Case Law Details

Case Name : Shri Ashokkumar Khimraj Vs ITO (ITAT Ahmedabad)
Appeal Number : ITA No. 1247/Ahd/2015
Date of Judgement/Order : 01/01/2019
Related Assessment Year : 2006-07
Courts : All ITAT (7310) ITAT Ahmedabad (484)

Shri Ashokkumar Khimraj Vs ITO (ITAT Ahmedabad)

Conclusion: Income from purchase and sale of shares was liable to be taxed under the capital gain instead of income under the head business and profession as the frequency, magnitude of transaction in a systematic manner could not be the criteria to hold that assessee was engaged in the business activity of shares.

Held: Assessee had done transactions of purchase and sale of shares which were very frequent and period of holding of these shares was also very less. AO held that assessee had been carrying on a business of sale and purchase of shares and therefore, assessee was liable to offer the income under the head business and profession. It was noted the intention of assessee at the time of the purchase of shares was paramount. If the assessee had clear intention of being an investor and showing the shares as investment, there was no reason to disturb the intention of assessee. Thus, it was concluded that the frequency, magnitude of transaction in a systematic manner could not be the criteria to hold that assessee was engaged in the business activity of shares. Therefore, AO was directed to treat the income from investment activity under the head capital gain.

FULL TEXT OF THE ITAT JUDGMENT

The captioned appeal has been filed at the instance of the Assessee against the order of the Commissioner of Income Tax (Appeals)–10, Ahmedabad [CIT(A) in short] vide appeal no.CIT(A)-10/ITO Ward-3(1)/104/14-15 dated 26.03.2015 arising in the matter of assessment order passed under s.143(3) r.w.s. 263 of the Income Tax Act, 1961 (here-in-after referred to as “the Act”) dated 16.12.2010 relevant to Assessment Year (AY) 2006-07.

2. The grounds of appeal raised by the assessee are as under:-

“1. The Learned CIT(A) as well as the A.O have grossly erred in law and on facts treating the Short termaianoR.961606/- and Long term capital gain of Rs.25471/- as business income of the appellant.

2. The Learned CIT(A) and the A.O. have also erred in law and facts in not appreciating the facts of the case in proper perspective in treating the income shown under the head Short term capital gain and Long term capital gain as the business income of the appellant.

3. The Learned CIT(A) equally erred in not appreciating the written submissions filed by the appellant before him during the proceeding as well as not properly applying the Judgment of Hon’ble Gujarat High Court in CIT vs. Rewashankar A. Kothari vide 383 ITR 338.

4. In the alternative and without prejudice to above, The Learned CIT(A) as well as the Leaned A.O have also erred in not following the provisions of the Act regarding the calculating of the cost of opening stock of the shares involved in Long term Capital gains as on 01.04.2005 as required under the Act, if the shares are to be converted from investments to stock in trade.

5. Your appellant craves leave to add, alter or amend the Ground of Appeal.”

3. The only effective issue raised by the assessee is that Learned CIT(A) erred in confirming the addition made by the AO treating the Short Term Capital Gain of Rs. 9,61,606/- and long-term capital gain 25,471/- respectively as business income of the assessee.

4. Briefly stated facts are that the assessee is an individual and engaged in the business of cloth merchant under the name and style of Riddhi Siddhi Enterprise. The assessee is also dealing in share activities.

The assessee in the year under consideration has declared short-term capital gain of Rs. 9,61,605/- and a long-term capital gain of Rs. 25,471/-only. The assessee has made 162 transactions of purchase and sale of shares for earning such income under the head capital gain. The transactions for the purchase and sale of the shares were very frequent and period of holding of these shares was also very less.

Accordingly, the AO was of the view that the assessee has been carrying on a business of sale and purchase of the shares. Therefore, the assessee is liable to offer the income as discussed aforesaid under the head business and profession. Accordingly, the AO sought an explanation from the assessee vide letter dated 06.08.2010.

4.1 The assessee in compliance to it vide letter dated 13.09.2010 submitted as under:

i. The investment in the shares has been classified in the Balance Sheet under the head as an investment.

ii. He is maintaining two sets of accounts one for personal affairs showing investment activity and the other for his cloth business.

iii. The investment was made in the shares to earn dividend income. As such, there was no intention to earn income by way of trading in the shares. The sale and purchases in the shares were carried out during the year to avoid the possible loss and to invest the same in the better script.

iv. He also submitted that the activity from the investments in shares was accepted under the head capital gain in the earlier year. The assessee also claimed that the income of short-term capital gain has increased in the year under consideration in comparison to the previous assessment year to avoid the losses and to make investments in the better script.

v. He has invested a sum of Rs. 4,29,258/- as Share Application money where shares were purchased in the initial public affairs.

vi. All the investments in the shares were made out of the own funds of the assessee, and there was not used any borrowed fund.

However, the AO disagreed with the submissions of the assessee by observing that the assessee has carried out numerous transactions in a systematic manner.

4.2 There was no distinction made by the assessee in its books of accounts between the shares held as stock in trade and by way of investment.

In view of above, the AO held that the motive of the assessee was to earn a profit by way of trading in the shares. Therefore the same should be treated under the head business and profession. Accordingly, the AO treated the sum of Rs. 9,87,077/- as business income.

5. Aggrieved, assessee preferred an appeal to Learned CIT(A). The assessee before the Learned CIT(A) submitted that the investment was made to earn dividend income and not to earn by way of sale and purchase of shares.

5.1 The shares were sold in the year under consideration intending to change the investment after considering the market downfall.

5.2 The assessee also submitted that the activity for investment was accepted under the head capital gain in the earlier years in the assessment framed u/s 143(3) of the Act.

However, the Learned CIT(A) disregarded the contention of the assessee and confirmed the order of AO by observing as under:

“4.1.3. Decision: The rival submissions have been considered. Hon’ble Gujarat High Court in Commissioner of Income-tax v. Rewashanker A. Kothari (2006) 283 ITR 338 (Guj.) has laid down the following tests for determining the question as to whether an assessee can be said to be carrying on business of sale and purchase of shares:-

“[a] The first test is whether the initial acquisition of the subject matter of transaction was with the intention, of dealing in the item, or with a view to finding an investment if the transaction, since the inception, appears to be impressed with the character of a commercial transaction entered into with a view to earn profit, it would furnish a valuable guideline.

[b] The second test that is often applied is as to why and how and for what purpose the sale was effected subsequently.

[c] The third test, which is frequently applied, is as to how the assessee dealt with the subject matter of transaction during the time the asset was with the assessee. Has it been treated as stock-in-trade, or has it been shown in the books of account and balance sheet as an investment. This inquiry, though relevant, is not conclusive.

[d] The fourth test is as to how the assessee himself has returned the income from such activities and how the department has dealt with the same in the course of preceding and succeeding assessments. This factor, though not conclusive, can afford good and cogent evidence to judge the nature of transaction and. would be a relevant circumstance to be considered in absence of any satisfactory explanation.

[e] The fifth test, normally applied in cases of partnership firms and companies, is whether the Deed of Partnership or the Memorandum of Association, as the case may be, authorises such an activity.

[f] The last but not the least, rather the most important test, is as to the volume, frequency, continuity and regularity of transactions of purchase and sale of the goods concerned. In a case where there is repetition and continuity, coupled with the magnitude of the transaction, bearing reasonable proportion to the strength of holding, then an inference can readily be drawn that the activity is in the nature of business.”

Relying on its own judgment in C1T vs. Rewashankar A Kothari (supra), hon’ble Gujarat High Court in CIT vs. Vaibhavi J. Shah (HUF) in Tax Appeal No. 77&78 of 2010 has held as follows:-

“It is clear that where number of transactions of sale and purchase, of shares takes place, the most important test is the volume, frequency, continuity and regularity of transactions of purchase and sale of the shares. However, where there is repetition and continuity, coupled with magnitude of the transaction, bearing reasonable proportion to the strength of holding, then an inference can be drawn that activity is in the nature of business. Learned counsel for the revenue from the records could not demonstrate that there were large number of transactions which had frequency, volume, continuity and regularity and fell within the tests laid down by the Division Bench of this Court. For the aforesaid reasons, we are of the considered opinion that the income earned by the assessee from trading in the shares under the ‘head long term capital gain / short term capital gain was correctly shown”.

In the present case, as per the appellant the intention at the time of acquisition of shares was investment Further, as per the appellant, the shares have been shown as investment in the balance sheet. Further, the appellant has shown income from sale of shares as Capital Gains for the last several proceeding years and the Department has accepted the contention of the appellant. Therefore, as per the appellant, income from sale and purchase of shares is to he trusted as capital gains.

Though the appellant may contend so but when the last test laid down by the Hon’ble Gujarat High Court in the above cited cases, which in the opinion of the Court’ is the most important one is applied, it clearly points to the fact that in the case of the appellant income from sale and purchase of shares shown as STCG is to be treated as business income for the reasons discussed as follows. The test laid down is regarding volume, frequency, continuity and regularity of transactions of purchase and sale of goods concerned. In the case of the appellant, the total transactions on which STCG is shown is 122 (80 in his own case + 42 in case of minor son). The activity is spread out throughout the year i.e. there is regularity of transactions. Further, same scrips are purchased and sold again and again i.e. there is repetition. Further, and most importantly the volume of transactions of sale and purchase of shares is very high. The total sale consideration on these transactions is Rs. 48.41 lakhs while total purchase price is Rs. 38.79 lakhs which is very high. The total investment in shares is shown at around Rs. 1.73 lakhs. Thus the turnover of sale and purchase of shares is very high as compared to the holding in shares. Also, the number of shares purchased and sold of several scrips is very high. For example 5000 shares of DATA IM purchased on 12.1.05 were sold on 15.6.05 and 14.7.05. Similarly, 3645 shares of IOFC were purchased on 11.08,05 and sold on 12.08,05, 11.11.05, 14.11.05 and 17.11.05. Thus, there is continuity and regularity in sale, and purchase of shares, the volume is very high, there is repetition and there is high frequency of dealing in shares. In view of these findings, it is clear that the income from sale and purchase of shares is to be treated as Business Income. With due regard to ratio of judgment in cases relied on by the appellant, the same are not applicable in the present case as the facts are different.

In view of discussion above, I hold that the AO was justified in treating STCG of Rs.9,61,606/- and LTCG of Rs.25,471/- on sale of shares as Business Income. The AO has rightly treated profit from sale of shares as Business Income. Accordingly, this ground of appeal is dismissed.”

Being aggrieved by the order of Learned CIT(A) assessee is in appeal before us.

6. The Learned AR before us filed a paper book running from pages 1-45 and reiterated the submissions as made before the Learned CIT(A).

6.1 The Learned AR also submitted that in the assessment year 2005-06 the activity of the assessee was accepted as under the head capital gain in the assessment order framed u/s 143(3) of the Act pertaining to the A.Y. 2005-06 vide order dated 16.10.2007.

6.2 The assessee has made all the investment in the IPO, and as such there was no investment by way of acquiring shares from the secondary market.

7. On the other hand, Learned DR vehemently supported the order of Authorities below.

8. We have heard the rival contentions and perused the materials available on record. At this juncture, we are inclined to refer to the Circular issued by the CBDT vide No.6/2016 dated 29.02.2016. The relevant extract reads as under:

“In this background, while recognizing that no universal principal in absolute terms can be laid down to decide the character of income from sale of shares and securities (i.e. whether the same is in the nature of capital gain or business income), CBDT realizing that major part of shares/securities transactions takes place in respect of the listed ones and with a view to reduce litigation and uncertainty in the matter, in partial modification to the aforesaid Circulars, further instructs that the Assessing Officers in holding whether the surplus generated from sale of listed shares or other securities would be treated as Capital Gain or Business Income, shall take into account the following—

(a) Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income,

(b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years;

(c) In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT.”

8.1 As per the above circular, the case on hand falls under the clause ‘c’ and it is pertinent to take guidance, therefore, from the CBDT Circular No.4/2007 dated 15.06.2007. The relevant extract reads as under:

“1. The Income-tax Act, 1961 makes a distinction between a “capital asset” and a “trading asset”.

2. Capital asset is defined in section 2(14) of the Act. Long-term capital assets and gains are dealt with under section 2(29A) and section 2(29B). Short-term capital assets and gains are dealt with under section 2(42A) and section 2(42B).

3. Trading asset is dealt with under section 28 of the Act.

4. The Central Board of Direct Taxes (CBDT) through Instruction No. 1827, dated August 31, 1989 had brought to the notice of the Assessing Officers that there is a distinction between shares held as investment (capital asset) and shares held as stock-in-trade (trading asset). In the light of a number of judicial decisions pronounced after the issue of the above instructions, it is proposed to update the above instructions for the information of assessees as well as for guidance of the Assessing Officers.

5. In the case of Commissioner of Income-tax (Central), Calcutta v. Associated Industrial Development Co. (P.) Ltd. [1971] 82 ITR 586, the Supreme Court observed that :

“Whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee who holds the shares and it should, in normal circumstances, be in a position to produce evidence from its records as to whether it has maintained any distinction between those shares which are its stock-in-trade and those which are held by way of investment.”

6. In the case of Commissioner of Income-tax, Bombay v. H. Holck Larsen [1986] 160 ITR 67, the Supreme Court observed :

“The High Court, in our opinion, made a mistake in observing whether transactions of sale and purchase of shares were trading transactions or whether these were in the nature of investment was a question of law. This was a mixed question of law and fact.”

7. The principles laid down by the Supreme Court in the above two cases afford adequate guidance to the Assessing Officers.”

8.2 On perusal of the above Circulars it is clear that the assessee can maintain two portfolios one for trading in the shares and the other one is for the investment in shares. The only requirement of the circular, both the activities of the assessee should be clearly demarcated in the books of accounts. As the assessee has not shown any activity from the trading of shares and there was no closing stock shown in the financial statement, therefore, we are of the view that the assessee is dealing only in the investment activity as evident from the classification shown by the assessee under the head investments. In this regard, we referred to the relevant portion of the balance sheet of the assessee which is placed on page 25 of the Paper Book and reproduced as under:

SHARES APPLICATION
ADHUNIK METAL SHARE APPL. 94,500.00
BIRLA POWER SOLU. SHARE APP. 94,500.00
KEWAL KIRAN CLO. SHARE APP. 96,250.00
ROHIT FERRO TECH SHARE APPL. 96000.00
SHIVALIK GLOBLE SHARE APPL. 48,000.00
4,29,250.00
INVESTMENT
N.S.C. ACCOUNT 30,000.00
30,000.00
SHARE INVESTMENT
SHARE ACCOUNT 1,73,439.46 1,73,439.46

From the above balance sheet, it is clear that the assessee has demarcated its shares under the head investment. Therefore the Circular issued by the CBDT applies to the instant facts of the case. Therefore, keeping in view the provision of the Circular issued by the CBDT we are inclined to hold that the income from the investment of share on account of sale purchase should be liable to tax under the head capital gain.

8.3 We also note that the benevolent circulars issued by the CBDT are binding on the Tribunal as held by the judgment of Hon’ble Supreme Court in the case of Keshavji Ravji & Co. Vs. CIT reported in 183 ITR 1 wherein it was observed as under :

The task of interpretation of the laws is the exclusive domain of the courts. However, – this is what Shri Ramachandran really has in mind – circulars beneficial to the assessees and which tone down the rigour of the law issued in exercise of the statutory power under section 119 of the Act or under corresponding provisions of the predecessor Act are binding on the authorities in the administration of the Act. The Tribunal, much less the High Court, is an authority under the Act. The circulars do not bind them. But the benefits of such circulars to the assessees have been held to be permissible even though the circulars might have departed from the strict tenor of the statutory provision and mitigated the rigour of the law. But that is not the same thing as saying that such circulars would either have a binding effect in the interpretation of the provision itself or that the Tribunal and the High Court are supposed to interpret the law in the light of the circular. There is, however, support of certain judicial observations for the view that such circulars constitute external aids to construction.

8.4 We also note that the Revenue has accepted the activity of investment in the shares in earlier years as well as subsequent years which was also not disturbed by the Revenue. Therefore, the principles of consistency need to be followed without any deviation when there is no change in the facts and circumstances of the case from the earlier years. Reliance in this regard is placed on the judgment of the Hon’ble Supreme Court in the case of Radhasaomi Satsang vs CIT reported in (1992) 193 ITR 321 (SC) .

8.5 We also note that the ITAT, Ahmedabad in the case of ACIT vs. Bhanuprasad T. Trivedi HUF in IT(SS)A No.460/Ahd/2010 pertaining to the A.Y. 2005-06 vide order dated 11.07.2016 has decided the issue in favor of the assessee by observing as under:

“10. The dispute is regarding the nature of income on sale and purchase of shares by the assessee. The issue, whether the income from sale and purchase of shares in a particular case should be treated as capital gain or as business income has been a debatable issue and there are conflicting decisions of the Tribunal on this issue. Each case is therefore, to be based on its own factual situation. In the balance sheet, the assessee has shown shares under the head ‘investment’. These investment shares have been valued at cost. The Hon’ble Supreme Court in the case of CIT Associated Industrial DevelopmentCo Pvt. Ltd. 82 ITR 586, which decision has also been considered by the CBDT in its Circular No. 4/2007 dt. 15.6.2007, has observed that:-

“Whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is -within the knowledge of the assessee who holds the shares and it should, in normal circumstances, be in a position to produce evidence from its records as to whether it has maintained any distinction between those shares which are its stock-in- trade and those which are held by way of investment”

11. The CBDT has further thrown light on this controversial issue in its Circular No. 6/2016 dated 29.02.2016 and the same reads as under:-

Sub: Issue of taxability of surplus on sale of shares and securities – Capital Gains or Business Income — Instructions in order to reduce litigation – reg.-

Sub-section (14) of Section 2 of the income-tax Act, 1961 (‘Act’) defines the term “capital asset” to include property of any kind held by an assessee, whether or not connected with his business or profession, but does not include any stock-in-trade or personal assets subject to certain exceptions. As regards shares and other securities, the same can be held either as capita! assets or stock-in-trade/ trading assets or both. Determination of the character of a particular investment in shares or other securities, whether the same is in the nature of a capital asset or stock-in- trade, is essentially a fact-specific determination and has led to a lot of uncertainty and litigation in the past.

2. Over the years, the courts have laid down different parameters to distinguish the shares held as investments from the shares held as stock- in-trade. The Central Board of Direct Taxes (‘CBDT’) has also, through Instruction No. 1827, dated August 31, 1989 and Circular No. 4 of 2007 dated June 15, 2007, summarized the said principles for guidance of the field formations.

3. Disputes, however, continue to exist on the application of these principles to the facts of an individual case since the taxpayers find it difficult to prove the intention in acquiring such shares/securities. In this background, while recognizing that no universal principal in absolute terms can be laid down to decide the character of income from sale of shares and securities (i.e. whether the same is in the nature of capital gain or business income), CBDT realizing that major part of shares/securities transactions takes place in respect of the listed ones and with a view to reduce litigation and uncertainty in the matter, in partial modification to the aforesaid Circulars, further instructs that the Assessing Officers in holding whether the surplus generated from sale of listed shares or other securities would be treated as Capital Gain or Business Income, shall take into account the following-

a) Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income,

b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years;

c) In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT.

4. It is, however, clarified that the above shall not apply in respect of such transactions in shares/securities where the genuineness of the transaction itself is questionable, such as bogus claims of Long Term Capital Gain/Short Term Capital Loss or any other sham transactions.

5. It is reiterated that the above principles have been formulated with the sole objective of reducing litigation and maintaining consistency in approach on the issue of treatment of income derived from transfer of shares and securities. All the relevant provisions of the Act shall continue to apply on the transactions involving transfer of shares and securities.

12. Considering the facts in hand, in the light of the aforementioned circular of the Board, in our considered opinion, the intention of the assessee at the time of the purchase of shares is paramount. If the assessee has clear intention of being an investor and showing the shares as investment, we do not find any reason to disturb the intention of the assessee. The assessee under consideration is investor and, therefore, any gain arising out the transfer of shares should be treated as capital gains be it short term or long term.

13. In the light of the aforementioned discussion, we have no hesitation in upholding the findings of the First Appellate Authority. Ground No. 1 is accordingly dismissed.”

8.6 The Hon’ble High Court of Gujarat subsequently confirmed the view taken by the Tribunal in the above case reported in 87 taxmann.com 137 wherein it was held as under:

“4. The CIT (Appeals) and the Tribunal having applied such parameters on the facts of the case and having come to the conclusion that the assessee’s stand that the shares were held by way of investment and therefore the sale thereof should result in long term capital gain instead of business income, calls for no interference.”

8.7 We also note that the Revenue against the order of Hon’ble Gujarat High Court in the above case had filed a petition before the Hon’ble Supreme Court which was dismissed by the Hon’ble Supreme Court reported in 95 taxmann.com 19.

8.8 We also note that the case law relied on by the Learned CIT(A) has not considered the CBDT Circular No.6/2016 dated 29.02.2016. Therefore we are reluctant to rely on the judgment relied upon by the Learned CIT(A).

In view of above, we hold that the frequency, magnitude of the transaction in systematic manner cannot be the criteria to hold that the assessee is engaged in business activity of shares. Therefore, we are inclined to set aside the order of Learned CIT(A) and direct the AO to treat the income from investment activity under the head capital gain. Hence, the ground of appeal of the assessee is allowed.

9. In the result, the appeal of the assessee is allowed

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