Court: INCOME TAX APPELLATE TRIBUNAL
Citation: Dy. Commissioner of Income Tax- 4(2) Vs M/s. SMK Shares & Stock Brooking Pvt. Ltd. ITA No. 799/Mum./2009, (Assessment Year : 2005- 06)
Brief :The assessee, a broker in the BSE, disclosed short-term capital gains and long-term capital gains on sale of shares. The AO accepted the LTCG as such though he held that the STCG was asses sable as “business profits” on the ground that the assessee was a stock broker & there was large volume and frequency (more than 300) transactions. On appeal, the CIT (A) reversed the AO. On appeal by the department to the Tribunal, HELD dismissing the appeal:
(i) It is no more res integra that a person can be both “Investor” as well as “Trader” in shares. (Draft Instruction No. 2005, Instruction No. 1827 dated 31.8.1989 & Circular No. 4/2007 dated 15.6.2007 referred). The assessee has to maintain the distinction between shares held as stock and those held as investments in its records;
(ii) While volume of transactions is an important indicator of the intention of the assessee whether to deal in shares as trading asset or to hold the shares as investor, it is certainly not the sole criterion. The AO’s conclusion that since sale and purchase had been determined by the volatility in the market, the same is against the basic feature of investor is not based on sound rational reasoning. A prudent investor always keeps a watch on the market trends and, therefore, is not barred under law from liquidating his investments in shares. The law itself has recognized this fact by taxing these transactions under the head “Short Term Capital Gains”. If the AO’s reasoning is accepted, then it would be against the legislative intent itself;
(iii) The fact that the assessee did not borrow funds for investment in shares is an important aspect which cannot be lost sight off while deciding the true intention of the assessee;
(iv) The fact that the AO accepted the assessee’s claim in earlier years that it was an investor is material because though the principles of res judicata do not strictly apply to income tax proceedings it is well settled law that the principles of consistency should not be ignored. Uniformity in treatment and consistency under the same facts and circumstances is one of the fundamentals of the judicial principles which cannot be brushed aside without proper reason;
(v) The fact that the AO accepted the offering of LTCG also showed that the assessee’s status as investor was accepted by him;
(vi) Some part of the STCG had arisen out the earlier investment which had been accepted as being on investment account. As the modus operandi of the assessee remained the same in regard to other shares purchased during the year, the assessee’s claim could not be negated only on the basis of frequency of the transaction (Gopal Purohit 228 CTR 582 (Bom), Sadhana Nabera 41 DTR 393 & Jayshree Pradip Shah considered).
ORDER
PER S.V. MEHROTRA, A.M.
This appeal by the Revenue, is directed against the impugned order dated 18th November 2008, passed by the Learned CIT(A)-IV, Mumbai, for assessment year 2005-06, on the following grounds:-
“1. On the facts and in the circumstances of the case, the learned CIT(A) erred in treating income from share trading as investment income.
2. On the facts and in the circumstances of the case, the learned CIT(A) erred ignoring the facts that due to high frequency of transactions, the profits from such transaction should be treated as business income.
3. On the facts and in the circumstances of the case, the learned CIT(A) erred not appreciating the fact that the assessee has in subsequent years declared income from similar transactions as business income.”
2. Brief facts of the case are that, the assessee company, a member of Bombay Stock Exchange, in the relevant assessment year, filed return of income declaring total income at Rs.58,92,409/- which was duly accompanied with tax audit report under section 44AB of the Income Tax Act, 1961 (for short “the Act”). The Assessing Officer noticed that the assessee had disclosed short term capital gains during the year at 42,34,000 and long term capital gains at 60,95,000. He noted that the assessee had purchased shares in small lots and entered into more than 300 transactions during the year. Thus, the assessee had consistently purchased and sold the shares during the year. Considering the volume and frequency of sale and purchase, the Assessing Officer concluded that the assessee had no intention to hold the shares. He further observed that the assessee is a broking firm and, therefore, the share transactions relate to the business of the assessee. He further pointed out that in subsequent assessment year, the assessee had treated income from similar transactions as business income. He, thus, concluded that income returned as short term capital gains was actually business income, observing as under:-
“7.3 In CIT Vs Sutlej Cotton Mills Supply Agency Ltd. (1975) 100 ITR 706 (SC), the respondent -assessee subscribed for 3,49,000 shares of a new issue of Gwalior Rayon and paid the application and call money. Subsequently, it sold 1,58,200 shares with a profit. The Income-tax Appellate Tribunal found that the transaction constituted business being an adventure in the nature of trade and that the profit was liable to income-tax. On reference to High Court of Madhya Pradesh held that the transaction was not an adventure in the nature of trade. On appeal to the Hon’ble Supreme Court, the decision of the High Court was reversed holding that the Tribunal had considered the evidence on record and applied the correct test of law, and there was no scope for interference with the finding of the Tribunal.
The court while deciding the case also observed “If a transaction is in the assessee’s ordinary line of business there can be no difficulty in holding that it is in the nature of trade. But the difficulty arises where the transaction is outside the assessee’s line of business and then, it must depend upon the facts and circumstances of each case whether the transaction is in the nature of trade”. Also “the view of the Tribunal was, it was with borrowed funds that the assessee purchased the shares. It is no doubt true that there was no evidence to show that the money was specifically borrowed for the purpose of buying shares. But there was evidence before the Tribunal for its finding that the liabilities of the assessee exceeded its assets. The finding, therefore, that the shares were purchased with borrowed funds on which the assessee was paying interest, was a finding supported by evidence. The reasoning of the Tribunal that it is most improbable that the assessee would be investing borrowed money on which interest would have to be paid in shares which yielded no dividend was correct. We cannot say that this was not a relevant circumstances of the Tribunal to take into consideration for coming to the conclusion that the transaction was an adventure in the nature of business.”
3. Before the learned CIT(A), the assessee submitted that the composition of its long term capital gains and short term capital gains was as under:-
