I.T.A. No. 1271/Mum/2012

Saktijit Dey (Judicial Member) And Ramit Kochar (Accountant Member)

Sanjiv M. Shah For the Appellant :
Ritesh Misra, Departmental representative For the Respondent :

ORDER

The order of the Bench was delivered by

Ramit Kochar (Accountant Member)- This appeal, filed by the assessee, being ITA No. 1271/Mum/2012, is directed against the order dated December 16, 2011, passed by the learned Commissioner of Income- tax (Appeals)-23, Mumbai (hereinafter called "the CIT(A)"), for the assessment year 2008-09, the appellate proceedings before the learned Commissioner of Income-tax (Appeals) arising from the assessment order dated December 27, 2010, passed by the learned Assessing Officer (hereinafter called "the AO") under section 143(3) of the Income-tax Act, 1961 (hereinafter called "the Act").

2. The ground of appeal raised by the assessee in the memo of appeal filed with the Income-tax Appellate Tribunal, Mumbai (hereinafter called "the Tribunal") reads as under :

"1. Treatment of income under the head short-term capital gain as business income :

On the facts and in the circumstances of the case and in law the learned Commissioner of Income-tax (Appeal)-23 (hereinafter referred to as the learned CIT(A)) erred in upholding the finding of the learned Assessing Officer assessing the short-term capital gains as income from business and profession.

1. That the orders of both the learned Commissioner of Income- tax (Appeals) and the learned Assessing Officer are bad in law and on facts."

3. The brief facts of the case are that the assessee is an individual having business income, being proprietor of (i) M/s. Movements, (ii) M/s. International Ship Agency, and (iii) M/s. S. B. Shroff engaged in the business of transporters, hire charges and cargo handling agents. The assessee also received salary from Silver Shield Energy Pvt. Ltd. The assessee is also having receipt of share of profit from partnership firms (i) M/s. Cargo Handlers and Stevedors, (ii) M/s. Shroff and Co. (cargo handling agent), and (iii) M/s. Shroff and Co. (CHA).

4. During the course of scrutiny assessment proceedings under section143(3) read with section 143(2) of the Act, the Assessing Officer observed that the assessee has earned short-term capital gains of Rs. 32,70,593 on the sale of shares. Keeping in view the magnitude, frequency of the shares transactions, the assessee was asked to explain as to why the profit on sale of shares shown as short-term capital gain should not be taxed as business income in view of Board's Circular No. 4 of 2007.

The assessee in reply submitted that the assessee is a businessman having interest in various firms engaged in the business of clearing and forwarding and parked his surplus funds with broker who purchase and sell shares on behalf of the assessee resulting in long-term capital gains and short-term capital gains on sale of shares. The assessee submitted that he has earned income from his proprietary business and also earned salary from the partnership firm, M/s. Shroff and Co., and also earned bank inter est. The assessee submitted that he is investing the surplus funds in shares and earned capital gains and dividend out of it and the period of holding of the shares in the case of long-term capital gains is up to 1277 days and in the case of short-term capital gains, the period of holding ranges from five days to 342 days, whereby the average holding period was 98 days. The assessee submitted that it did not undertook intra-day trading of shares or dealing in futures and options (F & O). The assessee submitted that he has not indulged in repeated sale and purchase of shares. The assessee submitted that he has only purchased and sold listed securities and mutual funds and no investment is made in sister or related concerns or inde pendent companies. The assessee submitted that he had given funds to broker who invest on the assessee's behalf and there are no repeated trans actions. The assessee relied upon the decision of the honourable Bombay High Court in the case of CIT v. Gopal Purohit [2011] 336 ITR 287 (Bom) ; [2010] 34 DTR 52 (Bom).

It was observed by the Assessing Officer that the assessee has traded in about 65 different scrips and there are large number of transactions. The assessee stated that the shares dealt by him are considered as investments in records and the income earned is to be considered as capital gain, while as per the Assessing Officer the income derived from such activity has to be treated as business income. The Assessing Officer observed that the prime intention of the assessee was to trade in shares and not to hold them as investment. Therefore, the assessee's motive was to earn maximum profit and the profits were again ploughed back to earn more profits. Thus, the entire activity of the assessee has to be treated as business in trading in shares and it cannot be treated as investment. The assessee entered into substantial number of shares and during the period the assessee dealt in number of transactions of 65 scrips and the holding period varies from 5 to 342 days and the motive of the assessee is to earn profit. The assessee wherever got an opportunity sold the shares at higher price and re-entered the share again at the lower price. Hence, the objective of the assessee was not to make investment but to earn profit and the entire activity was treated as business by the Assessing Officer. Thus, the entire short-term capital gain of Rs. 32,70,593 earned by the assessee was treated as business income of the assessee by the Assessing Officer, vide assessment orders dated December 27, 2010, passed under section 143(3) of the Act.

5. Aggrieved by the assessment orders dated December 27, 2010, passed by the Assessing Officer under section 143(3) of the Act, the assessee filed the first appeal before the learned Commissioner of Income-tax (Appeals).

6. Before the learned Commissioner of Income-tax (Appeals), the assessee submitted that merely because there were transactions in 65 different scrips will not have impact whether the shares are held as investment or otherwise. The average holding period of 98 days for short-term capital gain shows that the assessee has not done transactions in shares frequently. The frequency of transactions cannot be a decisive factor to arrive that the shares were held as stock-in-trade. No borrowed funds were used for making the investment in stocks. The assessee submitted that there are no business expenses like office employee, computer or travel expenses. The money is paid and received from the broker for the sale and purchase of shares and the trading is not carried by the assessee himself but was done through professional. The investments were made with the objective to earn good returns in the form of dividend or capital gain. No single principle would be decisive and the total effect of all the principles should be considered to determine whether the shares are held by the assessee as investment or stock-in-trade. The assessee submitted that in the preceding years, the short-term capital gains and long-term capital gains declared by the assessee were accepted by the Revenue in the scrutiny assessment under section 143(3) of the Act. The assessee submitted that he is consistently following the same principles as were adopted in the earlier years whereby delivery based shares were treated as investment and gains arising therefrom were treated as capital gains, the same principle should apply for the current year as the facts and circumstances are the same and the short-term capital gain of Rs. 32,70,593 on sale of shares declared by the assessee in the return of income filed with the Revenue should be accepted and brought to tax as short-term capital gains.

7. The learned Commissioner of Income-tax (Appeals) after considering the submissions of the assessee and the assessment order observed that the issue in hand depends upon the factual matrix of the case and each case has different facts which will determine whether the gains arising from shares on purchase and sale are to be classified as business income or capital gains under the provisions of the Act. Several factors such as intention of the taxpayer while purchasing the shares, whether borrowed funds were used, frequency of purchase and sale of shares, period of holding, declaration in the balance-sheet, etc., are to be considered for classifying the dealing in shares as business vis-a-vis investment. The learned Commissioner of Income-tax (Appeals) observed that the Assessing Officer pointed out the magnitude of the transaction and the period of holding, while apart therefrom the transactions in sale purchase of shares are repetitive and the learned Commissioner of Income-tax (Appeals) produced the following chart showing the repetitive transactions whereby the assessee is re-entering the market by purchasing the scrips after having sold the earlier holding in the same share :

The learned Commissioner of Income-tax (Appeals) observed that the intention of the assessee is to trade in the shares and not to hold them as investment. There are repeated buying and selling of shares. There are no employees and no business expenses and the transactions were undertaken through a professional is not relevant these days as what is required these days is a computer and internet connectivity, an elaborate office set up is not required to trade in shares. The learned Commissioner of Income-tax (Appeals) held that principles of res judicata is not applicable to the Income-tax proceedings and the nature of transactions is to be adjudged on the basis of the facts and circumstances of each year. The intention of the assessee is to be seen from the surrounding facts and circumstances. The magnitude of the transactions and the repetitive nature of transactions in several shares by the assessee, and repetitive transaction by the assessee clearly indicates the intention of the assessee to indulge in the nature of trade/adventure in the nature of trade and, hence, the income therefrom is to be treated as business income. Accordingly, the learned Commissioner of Income-tax (Appeals) upheld the orders of the Assessing Officer, vide the learned Commissioner of Income-tax (Appeals) appellate orders dated December 16, 2011.

8. Aggrieved by the appellate orders dated December 16, 2011, of the learned Commissioner of Income-tax (Appeals), the assessee is in second appeal before the Tribunal.

9. The learned counsel for the assessee submitted that the short-term capital gain earned by the assessee on investments made in shares has been classified as business income by the Revenue authorities. The assessee is consistently following the same principle whereby delivery based buying and selling in the shares is classified as investment and gains arising there- from are classified as short-term and long-term depending upon the period of holding of shares, and the same principles has been adopted in the earlier years which have been accepted by the Revenue even in the scrutiny proceedings. The assessment orders under section 143(3) of the Act for the assessment years 2006-07 and 2007-08 whereby the Revenue has accepted the short-term capital gain and long-term capital gain earned by the assessee on shares, vide order dated December 30, 2008, and December 16, 2009, respectively are placed in the paper book pages 27-29 and 38-39 respectively. The learned counsel for the assessee submitted that the principle of consistency has to be followed. The learned counsel for the assessee drew our attention to the paper book pages 65-66 whereby the details of holding of shares are there as at March 31, 2007, whereby the investments in shares have substantially increased as at March 31, 2008, indicating the indica of investment in the shares and the opening value of investment in shares at cost was accepted and taken by the Revenue and has not been disturbed. The learned counsel submitted that no borrowings were made by the assessee for making investment in the shares. The learned counsel also drew our attention to the detail of transactions carried by him for earning short-term capital gains on sale of shares which is also placed at the paper book pages 57-62. The learned counsel for the assessee has relied upon various case law which are also placed separately in the form of paper book of case law, in particular the decision of the Income-tax Appellate Tribunal in the case of Asst. CIT v. Naishadh V. Vachharajani (ITA No. 6429/Mum/2009, dated February 25, 2011) which is affirmed by the honourable Bombay High Court in ITA (L) No. 1042 of 2011 dated September 22, 2011, and also the decision of the honourable Bombay High Court in the case of CIT v. Gopal Purohit [2011] 336 ITR 287 (Bom) ; [2010] 228 CTR (Bom) 582. The learned counsel for the assessee also relied upon the decision of the Income-tax Appellate Tribunal in the case of Nagindas P. Sheth (HUF) v. Asst. CIT (ITA No. 961/Mum/2010 dated April 5, 2011) and in the case of Ramesh Babu Rao v. Asst. CIT (ITA No. 3719/Mum/2009 for the assessment year 2005-06 dated April 13, 2011) and contended that the assessee has entered into delivery based transaction and earned short- term capital gain of Rs. 32,70,593 which should be brought to tax as short- term capital gain and not income from business as has been done by the Assessing Officer and confirmed by the learned Commissioner of Income- tax (Appeals). In the earlier years also it was disclosed as short-term capital gains which was accepted by the Revenue. There are no intraday transactions and there are no F & O transactions. The learned counsel further relied upon the decision of the Income-tax Appellate Tribunal in the case of Nehal V. Shah v. Asst. CIT (ITA No. 2733/Mum/2009 for the assessment year 2005-06 dated December 15, 2010) and also relied upon the decision in the case of Management Structure and Systems Pvt. Ltd. v. ITO (ITA No. 6966/Mum/2007 for the assessment year 2004-05, vide orders dated April 30, 2010). The learned counsel submitted that the long-term capital gain declared by the assessee is not disturbed by the Revenue and only short-term capital gain on sale of shares has been brought to tax as business income. The learned counsel for the assessee submitted that there was dividend income earned of Rs. 2.57 lakhs on shares investment which reflect that shares are held as investment and objective is to earn return on investment and not merely profit on sale and purchase of shares. The learned counsel for the assessee submitted that, without prejudice, the shares in which holding of shares is more than 30 days be taken as short- term capital gain up to the period of one year, while the period of holding up to 30 days should be classified as business income. The learned counsel submitted that the assessee has invested in mutual funds also.

10. The learned Departmental representative, on the other hand, submitted that there were repeated transactions of sale and purchase of shares. The assessee has re-entered the same shares again after selling the said share which is indica of trade. He drew our attention to the order of the learned Commissioner of Income-tax (Appeals) where there is a chart reproduced by the learned Commissioner of Income-tax (Appeals) reflecting the shares whereby the assessee re-entered the same shares and purchased it after selling the same. The learned Departmental representative further relied upon the orders of the authorities below. He held that the principles of res judicata are not applicable to the Income-tax proceeding. The assessee's intention clearly indicates to earn profit by buying and selling of shares. The assessee is not having any infrastructure which is not material as these days trading is done through computers and internet.

11. The learned counsel for the assessee, in the rejoinder, submitted that the principle of consistency has to be followed although the principles of res judicata are not strictly applicable to Income-tax proceedings. The learned counsel relied upon the decision of the honourable Bombay High Court in the case of Gopal Purohit [2011] 336 ITR 287 (Bom).

12. We have considered the rival contentions and also perused the material available on record including the caselaw relied upon by the assessee. We have observed that the assessee is engaged in the business and is proprietor of M/s. Movements, M/s. International Ship Agency and M/s. S. B. Shroff engaged in the business of transporters, hire charges and cargo handling agents. The assessee also received salary from Silver Shield Energy Pvt. Ltd. The assessee is also having share of profit from partnership firms, M/s. Cargo Handlers and Stevedors, M/s. Shroff and Co. (Cargo Handling Agent) and M/s. Shroff Co. (CHA).

The assessee has dealt in the shares whereby buying and selling of shares were undertaken by the assessee through a professional broker who handled the investments on behalf of the assessee. We have observed that the assessee is regularly dealing in shares since last several years and declaring the gains earned on sale and purchase of shares as capital gains. The Revenue has accepted the gains arising from sale and purchase of shares as capital gains in the preceding assessment years even under the scrutiny assessments under section 143(3) of the Act but in the instant assessment year, the short-term capital gain arising from sale and purchase of shares has been treated as business income by the Revenue and brought to tax under the head "Income from business". The principle of res judicata is not applicable in Income-tax proceedings. The assessee is declaring the investment in shares at cost which is also accepted by the Revenue in the earlier years also in the scrutiny assessment under section 143(3) of the Act. The assessee has kept the funds with the broker whereby the broker is buying and selling the shares on behalf of the assessee with respect to the share transactions. All the shares were purchased and sold on delivery basis. No speculative transaction or F & O transactions has been undertaken by the assessee. The assessee has deployed his own money for the purchase of shares and no borrowed funds were utilised for the purchase of shares. On the other hand it is also observed that frequency, volume and magnitude of the transactions of sale and purchase of shares are very large and also the assessee is making re-entry in the shares by purchasing again the same scrip after selling the same scrip. The details of the transactions of sale and purchase of shares and the resultant gains arising therefrom are placed in the paper book which we have given an anxious thought. Keeping in view the factual matrix and the peculiar facts and circumstances of the case, we are of the considered view, it will be just and appropriate in the interest of justice that the gains arising from sale of shares held for a period of up to 30 days should be treated as business income and brought to tax as income from business as there is reflected an indica of trade on the part of the assessee in selling the shares within such a short period of time of holding up to 30 days, while gains arising from sale of shares held for a period of holding of shares of more than 30 days and not more than twelve months, the resultant gain arising therefrom should be charged to tax as short-term capital gains as there is reflected an indica of investment where the period of holding is more than 30 days and not more than twelve months. The Assessing Officer is directed to compute the respective business income and short-term capital gain on sale of shares accordingly as indicated by us as above. We order accordingly.

13. In the result, the appeal filed by the assessee in ITA No. 1271/Mum/2012 for the assessment year 2008-09 is partly allowed as indicated above.

The order pronounced in the open court on 27th May, 2016.