When income from sale of shares can be said to be income from business

IN THE ITAT MUMBAI BENCH ‘B’

Manish P. Gandhi V/s.  ACIT

IT APPEAL NOS. 5290 (MUM.) OF 2008 & 6430 (MUM.) OF 2009

[ASSESSMENT YEARS 2005-06 & 2006-07]

Date of pronouncement – 29.07.2011

ORDER

N.V. Vasudevan, Judical Member

ITA No.5290/M/08 is an appeal by the assessee against the order dated 11/6/2008 of CIT(A) 25, Mumbai relating to assessment year 2005-06, while ITA No.6430/M/09 is an appeal by the revenue against the order dated 29/9/2009 of CIT(A)-35, Mumbai relating to assessment year 2006-07. We shall first take up for consideration appeal by the assessee for assessment year 2005-06 in ITA No.5290/M/08.

2. The assessee in this case is an individual. The assessee filed return of income for assessment year 2005-06, wherein he declared income from Long Term Capital Gain(long term capital gains) and Short Term Capital Gain(STCG) as follows:

“II. Income From Capital Gains

3. The question before the AO was as to whether the income declared by the assessee under the head income from capital gain has to be assessed as income from business or income from capital gain. While deciding this issue the AO has referred to the transaction and the profit made by the assessee as follows:

“In the return of income assessee has declared income from business and profession at Rs. 7,47,743/-, income from capital gains upto 30.9.04 Rs. 13,66,398/- short term capital gains after 1.10.2004 at Rs. 17,92,538/-, and income from other sources at Rs. 36,014/-.

In the income and expenditure account filed along with the return of income assessee has credited the following amounts:

4. The further description of the transaction in the order of assessment is as follows:

“In addition to this as shown in the statement of short term capital gains from 1/4/04 to 30/9/04 assessee has purchased 104311 number of shares for Rs. 2,70,43,150.39 and sold the same for Rs. 2,84,09,548.64/- thereby earning a profit of Rs. 13,66,398.25. These scrips pertained to 34 companies and total no. of transactions done by the assessee were 56. further, as shown in the statement of short term capital gains from 1/10/04 to 31/3/05 assessee has purchased 447383 number of shares for Rs. 3,28,07,877.21/- and sold the same for Rs. 3,46,00,415.54/- thereby earning a profit of Rs. 17,92,538.33. These scrips pertained to 82 companies and total no. of transactions done by the assessee were 173.”

5. As can be seen from the above details culled out by the AO in the order of assessment the details do not tally with the statement of total income under the head income from capital gains filed by the assessee which we have referred to in the earlier part of this order. The transactions carried out by the assessee during the previous year which were filed alongwith the computation of the total income is at pages 108 & 109 of the paper book. A perusal of the paper book filed in ITA No.6430/M/09 shows that the assessee had dealt in shares of about 35 companies. The total number of scrips purchased by the assessee was 957180 for a sum of Rs. 6,39,45,234/-. The said scrips were sold by the assessee for a sum of Rs. 6,79,20,977/- resulting in a gain of Rs. 38,57,123/-. This is the statement of STCG from 1/10/2004 to 31/3/2005 filed by the assessee. Similarly the long term capital gains from 1/4/2004 to 30/9/2004 was in respect of three companies in which total purchase was 16485 shares of the value of Rs. 31,75,760/- which were sold for Rs. 50,38,355/- resulting in net long term capital gains of Rs. 18,50,732/-. The statement of long term capital gains from 1/10/2004 to 31/3/2005 shows that the assessee purchased shares of six companies totaling 27200 for a price of Rs. 11,79,152/-. They were sold for a sum of Rs. 32,66,290/-, resulting in a gain of Rs. 20,79,230/-. It can thus be seen that the number of transactions, the quantity of purchases and sales as well as value as declared by the assessee and as considered by the AO are totally different.

6. The AO was of the view that the assessee was carrying on business of trading in shares and in this regard relied on several judicial pronouncements, besides Circular of the CBDT namely Circular No.4/2007 dated 15/6/2007. In the light of the principles emerging from those decisions, the AO concluded that the income returned by the assessee under the head income from capital gains has to be assessed under the head income from business. Since the income was considered as income from business, the claim of exemption of long term capital gains made by the assessee was also denied.

7. On appeal by the assessee the CIT(A) confirmed the order of the AO. In doing so the CIT(A) also considered the transactions as done by the AO in the order of assessment.

8. Aggrieved by the order of the CIT(A) the assessee has preferred the ITA NO.5290/M/08 before the Tribunal.

9. The ld. Counsel for the assessee submitted that since facts and figures have not been properly considered by the AO and CIT(A) and their ultimate conclusions on the question whether the income in question was income from business or income from capital gains is erroneous.

10. We have considered the submissions and are of the view that the stand taken by the assessee is well founded. In this regard we find that Courts have laid down principles for deciding the question as to when income from sale of shares can be said to be income from business. The following are some of the important decisions in this regard:

(a) Whether a transaction of sale and purchase of shares were trading transactions or whether they were in the nature of investments is mixed question of law and fact. Learned CIT(A) v. H. Holck Larsen, [1986] 60 ITR 67.

(b)  It is possible for an assessee to be both an investor as well as a dealer in shares. Whether a particular holding is by way of investment or formed part of stock in trade is a matter which is within the knowledge of the assessee and it is for the assessee to produce evidence from his records as to whether he maintained any distinction between shares which were hold by him as investments and those hold as stock in trade. (CIT v. Associated Industrial Development Co. Ltd., [1971] 82 ITR 586 (SC).

(c) Treatment in the books by an assessee will not be conclusive. If the volume, frequency and regularity with which transactions are carried out indicate systematic and organized activity with profit motive, then it would be a case of business profits and not capital gain. CIT v. Motilal Hirabhai Spg. & Wvg. Co. Ltd., [1978] 113 ITR 173 (Guj); Raja Bahadur Visheshwara Singh v. CIT [1961] 41 ITR 685 (SC).

(d) Purchase without an intention to resell where they are sold under changed circumstances would be capital gains. CIT v. PKN Co. Ltd. [1966] 60 ITR 65 (SC). Purchase with an intention to resell would render the gain profit on sale business profit depending on the circumstances of the case like nature and quantity of article purchased, nature of the operation involved. Saroj Kumar Mazumdar v. CIT [1959] 37 ITR 242 (SC).

(e) No single fact has any decisive significance and the question must depend upon the collective effect of all the relevant materials brought on record. Janki Ram Bahadur Ram v. CIT [1965] 57 ITR 21 (SC).

11. The application of the principles as set out above will require reexamination of the correct facts that prevails in the case of the Assessee. Since, the Revenue authorities have proceeded on wrong facts and figures, we, deem it fit and proper to set aside the order of the CIT(A) and remand the issue to the AO for fresh consideration in accordance with law after taking into consideration the correct facts. Thus ground No.1 to 4 raised by the assessee in its appeal are allowed for statistical purposes.

12. In ground Nos.5 & 6 the assessee is aggrieved by the action of the AO in determining the income from house property in respect of Kandivili and Pune properties despite the fact that the same ought to have been considered as self occupied property and interest income determined at Rs. Nil. This ground can be conveniently disposed off together with ground No.4 of Revenue’s appeal for AY 06-07. On this issue we find that in A.Y 2006-07 on the very same issue the CIT(A) has held as follows:

“8. Income from House Property:-

8.1 The A.O noticed from the balance sheet that the appellant was owning three flats, namely flat at Challenger Tower (Kandivali), flat at Pune and flat at Oberoi Park View (Kandivali) and the appellant was living in Challenger Tower flat. He further noticed that in the statement of total income, the appellant had offered only house property income in respect of flat at Pune at Rs. 50,000/-, net of deduction u/s. 24 as per assessment order for A.Y 2004-2005. Thus, the AO found that the appellant did not offer any notional income in respect of flat at Oberoi Park View, Kandivali. He further found that for A.Y 2005-06 the notional income from the above house property was estimated at Rs. 1 lac after deduction u/s. 24 and the same was confirmed on appeal by CIT(A). He therefore, assessed notional erent of Rs. 1,10,000/- from Oberoi Park View property and further assessed Rs. 75,000/- in respect of Pune flat considering the rise in the rental value.

8.2 At the time of hearing the, the representative submitted that the appellant did not offer any income in respect of flat at Oberoi Park View, Kandivali as the possession was not yet received as on 31/3/2006. He further submitted that this was also explained to the AO but since the addition was made in the last year and confirmed by CIT(A), the AO repeated the same addition. He submitted that the above flat was booked in the year 2004 and possession of the said flat was received after 31/3/2006 and the appellant paid the last instalment in the month of February, 2006. He also filed a copy of the ledger account for payment of the last instalment in February, 2006. He submitted that the appellant occupied the above flat in the month of January 2007 and, therefore, there is no notional income to be assessed from the said property for this year. Regarding the Pune flat, he submitted that the notional income could be assessed only on the basis of municipal valuation and the same cannot be varied from year to year considering the increase in the market value unless the municipal valuation was also increased. He submitted that even if the municipal valuation is adopted, the valuation would be much less than Rs. 50,000/- but the appellant admitted Rs. 50,000/- on estimate basis which is reasonable and there is no necessity for disturbing the same.

8.3 After considering the submissions, I find that the AO has made the addition merely because such addition was made in the earlier year and confirmed by the CIT(A). A perusal of balance sheet of the appellant as on 31/3/2006 shows that the value of the flat in Oberoi Park View is shown at Rs. 76,17,180/- under the head ‘Fixed Assets” and as on 31/3/2005, the value of the flat was shown at Rs. 58,58,908/-. Both these balance sheets are available with the AO forming part of the accompanying statements filed with the return of income. Thus it is clear that the appellant was making payment during this year towards cost of construction of the above flat and the final payment was made only in the month of February, 2006 as per the ledger account copy. In the circumstances, I accept the plea of the representative that possession of the lat was not received till the end of the year and the same was received only in the next year and consequently there is no justification for addition Rs. 1,10,000/- towards notional rent from the above flat and the same is deleted. Regarding the Pune property, I accept the plea of the representative that notional rent is to be determined on the basis of municipal valuation and it cannot be enhanced based on the general increase in the market value. As contended by the representative, if the municipal valuation is adopted, the notional rent might be less than Rs. 50,000/- and the appellant has already offered Rs. 50,000/- on estimate basis and, therefore, there is no necessity to disturb the same. I, therefore, direct the AO to accept the notional rent of Rs. 50,000/- after deduction u/s. 24 as admitted by the appellant.”

In AY 05-06, the Assessee claimed Flat No.2302, Obroi Park View Tower as self occupied property, whereas in A.Y 2006-07 the Pune property has been claimed as self occupied property. Moreover, the facts as stated by the Assessee in AY 06-07 was raised for the first time in that year only. Since new facts have been raised in AY 06-07 contrary to facts in AY 05-06, we deem it fit and proper to set aside the order of the CIT(A) on this issue in both the AYs and direct the AO to examine the correct facts and consider the issue afresh. We, set aside the issue to the AO for fresh examination in accordance with law after ascertaining the correct facts.

13. The other grounds of appeal is with regard to charging of interest which is purely consequential.

14. In the result, the appeal by the assessee is treated as allowed for statistical purposes.

ITA 6430/M/09:Revenue’s Appeal:

15. In this assessment year the very same issue as to whether income declared by the assessee under the head income from capital gain or income from business has to be determined. This grievance is projected by the revenue in Ground No.1 by it before the Tribunal. In this year the conclusions were arrived at by the AO by following the order of the AO in 2005-06. The CIT(A) however held that the income in question was income from capital gain. We are of the view that the issue needs to be readjudicated in the light of the decision that might be arrived at by the AO in the set aside proceedings in A.Y. 2005-06. We, therefore, set aside the order of the CIT(A) and remand the issue to AO for fresh consideration. Both parties were agreeable for this course of action.

16. The issue raised by the revenue in Ground No.2 with regard to disallowance under section 14A has also to be decided afresh in the light of the judicial pronouncements of the Hon’ble Bombay High Court on the issue. Hence, the same is remanded to the AO for fresh consideration.

17. Ground No.3 with regard to accrual of income on 8% GOI Bonds was decided by the CIT(A) as follows:

“7.2 At the time of hearing, the representative submitted that the interest as per scheme of GOI Bonds would accrue on 30th June and 31st December of every year and interest accrued and received as on 31/12/2005 was offered for taxation and the interest for the period from 1/4/2006 to 31/3/2006 would only accrue on 30th June as per the scheme and, therefore, the appellant has not accounted for the same and the said interest is offered for taxation as and when accrued and due to the appellant’s wife. He submitted that as per the scheme of GOI Bonds, the appellant has the right to receive the interest only on 30th June and, therefore, the AO was not justified in brining to tax this amount.

7.3 I have considered the submissions of the representative and the stand of the AO. The AO has not incorporated the explanation of the appellant on this point in the assessment order. As contended by the representative, if the scheme of GOI Bonds provide for payment of interest on 30th June and 31st December, the right to receive the amount accrues only on these dates. Without a legally enforceable right, it cannot be said that the income has accrued. As the interest relating to the period 1/1/2006 to 31/3/2006 was not yet accrued as on 31/3/2006 but would accrue only on 30th June, 2006, I direct the AO to delete the addition and the same will be brought to tax in the next year on accrual basis.”

18. We are of the view that the findings of the CIT(A) are proper and calls for no interference.

19. Issue raised in Ground No.4 has already been decided while deciding the appeal of the Assessee on identical in assessment year 2005-06 in Ground Nos. 5 & 6.

20. In the result, the appeal by the revenue is partly allowed for statistical purposes.