 73 ITR 735(SC) it has been held that answer whether transaction is adventure in nature of trade or not, must necessarily depend on each case on total impression and effect of relevant factors and circumstances. In case of V Nagesh (ITA No5410 mum 2008) on page 5 of order Hon'ble ITAT while holding that sale and purchase of shares frequently would amount to trading, has observed that "in case of Investment, person usually watches market over longer period of time before selling shares. earning of dividend and appreciation of shares is primary concern". Though nature of treatment given in books would be guiding factor but same cannot be applied as decisive factor alone ignoring other relevant factors. Further, mere fact that assessee has been treated as investor in past may not by itself be enough to hold him as investor in subsequent year on rules of consistency but if there are no material change in facts legal position to be demonstrated by assessee, then rules of consistency can be applied. There can be no dispute that person can simultaneously be trader as well as investor in shares. Moreover when courts as in circular no 4 2007, have also held that assessee can be investor as well as trader simultaneously but sanction between trading activity and investment activity has to be apparent from relevant facts. Thus activity of assessee amounts to trading or investment can change from year to year depending upon various other factors' such as volume and number of transactions, period of holding, repetitive dealing in same scrip, utilization of borrowed funds, existence of speculative activity, high percentage of number of transactions as well as profits in shares held for shorter period, turnover investment ratio, etc for each year which will determine whether assessee is investor or trader in that particular year. In short, no single f8c:tor but it is only cumulative effect of all relevant factors and. circumstances as discussed above that would 18 ITA No.3541,3542,3543,4571-2012, determine whether nature of transaction of appellant was as investor or as trader or both in any particular year? 3.6. If above parameters are applied to facts of appellant's case then it is clear that total transactions of sale of short term shares are 227 with turnover of 11 Crores which will be high volume and frequency suggestive of activities like trader in shares and not investor It is also noted that on large number of occasions assessee has purchased or sold same scrip several time in same year which suggests that assessee conducted himself in manner like trader so far as short term shares are concerned. It is also noted that out 227 transactions, holding period in 110 transactions is Jess than 30 days and In 145 transactions it is less than 60 days. This is suggestive of fact that in substantial number of transactions, appellant is selling shares after holding for smaller periods only. Thus considering totality of facts that there are 2 ;7 transactions wherein more than 50% shares being held for less than 60 days, and by repeated sales purchases on several times during year in same scrip, see conducted in manner like trader in respect of shares or less than 12 months. closing balance out of shares hold short term shares for quick rotation of turnover. appellant has also done speculative transactions in same scrips without taking delivery. Besides this, appellant has also been done business activity of dealing in futures & options till immediately preceding years though no F&O activity has been done during current year. In all decisions, ITAT have held that no single factor is decisive to decide whether assessee is trader or not and it is on analysis of facts of those cases, ITAT held that, assessee was investor. There can be no dispute to this proposition. In fact these decisions support view that mere absence of any borrowed funds as claimed by appellant alone will not be indicative of investment activity, if cumulative effect of other factors as already discussed above indicates appellant to be trader. Under these circumstances, it is clear that assessee has conducted like trader in respect of shares held for less than 12 months and hence profit derived on equity shares held for less than 12 months will have to be assessed as business income only. action of 19 ITA No.3541,3542,3543,4571-2012, AO in treating Short term capital loss of Rs 1,67,02,188 as business loss is therefore confirmed. He shall however give deduction of STT paid since income is being treated as business income. appellant shall also be at liberty to value his closing stock of short term shares at cost or market' whichever is lower as income from sale of short term shares have been held as business Income. 3.7. So far question taxability of long term capital gain of Rs.3,20,34,059 on shares held for more than 12 months is concerned, it is well known ,that share market is highly volatile and hence no one can be expected 'to be doing trading in shares by holding same for very long period i.e., more than 12 months. Holding period of 12 months can only be with intention of trading. Hence for shares held for more than 12 months there cannot be any reason to treat same also as part of trading activity. mere fact that assessee has been treated as trader for shares held for less than 12 months, doesn't mean that he is required to be treated as trader in shares in respect of shares held for more than 12 months also, if nature of transaction, period of holing as well as other factors suggest that assessee has acted like investor in case of shares held for more than 12 months. In fact, various courts and as well as CBDT circulars has also made it very clear person can have two portfolio simultaneously as trader in shares and investor in shares. It is noted that assessee has earned dividend of 20,22,409 - on such shares held for more than 12 months, which is suggestive of intention of investment. Further such investments have been made out of capital only and there are no borrowed funds. period of holding is also sufficiently large i.e. from 365 days 1095 days. Most of long term shares have been sold after holding them for 2 to 3 years. More than 85% of LTCG earned is on shares which were held from 551 days to 1095 days which clearly shows intention of holding shares for investment only. From perusal of nature of income for last 6 assessment years i.e. from 2004-05 to 2009-10 it is noted that appellant has been having deriving substantial LTCG for all 6 years regularly which supports contention that for shares held for more than 12 months, intention was to invest as it is not possible for trader to hold shares for such long periods regularly for last so 20 ITA No.3541,3542,3543,4571-2012, many years. AO in Ay 2003-04, 04-05 and 05-06 has also accepted LTCG offered by assessee u s 143 (3). In fact CIT(A) 31 Mumbai also while passing order for AY 2006-07 to 2008-09 in case of appellant has also held profit on shares held for more than 12 months to be assessable as LTCG 'with only exception made by him in respect of scrip where appellant had made purchase and sales for more than 4 times in year for any single scrip. With due respect to my colleague's findings, I am unable to agree with exception made by Ld CIT(A)-31 in treating profits on sale of long term shares where assessee had made purchase and sales for more than 4 times in year as business income. classification of business income or capital gain merely on number of sale transaction in particular scrip being more than 4 times, as sole criteria may give distorted picture. long term shares sold are sold after holding for more than 12 months hence same were not at all purchased during year and hence such criteria cannot be applied for long term shares. If share are held for more than 12 months than mere fact that assessee sells same in more than 4 lots also does not take away intention of investment which is evident by fact that shares were held for more than 12 months. If that were held to be so, than shares of any scrip held for more even than three years will get treated as business income instead of LTCG just because it is sold in more than 4 times, thereby leading to distorted conclusion. Thus sale of single scrip more than 4 times after holding same for more than 12 months cannot be criteria to decide issue because it is known fact in share market that when one places order for sale of particular number of shares at particular price, sale may not materialize in one lot due to lack of availability of buyers for all shares at that price. Hence such shares though placed for sale in one lot, get ultimately sold to more than one lot to several buyers in parts at different point of time on same day depending upon market conditions. So these transactions of sale on same day cannot be treated as separate sale transactions on part of seller who had all shares for sale at one lot only. Thus intention should discernible from period of holding and not from fact that in how many lots shares are sold. Under these circumstances it cannot be said that appellant was acting like trader in respect of shares which have peep held for very long period of more than 12 months 21 ITA No.3541,3542,3543,4571-2012, just because shares were sold on more than 4 times in year. Hence, profit of long term capital gain shares of Rs. 3,20,34,067 - is to be liable to be assessed as Long term capital gain only and not as business income. 7. detailed finding so recorded by CIT(A) has not been controverted, accordingly we do not find any infirmity in order of CIT(A) for treating gain arising out of sale of shares held for more than 12 months as long term capital gains. This issue is also covered by order of Tribunal dated 21.02.2014 in assessee s own case. 8. Revenue is also aggrieved for deleting disallowance of Rs.2,67,243 - made by AO under Section 14A. 9. disallowance made by AO to extent of Rs.2,67,243 - was deleted by CIT(A) after having following observation:- 4.2. I have considered arguments of Ld. AR. It has been contended that no expenditure has been claimed against taxability of income offered by assessee. It only for sake of computation of P&L c and corresponding income and expenditure were claimed. However, income has been offered in computation of income without claiming any expenditure whatsoever in respect of taxable income being reflected in P&L c. To support his contention appellant has furnished copy of P&L c as well as statement of income. Going through P&L c it is seen that assessee has credited in P&L 8. c taxable income in nature of speculation profit of Rs.6,50,574 -, bank interest of Rs.98,786 -, commission of Rs.4,OOO -, rent of Rs. 27,20,000 - and profit on sale of property Rs.51 ,00,000 -. From perusal of statement of income it is noted that above income has been offered as it is in various heads without claiming any expenditure as appearing in P&L c. Regarding capital gain of Rs. 51 lakhs appellant has that same has been claimed as exempt u s.54EC by investment in REC bonds. Once there is not expenditure claimed in 22 ITA No.3541,3542,3543,4571-2012, computation of income against any taxable income, there cannot be any disallowance of administrative expenditure also. This view is supported by decision in case of Godrej & Boyce Manufacturing Ltd., 234 CTR 1(BOM) wherein Court has observed as under:- Sub sec (2) does not ipso fact enable AO to apply method by rules straightaway without considering whether claim made by assessee in respect of expenditure incurred in relation to income which does not form part of total income, is correct. AO must in first instance, determine whether claim of assessee in that regard is correct and determination must be made having regard to accounts of assessee. satisfaction of AO must be arrived at on objective basis. It is only when AO is not satisfied with claim of assessee, that legislature directs him to follow method that may be prescribed. ) Similar view is held in case of Hero Cycles Ltd. [2009] 323 ITR 518 (Punjab & Haryana) also. Thus without giving finding as to whether there was any expenditure claimed as deduction in relation to exempt income, section 14A & rule 8D cannot be invoked. Hence addition of Rs.2,67,243 - made by AO u s.14A r w rule 8D is directed to be deleted. 10. We have carefully gone through orders of authorities below and found that CIT(A) has recorded clear finding to effect that AO has made disallowance without giving any finding as to whether there was any expenditure claimed as deduction in relation to exempt income. findings so recorded by CIT(A) has not been controverted, accordingly we do not find any reason to interfere in order of CIT(A). 11. Last grievance of revenue relate to CIT(A) s direction to Assessing Officer to treat Rs. 9 lakhs as rental income.The facts of 23 ITA No.3541,3542,3543,4571-2012, case are that it was noted by AO from leave and license agreement in respect of flat No.3, Tulsi, Plot No.67, JVPD Scheme claimed that assessee is receiving Rs.1,10,000 - per month towards rent license fee of flat whereas Rs.75,OOO - per month was received as amenities charges towards same flat. Leave and licence agreement and amenities agreement were separate. amenities agreement was' in respect of electrical fittings, floorings, windows, split AC, sliding Windows, glass partitions, grills, geysers, furniture, fixtures etc. AO asked assessee to explain as to why amount received towards amenities may not be treated as income from other sources. It was replied by AR of assessee that letting out of amenities is inseparable to that of letting out of house property and hence same has to be assessed under head income from house property and not as income from other source.However, AO did not agree with assessee s contention and treated income as income from other sources. 12. By impugned Order CIT(A) allowed assessee s claim after observing as under:- I have considered arguments of Ld. AR and perused assessment order. From perusal of nature of amenities provided it is seen that in respect of various fixtures and fittings which are either part of residential unit or attached to house property. These fixtures arid fittings cannot be let out independently, without letting out flat in question to which these are attached. Hence whatever amenities charges are received in respect of such fixtures though as per separate agreement, same are required to 24 ITA No.3541,3542,3543,4571-2012, be assessed as income from house property only as these fixtures are inseparable and appurtenant to building itself.' . In case of Shambhu Investments 263 ITR 147(SC) wherein building was let out along with amenities, it was held that entire income was assessable as income from house property only. mere fact that amenity agreement is separate does not change character of receipts. In view of decisions cited by appellant and apex court decision in case of Shambhu Investments(supra), entire income including amount received towards amenities is assessable u s.22 only. AO is directed to do accordingly. 13. We have considered rival contention and found that rental income so received by assessee was in respect of fixtures and fittings which was either part of residential unit or attached to house property. CIT(A) observed that these fixtures and fittings cannot be let out independently without letting out flat in question to which these are attached. Under these circumstances, we do not find any infirmity in order of CIT(A) for treating rental income in respect of these amenities as income from house property. 12. In result, appeals of assessees are allowed in part where as appeal of revenue in assessment 2009-2010 is dismissed. Order pronounced in open court on this 30 09 2016. Sd - Sd - (SANDEEP GOSAIN) (R.C.SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated 30 09 2016 Karuna, Sr. PS 25 ITA No.3541,3542,3543,4571-2012, Copy of Order forwarded to : 1. Appellant 2. Respondent. 3. ( ) CIT(A), Mumbai. 4. CIT 5. , , DR, ITAT, Mumbai BY ORDER, 6. Guard file. True Copy (Asstt. Registrar) , ITAT, Mumbai Mohan Kapoorchand Jain v. ACIT, 20(2), Mumbai
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