Shares activity treated as investment in earlier years cannot be treated as business in subsequent years if facts are the same

The assessee was engaged in two different activities of sale and purchase of shares. The first set of transactions involved investment in shares in which the assessee took delivery of the shares. The second set of transactions involved dealing in shares for business purposes. The assessee was accordingly an investor as well as a dealer.

The income from investment activity was offered as capital gains while the income from dealing activity was offered as business income. This position was accepted by the AO in the earlier years. In AY 2005-06, the AO took a different view and held that even the shares held on investment account had to be assessed as business income. The Tribunal allowed the assessee’s appeal (see 122 TTJ (Mum) 87). On appeal by the Revenue, HELD dismissing the appeal:

(a) The Tribunal has correctly applied the principle of law in accepting the position that it is open to an assessee to maintain two separate portfolios, one relating to investment in shares and another relating to business activities involving dealing in shares. Delivery based transactions were rightly treated as being in the nature of investment transactions giving rise to capital gains.

(b) The Tribunal correctly accepted the position that though the principle of res judicata is not attracted, there ought to be uniformity in treatment and consistency when the facts and circumstances are identical. The Tribunal has noted that the assessee has followed a consistent practice in regard to the nature of the activities, the manner of keeping records and the presentation of shares as investment at the end of the year in all the years and there is no justification for a different view being taken by the AO.

(c) The Tribunal applied the correct principle in holding that while entries in the books of account alone are not conclusive in determining the nature of income, it does have a bearing.

FULL TEXT OF THE CASE LAW IS AS FOLLOWS:-

IN THE HIGH COURT OF JUDICATURE AT BOMBAY
O.O.C.J.

INCOME TAX APPEAL NO.1121 OF 2009

The Commissioner of Income Tax 25 …Appellant.

Vs.

Gopal Purohit ….Respondent.

….

Ms. Suchitra Kamble for the Appellant.

Mr. S.C. Tiwari with Mr.R.Asokan for the Respondent.

…..

CORAM : DR.D.Y.CHANDRACHUD AND

J.P.DEVADHAR, JJ.

January 6, 2010.

P.C.:

The following questions of law have been formulated in the appeal filed by the revenue against the judgement of the Income Tax Appellate Tribunal, dated 10^th February 2009:

“a) Whether, on the facts and circumstances of the case and in law, the Honourable ITAT was justified in treating the income from sale of 7,59,003 shares for Rs. 5,00,12,879/­ as an income from short term capital gain and sale of 3,88,797 shares for Rs. 6,65,02,340/­ as long term capital gain as against the “Income from business” assessed by the A.O.?

b) Whether, on the facts and circumstances of the case and in law, the Honourable ITAT was justified in holding that principle of consistency must be applied here as authorities did not treat the assessee as a share trader in preceding year, in spite of existence of similar transaction, which cannot in any way operate as res? judicata to preclude the authorities from holding such transactions as business activities in current year?

c) Whether, on the facts and circumstances of the case and in law, the Honourable ITAT was justified in holding that presentation in the books of account is the most crucial source of gathering intention of the assessee as regards to the nature of transaction without appreciating that the entries in the books of accounts alone are not conclusive proof to decide the income?”

2. The Tribunal has entered a pure finding of fact that the assessee was engaged in two different types of transactions. The first set of transactions involved investment in shares. The second set of transactions involved dealing in shares for the purposes of business (described in paragraph 8.3 of the judgement of the Tribunal as transactions purely of jobbing without delivery). The Tribunal has correctly applied the principle of law in accepting the position that it is open to an assessee to maintain two separate port folios, one relating to investment in shares and another relating to business activities involving dealing in shares. The Tribunal held that the delivery based transactions in the present case, should be treated as those in the nature of investment transactions and the profit received therefrom should be treated either as short term or, as the case may be, long term capital gain, depending upon the period of the holding. A finding of fact has been arrived at by the Tribunal as regards the existence of two distinct types of transactions namely, those by way of investment on one hand and those for the purposes of business on the other hand. Question (a) above, does not raise any substantial question of law.

3. In so far as Question (b) is concerned, the Tribunal has observed in paragraph 8.1 of its judgement that the assessee has followed a consistent practice in regard to the nature of the activities, the manner of keeping records and the presentation of shares as investment at the end of the year, in all the years. The revenue submitted that a different view should be taken for the year under consideration, since the principle of res judicata is not applicable to assessment proceedings. The Tribunal correctly accepted the position, that the principle of res judicata is not attracted since each assessment year is separate in itself. The Tribunal held that there ought to be uniformity in treatment and consistency when the facts and circumstances are identical, particularly in the case of the assessee. This approach of the Tribunal cannot be faulted. The revenue did not furnish any justification for adopting a divergent approach for the Assessment Year in question. Question (b), therefore, does not also raise any substantial question.

4. In so far as Question (c) is concerned, again there cannot be any dispute about the basic proposition that entries in the books of account alone are not conclusive in determining the nature of income. The Tribunal has applied the correct principle in arriving at the decision in the facts of the present case. The finding of fact does not call for interference in an appeal under Section 260A. No substantial question of law is raised. The appeal is accordingly dismissed.

(Dr. D.Y. Chandrachud, J.)

(J.P. Devadhar, J.)