Business income or capital gains on Purchase & sale of shares- ITAT adopts 30 days theory

This appeal, filed by the assessee, being ITA No. 828/Mum/2012, is directed against the appellate order dated 14-11-2011 passed by learned Commissioner (Appeals)-9, Mumbai (hereinafter called “the Commissioner (Appeals)”), for assessment year 2008-09, appellate proceedings had arisen before learned Commissioner (Appeals) from the assessment order dated 13-12-2010 passed by learned assessing officer (hereinafter called “the AO”) under section 143(3) of the Income Tax Act, 1961 (hereinafter called “the Act”).

2. The grounds of appeal raised by the assessee in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called “the tribunal”) read as under :–

“ The Commissioner (Appeals)-9, Mumbai has erred :–

1. In treating the capital gain from sale of shares as business income instead of as short term capital gain.

2. Without prejudice, in not allowing the appellant an adjustment for Securities Transaction Tax if the said income was taxable as business income merely on the ground that the same was not claimed before the assessing officer.

The appellant craves leave to add, alter or amend the grounds as may be advised from time to time.”

3. The assessee is a company engaged in the business of renting of properties thereby deriving income from house property and dealing in shares. The sole issue in this appeal between rival parties is a dispute between the revenue and the assessee as to treatment of income arising from dealing in share to be charged to tax as income from capital gains or to be charged to tax as income from business. The revenue is treating gains arising from purchase and sale of shares as business income while the assessee is contending that the said income arising from sale and purchase of shares is an income chargeable to tax as income from capital gain. The assessee was called upon to explain the same by the assessing officer and the assessee submitted before the assessing officer as under :–

“In this connection, we respectfully submit that the company has taken delivery of the shares and securities and all shares and securities are held by the company and when the company thought that in the script where the company has made investment is appreciated in investment. The company has sold shares and shown as short term capital gain. The company has not borrowed any fund for the investment in the shares and securities. The fund which was borrowed invested for buying the property and this fact can be seen that the total interest payment is claimed against property income.

The company has also shown shares as an investment in this balance sheet and not as a stock in trade. The company has held some of the investment more than years. The main purpose of the investment to get appreciation and dividend. Thus, the short term capital gain shown by the assessee company is proper and no disturbance is called for”

The assessing officer rejected the contentions of the assessee and held that whether the tax-payer is a trader or is an investor is a mixed question of law and facts and it’s to be decided based upon facts and circumstances of each case and legal principals involved in settling the controversy are as under :–

“(i) Whether a transaction of sale and purchase of shares is trading or investment is a mixed question of law and facts.

(ii) It is possible for an assessee is by way of investment or of stock in trade is a matter within the knowledge of the assessee and it is for the assessee to produce evidence from the records as to whether he maintained any distinction between shares held as investment and those held as stock in trade.

(iii) The treatment in the books by an assessee is not conclusive and if the volume, frequency and regularity at which transactions are carried out indicate systematic and organized activity with profit motive then it becomes business profit not capital gain.

(iv) Purchase with intention to resale can constitute capital gains or business profit depending on circumstances like quantity of purchase and nature of activity.

(v) No single fact has any decisive significance and the question must be answered depending on the collective effect of all relevant material brought on records.”

The assessing officer relied upon several decisions of the courts as are detailed in the assessment order and summed up that the assessee is in the business of dealing in share by holding as under, vide assessment order dated 13-12-2010 passed by the assessing officer under section 143(3) :–

“Various courts have time and again interpreted that the intention of the assessee is of paramount importance in determining whether the assessee has been a trader or an investor. The source of funds utilized also sheds light on the nature of transaction and its intention. A singular transaction or multiple transactions are determined as to be in the nature of adventure for earning profits or with a view to invest and enjoy the fruits thereof on the basis of intention. To sum up the assessee is treated as trader in shares on following grounds :–

(i) The purchase and sale of shares is not an unrelated activity but main business of the assessee.

(ii) It is a well settled law that even a singular transaction of purchase and sale could be in the nature of trade. But here the assessee has continuously and systematically carried out the activity of trading in shares over the period of one year.

(iii) The assessee has borrowed funds to fund her activity for purchase and sale of shares. The presence of borrowed funds imparts the activity the colour of trade rather than investment.

(iv) In the absence of definitive reason on the part of assessee about purchase and sale of shares, what can be gauged from the facts is that the assessee has bought and sold shares depending on the volatility of the market. This behavior resembles that of the trader.

The assessee has argued that it had recorded the above purchases as investment therefore the income from the same should be treated as capital gains. The recording in the books of accounts is illuminator but it is not sacrosanct. The income from the same can be assessed as business income depending on the facts and circumstances of the case. Hon’ble Apex Court in the case of Karanpura Development Co. Ltd. v. CIT (1962) 44 ITR 362, has clearly held that “substance of transaction should prevail over its form given by the assessee.” Therefore, in light of above Apex Court decision it become clear that assessee’s substantial business, either checked through nos, or through volumes, or through profitability, or through money employed, is shares transaction only.

(v) Commodities and scripts, as held by Royal Commission of England are normally the subject matter of trading and very exceptionally the subject of investment.

(vi) Usually the profits on this property have been realized in very short duration.

8. The Authorized Representatives of the assessee company was again specifically asked on 10-12-2010 why its income from the STCG should not treated income from business activities of the trading of shares. The Authorized Representatives of the assessee submitted written submission on dated 13-12-2010 and the relevant content is reproduced herewith.

“In this connection, we respectfully submit that the company has purchased shares and securities and taken delivery thereof and has held the shares securities as an investment and not so stock-in trade. The amount invested in buying shares and securities are for the purpose of earning dividend income and appreciation in the value of investment. Therefore, the assessee company has taken the delivery of shares and in support of delivery, we have submitted demat account of the company wherein shares are credited and when the company thought that the appreciation in investment is good, the company has sold the shares and the excess amount of investment shown as a short term capital gain.

The company has made investment out of owned funds on which no interest is paid by the company. The interest payment is on the borrowing which is invested in buying property. Therefore, the total interest payment claimed against the property income. On the sale of shares, the STT is charged and same is disallowed by the company while computing its total income which clearly shown that the investment which company has sold are capital gain, long-term or short-term and not business income.

As per Memorandum of Articles of the company, the company’s main activities to carry business of builders, engineers, contractors, construction, to purchase and lease exchange or otherwise lands, building and hereditaments of any tenure of description, any state or interest therein. In the Memorandum of Articles, nowhere the main object of the company to deal in shares and securities business. Since the assessee company’s object is not to trade in shares and securities, it cannot be treated as business income on sale of shares and securities.

In the object of incidental or ancillary, the company can invest in shares and securities to earn dividend and interest. Thus the amount received on sale of shares is correctly shown as a short -term capital gain by the assessee company and paid taxes accordingly.

The investment made in shares is only for the interim period pending actual usage of funds for the objects of the business. The deployment of funds in shares in thus a mere passive temporary action pending disbursal of funds available on the business of the assessee.”

The assessee company could not offer any logically and supporting, valid reasons and facts which will support their contention and claim of short term capital gain.

Hence in view of the above ongoing discussion, facts and circumstances of the case and various case laws I hold that income declared from the Short term Capital Gain shall be assessed as income from the business from the activities of the selling/trading of shares.”

4. The matter was carried further by the assessee by filing first appeal before learned Commissioner (Appeals) who dismissed the appeal of the assessee. The assessee also raised an alternative contention that if the gains arising from purchase and sales of shares are held to be business income, then the assessee be allowed deduction of Securities Transaction Tax paid by it, which claim of the assessee was also denied by learned Commissioner (Appeals) as assessee did not raised any such claim before the assessing officer in the return of income filed with the Revenue, vide appellate order dated 14-11-2011 passed by learned Commissioner (Appeals).

5. Aggrieved by the appellate order dated 14-11-2011 passed by learned Commissioner (Appeals), the assessee filed an appeal before the tribunal. It was submitted by learned Counsel for the assessee that the assessee is engaged in purchase and sale of shares as an investor and income is to be brought to tax as capital gains instead of business income. It was submitted that in the alternative if the said income is held to be business income, then STT paid by the assessee is to be allowed as business expenses. Our attention was also drawn to the orders of authorities below and it was submitted that assessee main business is real estate and it was submitted that the authorities below has not given any reasons before bringing to tax income from purchase and sale of shares as business income instead of income from capital gains. The learned counsel for the assessee submitted that investments in immovable property made by the assessee as at 31-3-2008 were to the tune of Rs. 4.07 crores out of total investments of Rs. 6.28 crores (pb/page7). It was also submitted that interest bearing Debentures to the tune of Rs. 3.66 crores were raised which were utilized by the assessee for the purposes of making investments in properties. He drew our attention to the paper book/page no. 5 wherein audited balance sheet is placed. He also drew our attention to page 7 of the paper book where schedule of investments is placed wherein the total investments held by the assessee as of 31-3-2008 were to the tune of Rs. 6.28 crores, out of which investments in properties are to the tune of Rs. 4.07 crores Our attention was also drawn to the schedule of unsecured loans which is placed in paper book/page 7 and our attention was drawn to details of financial expenses of Rs. 20.02 lacs paid on unsecured loan raised are placed page no. 9 of the paper book which constituted interest on debentures of Rs. 14.65 lacs and other interest of Rs. 5.37 lacs. The learned counsel for the assessee also drew our attention to page no. 37 to 56 wherein all the detail of capital gain earned by the assessee are placed. He also drew our attention to page no. 14 to 34/paper book wherein Memorandum and Articles of association of the company is paced and it was claimed that main object clause of the company is to deal in real estate. The learned counsel for the assessee also drew our attention to internal page no. 15 of the assessing officer assessment order wherein interest of Rs. 20,02,795 is allowed as interest paid on loan for buying the property under the head income from house property. Thus, it was contended that the entire interest bearing loans were utilized for investment in properties and such interest was allowed by the assessing officer itself under the head income from house property and hence it could not be imputed that interest bearing borrowed funds were utilized by the assessee for investments in shares. It was also submitted that rental income from properties earned by the assessee was to the tune of Rs. 80 lacks which was offered for taxation. Thus, it was claimed that no borrowed funds were utilized for investment in shares. The assessee also has given fund flow statement to reflect investments in properties which is at page no. 36. It was submitted that out of capital gains arising from shares claimed by the assessee of Rs. 41,07,492, capital gains to the tune of Rs. 8,62,038 were earned within 30 days of buying of the shares as the shares so bought were sold within 30 days. It was submitted that if it is held that the assessee is engaged in the business of dealing in shares wherein income is held to be assessed as business income, then STT paid should be allowed. It was submitted that this ground was raised before learned Commissioner (Appeals) but he did not allowed the same as the claim was not made in the return of income filed with the revenue. He relied upon the decision of Hon’ble Bombay High Court in the case of CIT v. Pruthvi Brokers & Shareholders (2012) 349 ITR 336 (Bom HC) and it was submitted that the additional ground can be taken up for the first time before appellate authorities.

6. The learned Departmental Representative on the other hand submitted that the controversy is with respect to the treatment of gains earned on sales and purchase of shares wherein the assessee is claiming the same to be capital gain while revenue is contending the same to be business income. It was submitted by learned Departmental Representative that the assessee is engaged in trading of shares wherein only intention was to make profits and the income arising therefrom is an business income and not capital gains as contended by the assessee. It was submitted that majority of shares was sold within 90 days. It was submitted by learned Departmental Representative that there is frequent transactions of shares and hence frequency of transactions itself reflected that the assessee is doing this activity as business activity. Our attention was drawn to page 37-56/paper book. It was claimed that the assessee has not claimed any income from sales and purchase of real estate and it is only income earned from the house property which is offered for tax under the head income from house property. The learned Departmental Representative prayed that the matter may be set aside and restored to the file of the assessing officer.

7. We have considered revival contentions and perused the material on record. We have observed that the assessee is declaring income from house property as well income from capital gain in the return of income filed with the Revenue. The dispute is within narrow compass wherein the assessee is contending that the income from sale and purchase of shares be treated as capital gains while revenue is contending the same to be business income. The assessee duly explained before us that no interest bearing borrowed funds were utilized for buying the shares. The assessee has duly explained that the interest of Rs. 20.02 lacs was paid towards borrowed funds which were invested in immovable properties and the said interest expenses were allowed by the revenue by way of deduction under the head “income from house property”. We have gone through the details of transactions carried on by the assessee relating to the sale and purchase of shares which are placed in paper book page no. 37 to 56. We have carefully gone through these transactions which are large number of transactions entered into by the assessee in shares which were entered into frequently, regularly and in many cases the transactions are squared within a short span of buying of the shares. No doubt every investment which is made by the tax payer, there is always an intention to make profits but the same cannot be classified as business income merely because it was carried on with profit motive and its classification is to be tested based on motives, frequency, regularity transactions entered into by the tax-payer to come to the conclusion whether the activity is a business activity or an investment to earn capital gains. It is also noted that in majority of the cases the assessee has sold the shares within 90 days of purchase. This is a mixed question of fact and law and is to be decided on the factual matrix of each case. It is also undisputed that the transactions for purchase and sale of shares entered into by the assessee are all delivery based transactions for sale and purchase of shares. After carefully considering the voluminous transactions entered into by the assessee during the year running into several pages of paper book from page no. 37 to 56 and the overall conduct of the assessee, we are of the considered view that gains arising from purchase and sale of shares which are squared within 30 days of purchase by the assessee, the same may be treated as a business income and correspondingly STT paid be allowed as deduction in accordance with law, while the transactions for purchase and sale of shares which are squared after 30 days of its purchase, the same may be treated as income from capital gains. In view of decision of Hon’ble Bombay High Court in the case of CIT v. Pruthvi Brokers & Shareholders (supra), the claim of the assessee raised for the first time before tribunal for grant of deduction towards STT paid is admitted and allowed as business deduction after verification on merits in accordance with law and corresponding STT paid on such shares income of which is held to be business income be allowed by the assessing officer after verification. For the limited purposes we are restoring this matter to the file of the assessing officer to make computation of business income as well capital gains on shares after verification of period of holding of such shares in accordance with our above directions. We order accordingly.

8. In the result, appeal of the assessee in ITA No. 828/Mum/2012 for assessment year 2008-09 is partly allowed as indicated above.