In this case Though activity of purchase and sale of shares was not the main occupation of assessee, however, high volume of trade in shares, and very short holding period showed that assessee was using his knowledge, skill and resources to deal in shares, and gains arising on sale of shares were, therefore, to be assessed as business income, and not as short term capital gains.
FULL TEXT OF THE ITAT JUDGMENT
This appeal by the assessee directed against the Order by the Commissioner of Income Tax (Appeals)-34, Mumbai (‘CIT(A)’ for short) dated 12.01.2016 and pertains to the assessment year (A.Y.) 2012-13. The grounds of appeal read as under:
1. Short Term Capital Gain of Rs. 3,51,66,426/- treated as Business Income
The Learned CIT(A) erred in treating the Short Term Capital Gain of Rs.3,51,66,426/- as ‘Business Income1without appreciating the crucial facts that the assessee is a professional / consultant for exploration and drilling activities for Oil wells / Rigs etc. which is the principal source of income since 32 years, wherein he has to devote maximum time and the activity has been accepted by the department in all the prior years as well as in the relevant assessment year, therefore merely considering the value, volume and frequently of transaction, treating the assessee as trader is contrary to the facts on record.
2. The Learned CIT(A) failed to appreciate that the assessee is consistently showing the same as investment over number of years and no borrowed funds were utilised for purchase of shares. And the intention of assessee was also to treat the shares as investments and considering the change in pattern of investment, the assessee is acting as a prudent investor, therefore the-addition of Rs.3,5 1,66,426/- as Business Income as against Short Term Capital Gain, is not justified.
3. Without prejudice to above the shares treated / assessed as investment in earlier years cannot be assessed as ‘business income’ in subsequent years, thus action of department is contrary to its own action taken in earlier years. Further the department is inconsistent in its stands in different years . Therefore, the addition made of Rs.3,51,66,426/- may be deleted.
4. The learned CIT(A) erred in confirming the order of the Assessing officer for not allowing the set-off b/f loss of the earlier years .
2. In the present case, the assessee is an individual doing the business of providing consultancy services for exploration and drilling activities for oil wells/rigs and also earning income from the activity of purchase and sale of shares.
3. In the assessment order, the Assessing Officer held that the share trading activity of the assessee is treated as ‘business income’ and the entire capital gain, i.e., short term and long term is treated as ‘business income’ of the assessee.
4. Upon the assessee’s appeal, the ld. Commissioner of Income Tax (Appeals) confirmed the action of the Assessing Officer in treating the short term capital gain as ‘business income’ of the assessee. However, the ld. Commissioner of Income Tax (Appeals) granted relief with respect to the long term capital gain earned by the assessee. In his appellate order, the ld. Commissioner of Income Tax (Appeals) relied upon this order of the ITAT in assessee’s own case for assessment year 2006-07 and has found the facts to be identical.
5. Against this order, the assessee is in appeal before the ITAT.
6. We have heard the ld. counsels and perused the records. The ld. Counsel of the assessee submitted that the short term capital gain reflected by the assessee should not be treated as business income. He submitted that the decision of the ITAT relied upon by the ld. Commissioner of Income Tax (Appeals) is in appeal before the Hon’ble jurisdictional High Court. Furthermore, he sought to state that some of the facts in the present assessment year are different from that dealt with by the ITAT.
7. Per contra, the ld. Departmental Representative submitted that the facts of the present case and the facts dealt with by the ITAT as above are similar. This finding has already been given by the ld. Commissioner of Income Tax (Appeals). Furthermore, she submitted that regarding the distinction being referred by the ld. Counsel of the assessee, the ld. Commissioner of Income Tax (Appeals) has already granted relief in-as-much as he has held that the long term capital gain shown by the assessee should be accepted. To this extent, the assessee has already been granted necessary relief. Hence, the ld. Departmental Representative submitted that there is no infirmity in the order of the ld. Commissioner of Income Tax (Appeals).
8. We have carefully considered the submissions and perused the records. The facts in respect of share transactions mentioned in the assessment order and emerging from the information on record are as follows:
(1) The assessee has transacted in fifty three kinds of shares.
(2) The number of shares transacted is more than 1,00,00,000.
(3) The volume of turnover is also more than 70,00,00,000.
(4) The details in respect of shares which were sold within a period of less than fifteen days were as follows:
(a) Total type of shares – 23.
(b) Total number of shares transacted – 91,68,615.
(c) Total amount of profit earned – 94,17,857 which is 27% of the total Short Term Capital Gain earned,
(5) The holding period for nearly all the shares in respect of which Short Term Capital Gain is shown was less than six months.
(6) There were also instances of day-trading transactions. Total 2,99,829 number of shares were transacted within a day and the total sale value of such transactions was Rs.5,25,30,000/-,
(7) The total amount of dividend earned by the appellant in the F.Y.2011-12 was Rs.2,91,627/- whereas the total investment in shares as on 31/03/2012 was 11,20,67,592/-. Thus the dividend earned was mere 0.26% of the total investment which also included such shares which are being held by the assessee for more than one year.
(8) The ratio of the turnover (total sale of shares) to the total investments is also telling in this case. The total value of sales which is about Rs.70 Crores is about seven times of the total value of investments which is about Rs. 11.20 This shows that the assessee has rotated huge volume of shares during the period compared to the investments.
(9) The assessee has heavily traded in some scrip in a repetitive manner. Following are some illustrative examples:
|Name of the Scrip||No. of
|No. of sales
|Cairn India Ltd.||22||18||602724||633624||19,84,31,301|
|Titan Industries Ltd.||9||8||13000||13000||55,25,703|
(10) Out of total fifty six kinds of shares in which the appellant has transacted, repetitive transactions of purchases and shares are seen in respect of forty one shares. Most of shares in which repetitive transactions of purchases and sales are not seen are the transactions which have yielded long term capital gains. Thus nearly all the transactions yielding short term capital gains are such in which the appellant has repetitively purchased and sold same scrips in different transactions on various dates.
(11) The total profit earned by the appellant from the transactions of purchase and sales of shares termed as capital gains by him is Rs.5,17,38,427/- whereas the income earned from the activity which is depicted as the principle activity of the appellant is Rs,6,47,4077- (which is about 1.25% of the income earned from purchase and sale of shares).
9. In view of the above facts, the ld. Commissioner of Income Tax (Appeals) passed the following order:
5.2 In view of the plethora of conflicting judgments on the contentious, issue of treatment of the transaction of purchase and sale of shares either as capital gains or business income it is very important that the facts of the case are understood in totality. As explicitly laid out in the CBDT’s Circular No.4/2007 dated 15/06/2007 on the matter and also in view of various judgments of various judicial authorities the matter has to be decided in the light of the facts of each and every case.
5.3 In the present case, nearly all the parameters such as frequency of transactions, repetitive transactions in same scrip/ duration of the holding period, amount of dividend earned, volume of transactions, scale of income earned compared to the principle activity etc. are clearly indicating that the correct nature of such transactions is of trading in shares.
5.4 The Hon’ble ITAT, Mumbai in the appellant’s own case has dealt in detail with this matter for A.Y. 2006-07. The facts in respect of all the parameters mentioned in the earlier paragraph were in fact occurring at a milder scale in A.Y. 2006-07 as compared to the A.Y. 2012-13, the year under consideration. The relevant paragraphs of the order of ITAT, Mumbai are reproduced below:
“9. The issue as to whether the assessee is an investor or a trader has to be decided based on the facts of each case. In this case the assessee has submitted a statement of holding as on 31-03-2006. He has not furnished the period of holding of each scrip, though the date of purchase has been mentioned. From the details furnished, it can be noticed that certain shares, have been held, for a period of more than 24 months, as in the case of Daewoo Motors. In the case of Vikas 5. W.P. and Nirlon and Southern Herbals, shares were purchased in the years 2001, 2002, 2003. The shares of Info quest Soft were purchased in 2003. Thus as per the statement of holding on 3 1-03-2006, except for the shares of Gujarat Alkalies of value of Rs.1,58 lakhs and Indiabulls which is value Rs.45.22 lakhs approximately, all the other shares are held as long term investment. It is well settled that the assessee can be both a investor in shares as well as a trader. When certain shares are held for a long period of time, the assessee can be called an investor, as far as these shares are concerned.
10 Though the assessee has certain investments which he has held as long term capital gains in this year, the assessee has not transferred any of these shares and hence we are not concerned with this category. The assessee has indulged in voluminous transaction of purchase and sale of shares. There were intraday transactions as well as purchase end sale of shares within a very short period. The details are furnished by the assessee from page 12 to 22 of his paper book. A perusal of these show that the assessee has purchased and sold shares at frequent intervals, sometimes with a small holding period as 2 to 3 days. In the cases like Bombay Dyeing, the assessee has purchased and sold shares on the same day i.e. 5-11-2005 and incurred a loss. Similarly in the case of Bharat Electronic the purchase and sale was made on the same day and the assessee incurred a toss. We observe that in many cases, the assessee has sold the shares the very next day. The average period of holding of shares as pointed out by the AO and as accepted by the assessee is only 26 days and there were repeated transactions in certain scrips. The assessee has also speculation loss in many transactions which he has returned as such. By doing so, the assessee himself agreed that he is not a investor in all cases of dealing in shares and at time he does it as a business, Entries in the books are not decisive. Not borrowing funds is also not decisive factor in this case. This is a case of the assessee doing very high volume of trade in shares and that too holding the shares for very short period. Investors do not sell shares the same day or the next day for a loss. The fact that the assessee has non-delivery based transaction show that he is using his knowledge, skill and resources to deal in shares. In this factual matrix, we are unable to agree with the findings of the ClT(Appeals) that the assessee is a mere investor in shares. Just because the assessee has income from certain other sources, it does not mean that the assessee would not have income from trading in shares. When a person has gross professional fee of Rs.11.29 lakhs and turnover of purchase and sale of shares running into crores of rupees and when such trade results in a profit of Rs. 1.17 crorest it cannot be said that the assessee is not in the business of purchase and sale of shares as it is not his main occupation. The fact show that the main occupation of the assessee is to buy and sell shares.
11. It is well settled that each case has to be decided based on the facts and circumstances of the case. In the case of Bharat Kunverji Kenia (supra) the case is different on facts as the assessee had not employed any infrastructure for purchase and sale of shares- and has also earned substantive dividend from the investment. In fact the period of holding of shares was much higher in that case, than in the case on hand. On those facts, the Tribunal upheld the claim of the assessee that the income from sale and purchase should be assessed under the head ‘Capital Cains’. On the other hand, in the case of Sadhana Nabera, the Tribunal analyzed the various transactions done by the assessee and at page 9 para 13 and 14, held as follows:
’13. It is held that whether a transaction of sale and purchase of shares were trading transactions or they were in the nature of investment is a mixed question of law and facts as held by the Hon ‘ble Supreme Court in the case of CIT vs. H. Hoick Larsen 160 ITR 67. It is further held in the case of CIT vs. Associated Industrial Development Co. P. Ltd. 82 ITR 586 that it is possible that the assesses to be both an investor as well as dealer in shares. Whether a particular holding is by way of investment or form part of stock-in-trade is a mater within the knowledge of the assesses and it is for the assessee to produce evidence from the records as to whether he maintained any distinction between shares which are held investment and those held as stock-in-trade. It is also held in the case of Motilal Hirabhai Spg. & Svg. Co. Ltd. 113 ITR 173 (Guj.) and Raja Bahadur Visheshwara Sing 41 ITR 685 (SC) that treatment in the books by an assessee will not be conclusive and if the volume, frequency and regularity at which transactions are carried out indicate systematic and organized activity with profit motive then it become business profit not capital gain. In the case of CIT vs. PKN Co. Ltd. 60 ITR 65 it was held that purchase with an intention to resale will also, under the changed circumstances, would be capita! gains. It is also held in the case of Saroj Kumar Mazumdar vs. CIT 37 ITR 242 by the Hon ‘ble Supreme Court that purchase with an intention to resale in order to gain profit will be business profit depending on the circumstances of the case tike nature quantity of purchase and nature operation involved. It was also held in the case of Janki Ram Bahadur Ram vs. CIT 57 ITR 21 (SC) that no single fact has any decisive significance and the question must be answered depending on the collective effect of all relevant material brought on record.
14. Keeping in view the above principles, the facts in the present case of the assessee are examined. The assessee during the entire previous year had entered into transaction of purchases and sale of shares of about 32 companies totaling to Rs.l,87,83,440/- and these shares were sold for a value of Rs,2,69,71,368/-. The above transactions were effected by actual delivery of shares at the time of purchase and sale of shares except in the case of Hiran Orgo Chem, where there are 19 transactions of purchases and sale on the same day of various number of shares involving a total purchase of Rs. 7,00,457/- and sale of Rs.6,95,224/- with a loss of Rs.5,232/-. There were expenses incurred with reference to brokerage, interest, security, transactions, bank charges etc. totally to Rs. 1,67,829/-. In all the transactions where capital gain shown during the year the holding period was less than even 6 months. Most of the gain earned by the assessee is in the shares held for a period 31 days to 90 days to an extent of Rs.30.81 lakhs and 90 days to 180 days, i.e. Rs.51.29 lakhs. In fact there were no shares which were held for more than 6 months period on which gains were earned. Thus the maximum holding period was from 1 day to a maximum of 180 u’ays. ‘ At para 17 the Tribunal held that the frequency in short period does indicate that the assesses has purchased the shares with a motive to earn profit in short period. This decision applies to the case on hand,
12. In our opinion, the judgment of the Hon’ble Bombay High Court in the case of Gopai Purohit also does not come to the rescue of the assessee for the reason that the facts are entirely different in that case. It is not a case where there was intra-day trading, speculation and sale within 1 to 2 days for a loss also.”
5.5 The Hon’ble ITAT has thus nailed the issue in the case of the appellant for A.Y. 2006-07 comprehensively and therefore the same reasoning has to come into play while deciding the issue in the case for A.Y. 2012-13, mainly because all the facts in respect of all the parameters are occurring in this year at an accentuated degree.
5.6 The decisions quoted and relied upon by the appellant in his submissions are considered. However, as discussed above the facts of the case at hand are different from the cases dealt in these decisions. Some of these cases are also dealt by the Hon’ble ITAT, Mumbai in the aforesaid decision in appellant’s case for A.Y. 2006-07. Therefore, it has to be concluded that the decisions relied upon by the appellant are not applicable in the present case because of peculiar and unique features of the transactions of shares and other such facts discussed in earlier paragraphs.
5.7 The appellant has argued that the department has treated the transactions of purchase and sale of shares as capital gains for A.Y.2007-08 to A.Y. 20 11- 12 and has also raised the application of- principle of consistency. In this regard, it needs to be noted that this issue was properly examined by the department in A.Y, 2006-07 and the Assessing Officer had come to a conclusion that the nature of transactions is that of trading, which was confirmed by the ITAT, Mumbai to the extent of Short Term Capital Gain transactions. As far as A.Ys, 2007-08, 20 10-11 and 20 11-12 are concerned, the return was not at all scrutinized. Therefore, the statement that the department accepted appellant’s method of treatment is completely false for these years. As far as A.Ys. 2008-09 & 2009-10 are concerned, the appellant has not shown any positive income under the head ‘capital gains’ due to which that particular issue was not at all examined by the department. Thus, appellant’s contention regarding application of principle of consistency is devoid of factual context. Attention is also invited to the remarks made by the IT AT, Pune in appellant’s own case referred in earlier paragraph in which the application of the ratio of decision of Bombay High Court in the case of Gopal Purohit has been defended on merits.
5.8 Though the issue in respect of treatment of Long Term Capital Gain was not before Hon’ble ITAT for A.Y. 2006-07, the ITAT has however commented about non-applicability of its treatment as trading income to the transactions of long term capital gains in its decision, The view formed by the ITAT in this regard is also required to be followed in this case for the A.Y,2012-13 mainly because of the facts of the case.
5.9 It is seen that the shares from the sale of which appellant has earned long term capital gains are not the one which also appear in the list of heavily or repetitively transacted shares. The Long Term Capital Gain has been earned from the sale of eleven kind of shares and major chunk of the Long Term Capital Gain is seen to be yielded from the sale of shares of India Securities Ltd. Since, these shares are held by the appellant for a larger period of time and the transactions of these shares yielding Long Term Capital Gains do not have the peculiar features of typical trading transactions, these transactions deserve to be treated as Long Term Capital Gain transactions.
5.10 Thus, in view of discussion in earlier paragraphs, the decision of the Assessing Officer to treat the short term capital gain of Rs.3,51,66,426/- by the appellant as business income is hereby confirmed. However, the decision of the Assessing Officer to treat the Long Term Capital Gains of Rs.1,65,72,001/- as business income is found to be incorrect. The profit on sale of shares held as long term capital asset amounting to Rs. 1,65,72,001/- is to be treated as long term capital gains. The Assessing Officer is directed to modify the computation of total income accordingly.
10. We find that the ld. Commissioner of Income Tax (Appeals) has passed an apposite order. He has duly followed the ITAT decision in the assessee’s own case which is in appeal before the Hon’ble jurisdictional High Court. As rightly pointed out by the ld. Departmental Representative, the ld. Commissioner of Income Tax (Appeals) has correctly followed the ITAT order with respect to the short term capital gain shown by the assessee and has already granted relief in respect of the long term capital gain, the facts about which were different. Accordingly, we do not find any infirmity in the order of the ld. Commissioner of Income Tax (Appeals). Accordingly, we uphold the same.
11. In the result, this appeal by the assessee stands dismissed.
Order pronounced in the open court on 04.12.2017