Case Law Details
ITAT RAJKOT BENCH
Deputy Commissioner of Income-tax
Versus
Mukeshbhai Babulal Shah
IT Appeal No. 318 (Rajkot) of 2011
[ASSESSMENT YEAR 2008-09]
FEBRUARY 8, 2013
ORDER
D.K. Srivastava, Accountant Member
The appeal filed by the Revenue is directed against the order passed by the CIT(A) on 14-06-2011, on the following grounds:-
1. The Ld. CIT(A) erred in law and on facts in deleting the addition of Rs.86,87,101/- made by the AO, treating the income disclosed under the head Short Term Capital Gain as Business income, without properly appreciating the facts of the case and the materials brought on record by the AO.
2. The Ld. CIT(A) erred in law and on facts in directing to treat where the holding of the shares is for a period of less than one month, the purchase and sale of shares is to be treated as business of the assessee, and where the period of holding of the shares is more than one month, the purchase of shares is to be treated as investment of the assessee, according to the period of holding of such shares.
3. On the facts and circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer.
4. It is therefore prayed that the order of the Ld. CIT(A) may be set aside and that of the order of the Assessing Officer be restored to the above extent.
2. The assessee is an individual. He filed his return of income for the assessment year under appeal on 16-07-2008 returning total income at Rs. 96,75,150/-. Perusal of the Tax Audit Report filed by the assessee for the assessment year under appeal shows that he is engaged in the business of “trading of shares” and in no other business. “Trading of shares” is his full time activity and source of income in respect of which he has maintained, as per Tax Audit Report, various books of accounts, namely, ledger, bank book, cash book, purchase register, ales register and journal. It is also stated in the Tax Audit Report that the tax auditor has examined the aforesaid books of account before giving his Tax Audit Report stating that the assessee is engaged in the business of “trading of shares”. During the course of assessment proceedings, the AO noticed that the assessee has shown income from his business at Rs. 10,69,519/-; income from short term capital gain at Rs. 86,87,102/- and income from other sources at Rs. 18,452/-. On further scrutiny of his accounts, the Assessing Officer noticed that profits from transactions on account of trading in Future and Options have been shown as business income while profits from transactions in respect of shares purchased and sold on delivery basis have been shown as capital gain. The Assessing Officer called upon the assessee to justify his claim that as to how the income on account of purchase and sale of shares on delivery basis was in the nature of capital gain and not in the nature of business income u/s.28 of the Income-tax Act. After taking into account the submissions of the assessee, the Assessing Officer concluded that the profits from purchase and sale of shares on delivery basis were in the nature of business income and not in the nature of capital gains as claimed by the assessee. In this view of the matter, he taxed a sum of Rs.86,86,102/- shown by the assessee as short term capital gain as income from business u/s 28 of the Income-tax Act for the reasons given by the AO in Para 4 of the assessment order.
3. On appeal, the ld. CIT(A) accepted the claim of the assessee that the impugned profits from purchase and sale of shares were in the nature of short term capital gain as claimed by the assessee and not in the nature of business income as held by the Assessing Officer following the judgment of this Tribunal in Sugamchand C. Shah v. Asstt. CIT [2011] 48 SOT 189 (URO) with the following observations:-
“2.11 However, the controversy relating to the taxability of the transactions of purchase and sale of shares and securities and the treatment to be given to such transactions has been resolved and set at rest by the Hon’ble Ahmedabad Tribunal in the case of Sugamchand C. Shah v. ACIT 37 DTR (Ahd) (Trib.) 345. The Hon’ble Ahmedabad Tribunal has held in the aforesaid case that:
“Considering the totality and peculiarity of the facts of this case, we find that assessee is neither fully acting as a trader nor as fully investor. Demarcation is quite hazy, though in the books he is showing all the purchases as investment but frequency of transaction in several cases is so large and holding period in many cases is so small form 0 to a week or so that assessee is de facto selling and purchasing shares as trader. He is also holding shares for long period-indicating that they are held as investment. Therefore, a criteria has to be fixed for determining as to when he is acting as trader and when as investor. Accordingly, we decide following criteria to hold when gains are to be taxed as profit to be earned under business or to be treated as short term capital gain, we hold that if shares are not held even say for a month, then the intention is clearly to reap profit by acting as trader and he did not intend to hold them in investment portfolio. We believe that if a person intends to hold his purchases of shares as investment, he would watch the fluctuation of rates in the market for which a minimum time is necessary, which we estimate at one month. Where shares are held for more than a month, they should be treated as investments and on their sale short term capital gain should be charged. When shares are held for less than a month, gain on them should be treated as profit from business”.
2.12 Considering the aforesaid discussion in para-2.2 to para-2.7 and specifically following the aforesaid binding decision of the Hon’ble Ahmedabad Tribunal in the case of Sugamchand C. Shah, it is held that where the holding of the shares is for a period of less than one month, the purchase and sale of shares is to be treated as business of the assessee and the resultant profit/loss is subject to tax as business income/loss. However, where the period of holding of the shares is more than one month, the purchases of shares is to be treated as investment and the assessee will be subjected to tax on short term capital gain or long term capital gain on the sales thereof according to the period of holding of such shares. The Assessing Officer is directed to re-calculate the business income or the short term capital gains as the case may be on the basis of period of holding of share as held by the Hon’ble jurisdictional Tribunal in the case of Sugamchand C. Shah (supra).”
4. Aggrieved by the aforesaid order passed by the CIT(A), the Revenue is now in appeal before this Tribunal. In support of appeal, the ld. Departmental Representative invited our attention to the factual aspects of the case. Referring to the Tax Audit Report filed by the assessee for the year under appeal in which the nature of business of the assessee has been shown as “TRADING OF SHARES”, he submitted that the assessee was a mere trader in shares and therefore his entire income from trading of shares was assessable as trading/business income u/s 28 of the Income-tax Act. His next submission was that the assessee himself has shown profits from trading of shares as gross profit in his account duly audited by tax auditors and therefore the aforesaid treatment given by the assessee to the income arising from purchase and sale of shares was nothing but his business income. His third submission was that the assessee has bifurcated his dealing in purchase and sale of shares under two heads, namely, (1) Future and Options, and (2) purchase and sale of shares based on delivery in his books of account. His fourth submission was that the stock turnover ratio of the assessee was 1:16 while gross profit rate was 5%. He further submitted that the capital turnover ratio was 1:14 and dividend as percentage of average capital was 0.01%. On the basis of the aforesaid facts, he contended that the assessee was not an investor but a dealer in shares. According to him, the frequency to turnover, volume of turnover and the intention of the assessee to realize the profit quickly were sufficient to establish that the assessee was not an investor in shares but a trader in shares. He submitted that the aforesaid facts fully confirmed the observations of the tax auditor that the assessee was mere a trader of shares and not investor in shares.
5. He also referred to several judgments particularly those referred to by the AO in his assessment order. He, in particular, referred to the decision of this Tribunal in Wallfort Financial Services Ltd. v. Addl. CIT [2010] 41 SOT 200.
6. In reply, the ld. Authorized Representative for the assessee supported the order passed by the CIT(A). He filed two sets of written submissions till the date of hearing and third set of written submissions was sent by him by post after the closure of hearing on 21-01-2013. His submissions, in brief, are as under:-
i. The Books of Accounts shows the purchase and sell as the investment and that shows that the appellant is engaged in the investment activity.
ii. Appellant has made investments from his own funds and not from the borrowed funds.
iii. The motive of the appellant was capital appreciation and not to make instant profit.
iv. The appellant has no infrastructure or administrative set up and that shows that the activity in which the appellant is engaged is purely an investment activity. All the decisions and actions were taken by appellant himself.
v. The appellant is maintaining two portfolios and which is well accepted now as per the decision in the case of Gopal Purohit v. JCIT. (Supra).
vi. In the previous years, the similar treatment was given and the same has been accepted by the Ld. DCIT.
vii. All other small issues like period of holding, frequency etc. are also covered by few of the decision narrated here in above.”
7. He has also relied upon several judgments most of which have been referred to by the CIT(A) in his appellate order.
8. In his rejoinder, the ld. Departmental Representative referred to the observations made by the CIT(A) in para-2.7 of his appellate order in which it is stated that the assessee was consistently maintaining two portfolios, one relating to investment in shares and another relating to business activities and submitted that the aforesaid findings recorded by the CIT(A) were factually incorrect inasmuch as no such accounts were maintained by the assessee in his books. According to him, the assessee has bifurcated his activity into two sets of transactions, one relating to future and options and the other relating to profits from shares based on delivery. He also referred to paras-2.8 and 2.9 of the appellate order passed by the CIT(A) and submitted that the ld. CIT(A) has wrongly held that (i) there was no transaction without delivery, (ii) the assessee has used his own surplus funds for investing in shares, and (iii) the assessee has received substantial dividend on the investments. He submitted that all the aforesaid findings recorded by the CIT(A) in para-2.9 of his appellate order were factually incorrect.
9. We have heard both the parties and carefully considered their submissions as also the materials available on record. Section 28 of the Income-tax Act brings the profits and gains of any business or profession carried on by the assessee at any time during the previous year to the charge of income tax. Sub-section (13) of section 2 defines “business” as including any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. It is therefore quite evident that the subject matter of charge u/s.28 is not only the profit from any trade, commerce or manufacture but also profit from any adventure or concern in the nature of trade, commerce or manufacture. The subject matter of charge u/s.45 of the Income-tax Act, on the other hand, is capital gains, i.e., any profit or gain arising from the transfer of capital receipt effected in the previous year. Capital asset is defined in sub-section (14) of section 2 as property of any kind held by assessee, whether or not connected with his business or profession, but does not include, inter-alia, any stock-in-trade. The distinction between income from business assessable u/s 28 and income from capital gain assessable under section 45 of the Income-tax Act has been explained by a Bench of five Judges of the Hon’ble Supreme Court in Sardar Indra Singh & Sons Ltd. v. CIT [1953] 24 ITR 415 as under:-
“The principle applicable in all such cases is well settled and the question always is whether the sales which produced the surplus were so connected with the carrying on of the assessee’s business that it could fairly be said that the surplus is the profits and gains of such business. It is not necessary that the surplus should have resulted from such a course of dealing in securities as by itself would amount to the carrying on of a business of buying and selling securities. It would be enough if such sales were effected in the usual course of carrying on the business or, in the words used by the Privy Council in Punjab Co-operative Bank Ltd. v. Income-tax Commissioner, Lahore, if the realization of securities is a normal step in carrying on the assessee’s business. Though that case arose out of the assessment of a banking business, the test is one of general application in determining whether the surplus arising out of such transactions is a capital receipt or a trading profit. The question is primarily one of fact and there are numerous cases falling on either side of the line but illustrating the same principle. On the facts found in regard to the nature and course of the company’s business, there can be no doubt that the present case falls on the Revenue’s side of the line.”
10. In G. Venkataswami Naidu & Co. v. CIT [1959] 35 ITR 594, the Hon’ble Supreme Court has held as under:-
“As we have already observed it is impossible to evolve any formula which can be applied in determining the character of isolated transactions which come before the courts in tax proceedings. It would besides be inexpedient to make any attempt to evolve such a rule or formula. Generally speaking, it would not be difficult to decide whether a given transaction is an adventure in the nature of trade or not. It is the cases on the border line that cause difficulty. If a person invests money in land intending to hold it, enjoys its income for some time, and then sells it at a profit, it would be a clear case of capital accretion and not profit derived from an adventure in the nature of trade. Cases of realization of investments consisting of purchase and resale, though profitable, are clearly outside the domain of adventures in the nature of trade. In deciding the character of such transactions several factors are treated as relevant. Was the purchaser a trader and were the purchase of the commodity and its resale allied to his usual trade or business or incidental to it? Affirmative answers to these questions may furnish relevant data for determining the character of the transaction. What is the nature of the commodity purchased and resold and in what quantity was it purchased and resold? If the commodity purchased is generally the subject-matter of trade, and if it is purchased in very large quantities, it would tend to eliminate the possibility of investment for personal use, possession or enjoyment. Did the purchaser by any act subsequent to the purchase improve the quality of the commodity purchased and thereby made it more readily resaleable? What were the incidents associated with the purchase and resale? Were they similar to the operations usually associated with trade or business? Are the transactions of purchase and sale repeated? In regard to the purchase of the commodity and its subsequent possession by the purchaser, does the element of pride of possession come into the picture? A person may purchase a piece of art, hold it for some time and if a profitable offer is received may sell it. During the time that the purchaser had its possession he may be able to claim pride of possession and aesthetic satisfaction; and if such a claim is upheld that would be a factor against the contention that the transaction is in the nature of trade. These and other considerations are set out and discussed in judicial decisions which deal with the character of transactions alleged to be in the nature of trade. In considering these decisions it would be necessary to remember that they do not purport to lay down any general or universal test. The presence of all the relevant circumstances mentioned in any of them may help the court to draw a similar inference; but it is not a matter of merely counting the number of facts and circumstances pro and con; what is important to consider is their distinctive character. In each case, it is the total effect of all relevant factors and circumstances that determines the character of the 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 the facts before us.”
11. In H. Mohmed & Co. v. CIT [1977] 107 ITR 637 (Guj.) the Hon’ble jurisdictional High Court has held as under: –
“………………These two illustrations of the circulating library and the car-hiring business clearly go to show the essential characteristics of stock-in-trade, viz., that it must be a commodity in which there is a dealing, i.e; which is bought and sold as distinguished from a commodity with which the business is carried on, viz., from the exploitation of which the income is derived. The distinction is between selling outright in the course of the business activity as distinguished from deriving income from exploitation of one’s assets.”
12. The aforesaid decisions make it amply clear that the income from purchase and sale of shares would be assessed as business income if the intention of the assessee behind their purchase and sale is to quickly realize profits. However, if the intention of the assessee behind purchasing and holding the shares is to earn dividend and not to realize the profit by turning over the shares as it is done in the course of business, the profit arising on sale of shares would be assessable as capital gains u/s 45 of the Income-tax Act. This aspect of the matter has been considered by this Tribunal in its well- reasoned order in Wallfort Financial Services Ltd. (supra) as under:-
“2.23 Though frequency and volume are indicative of a trading transaction, the same are not conclusive. The volume will depend upon funds deployed by the assessee and therefore the same could be high even in case of investment. Frequency is also not conclusive because even an investor may be frequently buying and selling shares and still he may remain an investor because the shares he is buying he may not be selling during the year and the shares sold may be those purchased more than a year ago. Therefore even if the number of transactions is large and volume is high, the assessee may still be an investor. Crucial factor is the period of holding which will be very short in case of a trader and long in case of an investor because a trader buys the commodity not for holding it in contrast to an investor who buys the commodity for holding it so as to earn some income from investment and have decent appreciation. In case of shares, income is in the form of annual dividend and therefore an investor in shares will normally be holding shares for more than a year and any sale before one year has to be explained from the circumstances of the case. The profit motive is also relevant but this is also not conclusive because even an investor may earn profit by way of appreciation.”
13. Turning to the facts of the case, the stock-turnover ratio, as rightly pointed out by the ld. Departmental Representative, is as high as 1:16. Such high stock-turnover ratio is found in business segment and not in investment segment. This shows that the intention of the assessee was to turn over the stock as frequently as possible to ensure quick realization of profits on sale of shares. In the Tax Audit Report, the nature of the business of the assessee has been shown as trading of shares. The tax auditor has come to the aforesaid conclusion after due examination of the books of account. The assessee has no other business. He is fully engaged in dealing with shares. He himself has treated the profit from purchase and sale of shares as gross profit in his books of account. The capital-turnover ratio, as pointed by ld. Departmental Representative, is as high as 1:14 which is normally found in business and not in investment. This shows that the intention of the assessee was to optimally utilize his capital to secure large turnover of shares as in the case of business. The fact that the shares were not held as a source of revenue is evident from the fact that dividend as percentage of average capital works out to 0.05%. Neither in the books of account nor otherwise the assessee has proceeded to compute the income from purchase and sale of shares in the manner laid down u/s 48 of the Income-tax Act. He has simply treated the entire profit arising on purchase and sale of shares as gross profit in the books of account. It is further observed that the assessee has utilized its own funds for trading not only in futures and options but also in purchase and sale of shares. All these facts clearly indicate that the dominant intention of the assessee behind purchase and sale of shares was to quickly realize profits by frequently tuning over the stock of shares and not to earn dividend from them. The aforesaid indicators lend credent to the fact that the assessee treated the shares more as stock-in-trade than as a capital asset. On the facts of the case, we endorse the view taken by the AO that the income arising from purchase and sale of shares is in the nature of business income as defined u/s 28 r.w.s. 2(13) of the Income-tax Act. In this view of the matter, the order passed by the AO deserves to be confirmed and is accordingly confirmed.
14. The ld. Authorized Representative for the assessee has cited a large number of decisions in support of the order passed by the CIT(A). We have perused all of them. They are distinguishable on facts. The finding as to whether a particular income has arisen from trading activity or investment is essentially a finding of fact as held by the Hon’ble Bombay High court in CIT v. Gopal Purohit [2011] 336 ITR 287 and by the Hon’ble Supreme Court in Sardar Indra Singh & Sons Ltd. (supra). The facts in the case before us are completely different from those in the decisions cited by the assessee. In our view, the principles laid down by this Tribunal in Wallfort Financial Services Ltd. (supra). re in conformity with the judgments of the Hon’ble Supreme Court and High Court some of which have been referred to above.
15. It was also contended on behalf of the assessee that the assessee is not a broker engaged in dealing with shares and therefore the income arising from purchase and sale of shares cannot be assessed in his hand as dealer/trader in shares. We are unable to accept the aforesaid submission. A broker in shares/securities in one who brokers a deal between purchaser and seller of shares/securities and in that process gets his brokerage. He does not himself purchase or sell the shares in his own right. A dealer/trader, on the other hand, purchases and sells the shares in his own right in order to quickly realize the profits for which purpose he frequently turns over the stock. Therefore, the mere fact that the assessee is not a broker in shares does not mean that he is also not a dealer/trader in shares.
16. In view of the aforesaid, the appeal filed by the Department is allowed.
I for Year ended on 31.3.14 have.. Rs.31000.00 Short term capital loss,
2>Rs. 340000 from share Buyback of listed Company and
3.Loss from equity Derivative RS.5,50,0000.00
4.other source Insurance and Mutual fund Commission Rs.74000.00
Expences 35000.0
have 80C investment of Rs.1,00,000.00
Please confirm,if I will file as per last date of 31.7.14 what will be status of ITR? What will go under what head and can i get carry forward loss of Derivative income as business income to next Years and what ITR form i had to use,,please do suggest