I. T. A. No. 2930 /Ahd/ 2011 (assessment year 2008-09).

KUL BHARAT (Judicial Member) and MANISH BORAD (Accountant Member)

Albinus Tirkey for the appellant.
Ms. Urvashi Shodhan, authorised representative, for the respondent.

ORDER

The order of the Bench was delivered by

1. Manish Borad (Accountant Member).-This is an appeal by the Revenue against the order of the Commissioner of Income-tax (Appeals)- XVI, Ahmedabad, dated September 12, 2011. Assessment order for the assessment year 2008-09 has been framed under section 143(3) of the Income-tax Act, 1961 (in short the Act) by the Assistant Commissioner of Income-tax, Circle-10, Ahmedabad, vide order dated December 23, 2010. The following grounds have been raised by the Revenue.

1. The learned Commissioner of Income-tax (Appeals) has erred in law and on facts in directing the assessee to treat the profit earned on sale of share as long-term capital gains instead of business income.

2. On the facts and circumstances of the case, the learned Commis sioner of Income-tax (Appeals) ought to have upheld the order of the Assessing Officer.

3. It is therefore, prayed that the order of the learned Commissioner of Income-tax (Appeals) may be set aside and that the order of the Assess ing Officer be restored to the above extent.

2. Briefly stated the facts of the case are that the assessee filed return of income for the financial year 2007-08 relevant to the assessment year 2008- 09 on September 29, 2008 declaring total income of Rs. 11,43,940. The case was selected for scrutiny and assessment was completed by issuance of notice under section 143(2) of the Act on December 23, 2010. In the return of income filed by the assessee exemption under section 10(38) of the Act of Rs. 28,81,963 was claimed on account of long-term capital gain from sale of equity shares of four companies which were held for more than one year. However, the Assessing Officer did not accept the claim of the assessee and treated the surplus from sale of the above referred equity shares as business income mainly for the reason that the assessee was showing the investment in shares under the head "stock-in-trade" (closing stock of shares) and not under the head "investment" consistently.

3. In disallowing the claim of exemption under section 10(38) of the Act the Assessing Officer relied on the decision of the hon'ble Supreme Court in the case of CIT v. Associated Industrial Development Co. P. Ltd. [1971] 82 ITR 586 (SC) wherein the hon'ble court has observed (headnote)-

"Whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee who holds the shares and he should, in normal circumstances, be in a position to produce evidence from his records as to whether he has maintained any distinction between those shares which are his stock-in-trade and those which are held by way of investment".

4. If this ratio of the hon'ble apex court is made applicable to the facts of the case of the assessee, it is clear that whether a particular transaction can be treated as trading or investment will be based on the intention of the assessee and intention can be judged on the basis of the records of the assessee and it clearly transpires from the past records of the assessee that the shares held by the assessee forms part of the stock-in-trade.

5. Taking reliance on the above judicial pronouncement, the Assessing Officer went ahead in making the addition of Rs. 28,81,963 in the hands of the assessee by treating the profit from sale of equity shares as business income whereas the assessee has claimed it as long-term capital gain from sale of shares eligible for exemption under section 10(38) of the Act.

6. Aggrieved, the assessee went in appeal before the Commissioner of Income-tax (Appeals) who has elaborately discussed the issues of the case and finally deleted the addition made by the Assessing Officer. The Commissioner of Income-tax (Appeals) in his appellate order has differentiated the facts of the assessee's case with the facts involved in the case of CIT v. Associated Industrial Development Co. P. Ltd. [1971] 82 ITR 586 (SC), which was the main basis taken by the Assessing Officer in making the addition in the hands of the assessee. It would be relevant to reproduce the relevant contents of the order of the Commissioner of Income-tax (Appeals) which reads as under :

"2.12 The Assessing Officer has relied upon the decision of the hon'ble Supreme Court in the case of CIT v. Associated Industrial Development Co. P. Ltd. [1971] 82 ITR 586 (SC). The facts of the case were that during the assessment year 1957-58, the assessee- company, which acted as managing agents of various companies, sold certain shares of the managed companies, and claimed the net profit arising therefrom as capital gain and not income in its hands, stating that the immediate necessity for the sale of those shares was the reduction of an overdraft with its bank. The assessee had never been treated as a dealer in shares in any of the past assessments and its holdings in the various companies were treated as investment and not as stock-in-trade of the assessee's share-dealing business. The Income-tax Officer held that the profit was taxable as the assessee was entitled, under its memorandum of association to deal in shares. On appeal, the Appellate Assistant Commissioner upheld the Income-tax Officer's orders. On second appeal, the Tribunal held that the assessee was a dealer in shares which were confined to the shares of the managed companies. On reference the High Court observed that the facts that part of the shares were subscribed for the purpose of acquiring the managing agency of a company and that subse quently large blocks of shares were purchased and held for long period without sale and further that the shares were not in small blocks but in big blocks to reduce the liability to the bank in its over draft account that those shares were held by the assessee as a part of its investment, it, therefore, held the said profit to be a capital and not a revenue receipts. On appeal before the Supreme Court, it was held that-

'The High Court went beyond the matters which were the sub ject-matter of controversy before the Departmental authorities and the Appellate Tribunal. It was never the case of the assessee at any stage that although it was a dealer in shares those shares which were the subject-matter of sale were held by way of investment. It had maintained throughout that all the shares were held by it as an inves tor and that it could not be regarded as a dealer because the shares did not form its stock-in-trade. That case of the assessee was negative because of the extensive dealings and other facts and circumstances which were taken into consideration. The figure of purchases and sales as also of the profits relating to the years 1954 to 1957 which were set out in the order of the President of the Tribunal justified the view that although up to a certain point of time it had been assessed as an investor, the multiplicity of the transactions occurring successively over the years supported the departmental stand that the assessee had ceased to be an investor and had become a dealer.

Whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee who holds the shares and it should, in normal circumstances, be in a position to produce evidence from its records as to whether it has maintained any distinction between those shares which are its stock-in-trade and those which are held by way of investment. The assessee in the present case, made no attempt whatsoever to make out a case that the shares which had been sold were a part of its capital investment. Nor did it place any material from which it could be established that those shares had been treated in its books differently from other shares held by it. The mere fact that the sale proceeds were paid into the overdraft account in which admittedly proceeds of sale of all the shares held by the assessee were being credited as and when the sales were made and that these shares had not been sold with any amount of frequency could not be regarded as sufficient to establish that these shares had been held by way of investment. Even otherwise it was for the Appellate Tribunal to give its decision on facts and since no decision was invited from the Tribunal as to whether the shares in question had been held by way of investment it was not open to the High Court to give its finding on that question which was essentially one of fact and which it was within the jurisdiction of the Tribunal to determine. Hence the Tribunal was justified in holding that the profit arose to the assessee in the course of its business as a dealer in shares and as such was liable to be assessed as a revenue receipt.'

2.13 The aforesaid decision of the hon'ble Supreme Court cannot be applied in the case of the assessee. Even this decision favour the appellant. There is no case of the extensive dealings and other facts and circumstances which were taken into consideration. There is absence of the multiplicity of the transactions occurring successively over the year. The appellant had established that the sold shares were shown as investment in the ledger account maintained in the books of account as 'shares investment account'. The 400 shares of Syntex Industries Ltd. valued at Rs. 880 were shown in 'share delivery account' by mistake though the holding period is more than 21 months though the same were purchased only for investment.

2.14 Considering the facts and circumstances of the case and after going through the decisions relied upon by the Assessing Officer as well as by learned counsel, I am of the opinion that the sold shares were held by the appellant as 'investment' and not as 'stock-in-trade' as wrongly concluded by the Assessing Officer. The particular ledger account as 'shares investment account' was conveniently ignored by the Assessing Officer. Even otherwise also, the entry in the books of account are not conclusive to hold the sale of shares as business income. There is absence of multiplicity of the transactions occurring successively over the year and extensive dealings. There was absence of frequency continuity and regularity of transactions of purchase and sale of shares as the most important test laid down by the hon'ble Gujarat High Court in the case of CIT v. Rewashanker A. Kothari [2006] 283 ITR 338 (Guj) for the activity in the nature of business. In view thereof, the profit earned on sale of shares of the aforesaid four companies was assessable under the head 'long-term capital gains' and not as 'business income'. The Assessing Officer was thus not jus tified in holding the profit on sale of shares as business income. The said finding of the Assessing Officer is not sustainable and rejected. He is directed to assess the profit on sale of aforesaid shares for Rs. 28,81,963 as 'long-term capital gains'. The only ground of appeal is allowed.

3.0 In the result the appeal is allowed."
7. Aggrieved, the Revenue is in appeal before us.

8. The learned Departmental representative along with relying on the order of the Assessing Officer also submitted that as the assessee herself has been showing the investments in equity shares under the head 'closing stock' forming part of trading and profit and loss account and at the end of the year in the balance-sheet under the head current assets as stock-in- trade, the profit from sale of shares should be taxed as business income and not long-term capital gain.

9. On the other hand, the learned authorised representative for the assessee along with relying upon the submissions made before the Commissioner of Income-tax (Appeals) also submitted that the assessee is normally dealing in shares and securities. But has kept separate records in respect of long-term investment as well as trading of shares. The long-term capital gain arose only from few scrips which were held for a period of more than 12 months. The learned authorised representative also submitted that the assessee has bifurcated his closing stock of shares in three sub- groups namely-'shares investment account', 'shares delivery account' and 'shares derivatives account' and the total closing stock as on March 31, 2008 in these sub-groups was Rs. 39,41,814, Rs. 26,02,542.66 and Rs. 19,439.81 respectively which in total comes to Rs. 65,63,823.89 shown in the audited profit and loss account. The learned authorised representative also submitted that the assessee has been showing profit from trading of shares as well as long-term capital gains from sale of shares held for investment in her return of income regularly in previous years also. The learned authorised representative referred to page 30 of the paper book filed on July 16, 2012 that the assessee has shown long-term capital loss of Rs. 1,84,140 during the assessment year 2005-06 and there was no capital gains during the assessment year 2006-07 and the assessment year 2007-08 and the assessee has shown long-term capital gains from sale of shares held for investment at Rs. 28,81,963 during the assessment year 2008-09 which is under appeal. In a nut shell learned authorised representative tried to convince that the assessee who even if has shown the total investment and stock as closing stock of shares business shown under the head current assets in the audited balance-sheet and has not bifurcated the stock in the balance-sheet but has been regularly maintaining sub-groups of holding in shares under shares investment account, shares derivative account and shares stock account and at the end of the year the surplus/ deficit on account of shares held under investment account are shown under the head "capital gain" in the return of income and the surplus/ deficit from the transactions from purchase/sales of shares under shares stock account and shares derivative account are being shown as business income.

10. We have heard the rival contentions and gone through the facts and circumstances of the case and perused the material on record. The issue before us is to examine as to whether the Assessing Officer is correct in treating the surplus amount arising out of sale and purchase of shares at Rs. 28,81,963 as business income, whereas the assessee has claimed it as long-term capital gain. The Assessing Officer has treated the aforesaid surplus out of purchase/sale of shares as business income on the ground that the shares were sold as stock-in-trade and were duly forming part of the audited financial statement. However, the learned Commissioner of Income-tax (Appeals) did not accept the reasoning of the Assessing Officer on the ground that the assessee has been maintaining different portfolios, investment, shares stock and derivatives. The impugned additions pertain to investment portfolio. The Commissioner of Income-tax (Appeals) also mentioned in his appellate order that there is no bar in law that the present gain maintained to different portfolios. The Commissioner of Income-tax (Appeals) has given his finding on facts which has not been controverted by the Revenue.

11. Now in order to examine the contentions of the learned authorised representative in regard to the claim of the assessee of maintaining three separate sub-groups out of which two sub-groups namely-share stock account and shares derivatives account, there is no dispute as the same has been treated as a part of business stock and the income from transactions in these sub-groups has been shown as business income by the assessee and has been duly accepted as business income by the Assessing Officer. The only sub-group which needs to be examined is the share investment account for which the learned authorised representative has placed on record the sub-group share investment account as on March 31, 2006, March 31, 2007 and March 31, 2008 and asserted upon that the surplus and deficit from sale of shares held in this sub-group has been consistently shown as capital gain. Before we analyse this aspect we reproduce below the details of long-term capital gain shown by the assessee in the relevant financial year for the year under appeal :

12. From the material placed on record it is noticed that the assessee has claimed the following equity shares held under share investment account as on March 31, 2006, March 31, 2007 and March 31, 2008. For the ease of comparison quantity of equity shares as on March 31, 2006, March 31, 2007 and March 31, 2008 have been placed together in one chart against the particular company :

Share investment account

13. The above chart of share investment account as on March 31, 2006, March 31, 2007 and March 31, 2008 will help to note that which company's share have been sold during the particular year so as to reconcile with the capital gain from sale of shares shown by the assessee in its return of income. From going through the above share investment account following issues are noticed :

(1) The quantity of shares of Bartronics India Ltd. as on March 31, 2006 was shown at 25,000 nos. and the same reduced to 22,000 nos. on March 31, 2007 but the difference of 3,000 nos. is not appearing in the long-term capital gains for the assessment year 2007-08.

(2) The shares of Britania India Ltd. (50 nos.) and shares of Sayaji Ind. Ltd. (368 nos.) which were shown up to March 31, 2006 are not appearing in the share investment account as on March 31, 2007, this transaction is also not forming part of long-term/short-term capital gains for the assess ment year 2007-08.

(3) Following equity shares which were appearing in the shares investment account as on March 31, 2006 as well as on March 31, 2007 but are not appearing in the shares investment account as on March 31, 2008.

14. Thus this raises question-that if all these shares were sold during the financial year 2007-08 then why the long-term capital gains/long-term capital loss has not been shown by the assessee in her claim of total long- term capital gains as filed in the return of income and what treatment has the assessee given to these shares in its books of account.

15. From the above analysis, it is clear that there has been some deviation to the contentions placed by learned authorised representative in relation to consistent treatment of transactions of purchase/sale of shares under the head "shares investment account". There is no dispute that the books of account are audited under section 44AB of the Act duly certified by the chartered accountant and showing the total stock of equity shares held by the assessee in trading and profit and loss account and has been treated as closing stock and no information is placed on record that whether such stock has been converted into capital account or vice versa. In these circumstances in order to verify the submissions/claim of the assessee of capital gains from shares held in shares investment account in the light of our working as well as questions raised, it will be just and proper to remit this issue back to the file of the Assessing Officer before whom the assessee will place all records. If the Assessing Officer is satisfied that the assessee has consistently treated the shares investment account as her investment for long-term purposes and has not shifted the stock in investment account to shares trading stock account or share derivatives account or vice versa then the Assessing Officer will accept the claim of the assessee of claiming deduction under section 10(38) of the Act for long-term capital gains from sale of equity shares and if contrary results are discovered by the Assessing Officer from the records made available by the assessee then such total income from the transaction of purchase/sale of shares in all the three sub-groups account shall be treated as business income. This ground of the assessee is allowed for statistical purposes.

16. Other grounds are of general nature, hence need no adjudication. In the result, the appeal filed by the Revenue is allowed for statistical purposes.

The order pronounced in the open court on October 15, 2015.