Assessee held shares under investment in books, AO in absence of anything contrary can’t held investment as trading

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Case Law Citation: Shri Vishal Dipak Shah Vs. Addl. CIT (ITAT MUMBAI), ITA No. 6530/Mum/2010, Date of Decision: 16/09/2015

Brief of the case:

In the case of Shri Vishal Dipak Shah Vs. Addl. CIT Mumbai Bench of ITAT held that Principle of Res judicata does not apply to the income-tax proceedings as each assessment year is a separate and self-contained assessment year. Therefore, the plea of the appellant that he should be allowed a relief on the same lines as he was allowed in the AY 2005-06 does not hold good. On the merits ITAT held that shares held by the assessee in the investment portfolio cannot be treated as stock-in-trade and consequently the transactions are in the nature of investment and not trading.

Facts of the case:

The assessee filed its return of income disclosing total income of Rs.2,54,17,781/- including short-term capital gains (STCG) from purchase and sale of shares to the tune of Rs.2,34,38,613/-
AO noted that the main income declared by the assessee is on account of STCG in relation to the activity of purchase and sale of securities.
The AO noted that for the assessment year 2005-06, the so-called STCG was treated as business income in view of the collections declared periodically, frequency and multiplicity of transactions of purchase and sale of shares and securities.

Contention of the revenue:

Assessee’s main activity is dealing in shares by way of speculation future end option and trading in shares. Accordingly, STCG declared by the assessee on purchase and sale of shares was treated as income from business and assessed to tax accordingly.
The Tribunal has given the finding for the assessment year 2005-06 after considering the nature of transaction, frequency, volume, sales, holding period of shares by the assessee.
In the absence of any material change in the facts and circumstances of the case for the year under consideration, the issue is covered by the decision of this Tribunal for the assessment year 2005-06.

Contention of the assessee:

For the AY 2005-06, the claim of the assessee was allowed by the CIT(A) and, therefore, the claim was liable to be allowed in this year also.
When the transaction tax has been levied on the transactions of purchase and sale of shares then the concessional tax levied on STCG stand compensated by the Securities Transaction Tax (STT) on purchase and sale of shares.
Vide Finance Act,2004 new scheme of tax has been brought into statute wherein no tax is provided on LTCG from listed securities. It has also reduced the rate of tax to10% on STCG from listed securities.
The definition of ‘short term capital asset’ being a share as per the provisions of sec.2(42A) remains unchanged despite the new scheme of tax on the capital gain from listed securities.
After introduction of STT, it is easy to administer the tax and it has an advantage of eliminating tax avoidance on the transaction of purchase and sale of listed securities.
In AY 2005-06 only a part was covered under new tax scheme w.e.f. 1/10/2004 and prior to that the transaction was subjected to tax rate provided under the unamended provisions of the Act whereas for the year under consideration, the transactions for the whole year are governed under the amended provisions of the Act.
The transactions carried out by the assessee have to be considered in the light of the substantial change in the stock market and the sensex during this year has enormously increased from 800 points to 1000 points.
There was no opening or closing stock as in the case of holding shares as stock-in-trade.
Intention of the assessee at the time of purchase was only investment and not trading though the assessee has also carried out trading activity as well as future end option activity in separate portfolio and there is no bar for having two portfolios – one for trading and another for investment.
The assessee is keeping separate account for trading as well as investment activity.
The assessee has used his own funds and no borrowings have been made for the purpose of purchase of shares.

Held by CIT (A):

CIT (A) while confirming action of AO regarding treatment of STCG held that the principle of res judicata is not applicable in the taxation matter and facts of this assessment year are different from the facts for the assessment year 2005-06.

Held by ITAT:

The object of the new tax scheme is to minimize tax avoidance on the income arising from transaction of purchase and sale of listed securities.
By introduction of this new tax scheme for capital gain from listed securities, the Legislature has taken due care to get compensatory tax recovery by levying STT on sale and purchase of the securities on stock exchange irrespective of the outcome of the sale and purchase in the hands of the buyer and the seller.
The tax concession and exemption provided on LTCG and STCG on listed securities was considered to be made up from the STT.
There was another object to be achieved by the introduction of this new scheme of tax that is to promote more and more transactions in the capital market and in the listed securities through stock exchange.
There is substantial difference in the facts and circumstances for the year under consideration from the assessment year 2005-06 and the order for the assessment year 2005-06 will not operate as res judicata.
The assessee has carried out the transactions through portfolio manager/agent and not by itself.
Assessee is a qualified financial consultant and earning his income by providing consultancy services.
Assessee has his own huge fund and had not utilized any borrowed fund for the purpose of purchase of shares in question.
Assessee is maintaining two separate portfolios – one for investment and another for trading.
The shares held in investment portfolio are valued at cost and shown in the balance sheet as investment.
The substantial capital gain earned by the assessee from 11 scrips having the average holding period of 143 days. The majority of shares held by the assessee are from these 11 scrips which have yielded substantial capital gain.
The assessee has paid STT and the same has not been claimed as an expenditure or rebate under section 88E. There is no opening stock or closing stock shown in the books of account in respect of shares held in the investment portfolio.
Carrying out the trading and speculative transaction under a separate portfolio will not change the character and the nature of the transaction held in the investment portfolio.
The Hon’ble Bombay High Court in the case of CIT vs. Gopal Purohit (228 CTR 582) has held that the assessee can have two portfolios – one in trading and another investment. Even otherwise, there is no bar on a trader or dealer of shares having investment in shares.
The trading carried out by the assessee in a separate portfolio will not have any impact or bearing in determining the nature of transaction under the investment portfolio.
In the overall facts and circumstances of the case, we find that the transactions carried out by the assessee in the investment portfolio cannot be given a colour of trading.
It is pertinent to note that when the assessee has given a treatment of these shares held under the investment portfolio in the books of account as investment, then, in absence of any thing contrary brought on record to disprove the primary evidence to reflect the intention of the assessee in carrying out the transaction the nature transaction being investment cannot be treated as trading.
The shares held by the assessee in the investment portfolio cannot be treated as stock-in-trade and consequently the transactions are in the nature of investment and not trading.
Accordingly, ITAT set aside the orders of the authorities below and allow the claim of the assessee of STCG.