IN THE ITAT MUMBAI BENCH ‘J’
Jignesh Indulal Patel
Income-tax Officer, 4(1)(2), Mumbai
IT APPEAL NO. 3455 (MUM.) OF 2009
[ASSESSMENT YEAR 2005-06]
AUGUST 31, 2012
Dinesh Kumar Agarwal, Judicial Member – This appeal preferred by the assessee is directed against the order dtd. 19-3-2009 passed by the ld. CIT(A) – IV, Mumbai for A.Y. 2005-06.
2. Briefly stated facts of the case are that the assessee an individual derives income from brokerage, shares and interest. He filed return declaring total income of Rs. 6,84,320/-. However, the assessment was completed at an income of Rs. 13,50,360/- including the addition by treating the short term capital gain and long term capital gain as business income, disallowance of securities transaction tax Rs. 1,15,213/- and disallowance of provision of loss on derivatives Rs. 2,589/- vide order dtd. 28-12-2007 passed u/s 143(3) of the Income Tax Act, 1961 (the Act). On appeal, the ld. CIT(A) while confirming the above disallowance/addition, partly allowed the appeal.
3. Being aggrieved by the order of the ld. CIT(A) the assessee is in appeal before us.
4. Ground No. 1 reads as under:-
“The learned Commissioner of Income Tax (Appeals) erred in law and in fact treating the Capital Gain of Rs. 4,44,984/- (Short Term Gain of Rs. 4,28,039/- and Long Term Gain of Rs. 16,945/-) as Business income.”
5. Brief facts of the above issue are that the A.O. observed that the assessee is a sub-broker and has also carried out purchase and sale of shares on own account. Considering the volume of transactions, the assessee was asked to justify the claim that income is from capital gains. In response, the assessee stated that such transactions are of two kinds viz. business transactions and investment transactions. The assessee further stated that the business transactions are those transactions which are recorded in the books of account under the head ‘Jignesh Patel (Margin a/c)’ and wherein the assessee had also utilised margin funding. The shares purchased with an intention to invest have been recorded in the books of account under the head ‘Jignesh Patel’. The assessee further stated that the unsold shares are shown separately as “Investments” in the balance sheet. The A.O. after considering the assessee’s reply has elaborated the volume of transaction at page 6 of the assessment order as under:-
|Type of account||No. of scrips in which transactionsons done.||Total quantity of purchases||Total value of purchases(Rs)||Total quantity of sales||Total value of sales(RS)|
|Investment account Accounted as Jignesh Patel||148||1,01,384||34,12,819.47||1,14,444||32,93,817.40|
|Business account Accounted as Jignesh Patel Margin A/c||81||89,958||38,38,348.32||86,508||36,68,821.49|
The A.O. from the above table while discussing the issue in paras 5.3 to 5.10 of the assessment order inter alia observed as under:-
(a) Similarity of transactions with regard to substantial volume, no. of scrips, value
(b) Intention of profit and not dividend
(c) Insufficient own capital and use of funds of creditors
(d) Specialised knowledge and skill
(e) own share transaction incidental/ancillary to main business of share broking
(f) motive of reducing tax liability
And accordingly treated short term capital gain of Rs. 4,19,323/- and long term capital gain of Rs. 16,945/- aggregating to Rs. 4,44,984/- as business profits and added the same to the total income of the assessee.
6. On appeal, the ld. CIT(A) vide his brief order has held as under:-
“I have gone through the order of the A.O. and submissions of the appellant. The appellant is a share broker and he deals regularly in the shares. The A.O. has discussed this issue in great length which clearly indicates that the activity undertaken by the appellant has all the ingredients of business and the action of the A.O. is, therefore, found to be correct and is confirmed.”
7. At the time of hearing the ld. Counsel for the assessee submits that the assessee in his books of accounts has maintained two separate accounts i.e. investment account of shares and stock of trading shares account and in support, he also placed on record a chart of factual matrix of six assessment years appearing at page 71 of the assessee’s paper book which is reproduced as under:-
|A.Y. 05-06||A.Y. 04-05||A.Y. 03-04||A.Y. 02-03||A.Y. 01-02||A.Y. 00-01|
|Stock in Trade||236658||140490||7505||100327||131087||808952|
He further submits that in the past the A.O. has accepted the above transactions of shares even in the scrutiny assessments for the assessment years 2002-03 and 2004-05 appearing at page 115 and 90 of the assessee’s paper book respectively and no addition was made on this account. He further submits that the aim of the assessee is to earn maximum profit by investment in shares and trading in shares for which he is maintaining two separate accounts. He further submits that the assessee has not taken any loan for investment in shares and in any case the investment in shares was made out of interest free funds i.e. in other words no interest was paid by the assessee on such investment in shares. He further submits that since the assessee is a sub-broker of shares, he can easily maintains his two separate accounts i.e. one for investment in shares and another for business in shares. He further submits that since the assessee is doing both activities i.e. investment in shares and trading in shares and the same activities have been accepted in the past, therefore, two activities are separate and distinct activities. He further submits that it is not the motive of the assessee to reduce the tax liability but to pay the tax as per the accepted activities of investment in shares and trading in shares. The ld. Counsel for the assessee has also placed on record the computation of capital gain showing the name of the scrips, opening stock/purchases, D-mat statement, period of holding in No. of days and working of short term and long term capital gains. In the light of the above, he reiterates that since the assessee is maintaining two separate accounts of shares i.e. investment account and stock of trading in shares account and the said system of accounting has been accepted by the Department in the past also, therefore, the short term and long term capital gains shown by the assessee be accepted as short term and long term capital gains and not as business income. The reliance was also placed on the decision in Narendra Gehlaut v. Jt. CIT  52 SOT 255, Nagindas P. Sheth (HUF) v. Asstt. CIT and vice versa in ITA No. 961 and 1836/Mum/2010 for A.Y. 2006-07 order dtd. 5-4-2011 and CIT v. Gopal Purohit  336 ITR 287.
8. On the other hand, the ld. D.R. supports the order of the A.O. and the ld. CIT(A).
9. We have carefully considered the submissions of the rival parties and perused the material available on record. The question before us as to whether the income earned from the activity of purchase and sale of shares could be treated as income from business or in the nature of short term/long term capital gains. Hence it is necessary to consider the relevant provisions of the Act, discussed in the order of the Tribunal in Dev Ashok Karvat v. Dy. CIT  50 SOT 167 which are reproduced as under:-
“8. Section 2(14) of the Act defines “capital asset” to mean property of any kind held by an assessee, whether or not connected with his business or profession. The definition of “capital asset” does not, however, include “stock-in-trade” held for the purpose of business. Section 2(22) of the Act defines “dividend” to include any distribution by a company of accumulated profits, whether capitalized or not. Section 2(42-A) defines “short-term capital asset” to mean a capital asset held by an assessee for not more than thirty six months immediately preceding the date of its transfer. Section 2(42-B) defines “short term capital gain” to mean capital gain arising from the transfer of a short term capital asset. Under Section 28(i) of the Act, the profits and gains of any business carried on by the assessee, at any time during the previous year, is chargeable to income tax under the head “profits and gains of business or profession”. Under Section 45(1) of the Act any profits or gains, arising from the transfer of a capital asset effected in the previous year, is deemed to be income of the previous year in which the transfer took place. Section 111-A, inserted by Finance Act, 2004, relates to tax on short term capital gains in certain cases and, under sub-section (1) thereof, where the total income of an assessee includes any income chargeable under the head “capital gains”, arising from the transfer of a short term capital asset being an equity share in a company and such transaction is chargeable to securities transaction tax, the tax payable by the assessee shall be the aggregate of the amount of income tax calculated, on such short term capital gains, at the rate of fifteen per cent.
9. If the shares purchased by the assessee are held to be capital assets, sale of such shares could fall within the ambit of Section 111A of the Act, and such capital gains would be subject to tax at a lower rate. If the shares are held by the assessee as stock-in-trade, profit on the sale of such shares would constitute business income, and be subject to tax at a higher rate. As noted hereinabove, Section 2(14) (i) of the Act defines a capital asset as not including stock-in-trade. If the assessee had held the shares as “stock-in-trade”, and not as investment, then such shares would stand excluded from the definition of “short term capital asset”, and the proof it earned on the sale of such shares would not be exigible to tax as “short term capital gain”, but as “profits and gains from business”.
10. In order to ascertain as to whether the shares were purchased by the assessee as investment or stock-in-trade, the most relevant aspect which is to be seen is the intention of the assessee behind the purchase of shares and such intention has to be gathered from the facts of the case including the conduct of the assessee.”
10. It is desirable to consider various judicial pronouncements in this regard. To begin with it is apt to take note of the decision of the Hon’ble Apex Court in Bengal & Assam Investors Ltd. v. CIT  59 ITR 547 wherein it has been held (Headnote) : Page 547 :-
“For a dividend on shares to be assessed under section 10 of the Indian Income-tax Act, 1922, the assessee, be it an individual or a company or any other entity, must carry on business in respect of shares, that is to say, the assessee must deal in those shares. An individual, who merely invests in shares for the purpose of earning dividend, does not carry on a business. The only way he can come under section 10 is by converting the shares into stock-in-trade, i.e., by carrying on the business of dealing in stocks and shares. If a company merely acquires and holds shares with the object of receiving dividends, it does not carry on business within section 10. The mere fact that a company is incorporated to carry on investment does not show that it is carrying on business.”
11. In CIT v. Associated Industrial Development Co. (P.) Ltd.  82 ITR 586 (SC) it has observed as under :-
“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 stock-in-trade and those which are held by way of investment.”
12. The Hon’ble Apex Court in another decision in CIT v. H. Holck Larsen  160 ITR 67, has held as under (head note page 69) :-
“In order to determine whether one was a dealer in shares or an investor, the real question was not whether the transaction of buying and selling the shares lacks the element of trading, but whether the later stages of the whole operation show that the first step-the purchase of the shares-was not taken as, or in the course of, a trading transaction. The totality of all the facts will have to be borne in mind and the correct legal principles applied to these. If all the relevant factors have been taken into consideration and there has been no misapplication of the principles of law, then the conclusion arrived at by the Tribunal cannot be interfered with because the inference is a question of law, if such an inference was a possible one, subject, however, that all the relevant factors have been duly weighed and considered by the Tribunal, the inference reached by the Tribunal should not be interfered with.”
13. A Division Bench of Hon’ble Gujarat High Court in CIT v. Rewashanker A. Kothari  283 ITR 338 has observed at page 344 that in the case of Pari Mangaldas Girdhardas v. CIT  6 CTR 647 (Guj), after analyzing various decisions of the apex court, this court has formulated certain tests to determine as to whether an assessee can be said to be carrying on business.
“(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.”
14. In CIT v. Vinay Mittal  208 Taxman 106/22 taxmann.com 151 Hon’ble Delhi High Court after considering the test laid down by the Hon’ble Gujarat High Court (supra) has held in para 9 & 10 as under:-
“9. In the present case, the assessee is an employee and is in service of a company. He has salaried income. The assessee had also made purchases and had sold securities. He is maintaining two separate portfolios i.e. investment portfolio and trading portfolio. The Assessing Officer has admitted the said position in the assessment order. It is pointed out that the shares in question which are subject matter of short term capital gains form part of the investment portfolio and were not part of the trading portfolio. We are not concerned with the trading portfolio in the present case as profits and gains from the trading portfolio have to be treated as business income/loss. As far as seven shares/transactions subject matter of short term capital gains are concerned it is noticeable that in four cases, the shares were held for a period of more than 7 months, 8 months, 8.5 months and 11 months. In three cases shares were held for 2.4 months, 2.5 months and 4 months. Quantum or total number shares is substantial but the transactions in question are only seven in number and the period of holding as mentioned above cannot be treated as insignificant and small. Quantum or total number may not be determinative but in a given case keeping in view period of holding may indicate intention to make investment. The Tribunal applying the aforesaid tests in the present case has accepted the position of the assessee that these shares which are subject matter of short term capital gains were rightly held by the assessee and treated by the assessee an investment portfolio and not a trading portfolio. We also notice that the Tribunal has mentioned that the assessee has received substantial dividend income of more than Rs.19 lakhs and Rs.27 lakhs in the assessment year 2005-06 and 2006-07. The Assessing Officer as noticed above was influenced to a large extent of the fact that the assessee had earned huge profits during the year in question from the sale of the said shares. This can happen even in case of investment portfolio because when investment is liquidated to earn gains and change their portfolio. Element of uncertainty and risk is always there when a person deals in securities but this factor cannot be determinative factor whether the assessee is trading in shares or is an investor. Some investors do take risk. The Assessing Officer has recorded that during the financial year 2006-07, the assessee had indulged in frequent and regular trade in securities. The Assessing Officer did not refer to and specifically dealt with the transactions in question though the chart and the figures noted above in this order were available and on record at the time of original assessment. He has not mentioned whether the assessee had indulged in frequent transactions in the previous period or subsequently. Merely because the assessee had sold the said shares in the relevant year and made substantial gains and could not show basically the objective for acquiring the shares was not as an investor but as a trade. The ratio of sales and purchase may be relevant in a particular case but when an assessee liquidates any investment, the said ratio will always be in favour of sales.
10. The Tribunal in the facts of the present case has examined and correctly applied test/criteria, which has to be applied. We may note that in the earlier assessment years, transactions in the investment portfolio by the assessee were accepted by the Assessing Officer.”
15. In Gopal Purohit (supra) it has been held as under (Headnote) :
“Held, dismissing the appeal, (i) that it was open to the assessee to maintain two separate portfolios, one relating to investment and another relating to business of dealing in shares, that a finding of fact had been arrived at by the Tribunal as regards the two distinct types of transactions, namely, those by way of investment and those for the purposes of business, and this warranted no interference.
(ii) That there should be uniformity in treatment and consistency when facts and circumstances for different years were identical particularly in the case of the same assessee.
(iii) That entries in the books of account alone are not conclusive in determining the nature of income.”
16. Recently the Hon’ble Gujarat High Court in CIT v. Vaibhav J. Shah (HUF) in Tax Appeal No. 77 of 2010 with Tax Appeal No. 78 of 2010 dtd. 27-6-2012 has held as under:-
“9. In view of the aforesaid decisions of the Apex Court as well as of this Court, 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.
10. 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. We do not find that in the Assessment Year 2005-2006 and 2006-2007, the transaction of sale of shares and volume were substantial. We do not find any error or irregularity in the impugned order passed by the Tribunal. The substantial question of law framed by this Court as mentioned above is answered in the affirmative and against the revenue. Both these Tax Appeals are accordingly dismissed.”
17. In Narendra Gehlaut (supra) the Tribunal has held as under :-
“5.5. In the case of 2 portfolios, an eventuality may arise, like an assessee deals in the shares of Telco, some are credited to trading activity and some may be accounted for on capital investment. The law and CBDT circular permits that in such cases accounting entry will determine the nature of assessee’s income. When the CBDT Circular and various case laws allow such type of eventuality, in our view the assessee has a stronger case. Looking at the accounting treatment, limited number of companies dealt in and limited number of transactions per month, in our considered view the assessee’s claim of capital investment cannot be denied.
5.10. In view of the foregoings, we are of the view that ground in respect of delivery based share transactions, investment and capital loss in respect of commodity transactions on delivery basis both are to be held on account of short term capital gain income and short term capital loss respectively. Thus, the grounds of the assessee are allowed.”
18. In Nagindas P. Sheth (HUF) (supra) it has been held as under:-
“………..On a conspectus of the matter, we are of the view that the transactions of purchase and sale of shares, in the instant case, deserves to be considered as investment and profit thereon has to be assessed to tax under the head ‘capital gains’. We direct the Assessing Officer accordingly.”
19. In Felspar Credit & Investment (P.) Ltd. v. CIT  346 ITR 121 (Mad.) it has been held as under (Page 122 head note) :-
“(ii) That the extent of income earned from the sale of shares could not be the criteria to hold that the assessee was dealing in shares as a business venture. When the Revenue had no grievance on the same pattern of transaction in the preceding yeas and in the subsequent years, the mere fact that the assessee had a profit in the assessment years 1992-93 and 1993-94 by itself could not change the nature of business of hire purchase to dealing in shares. The memorandum of association by itself would not be conclusive material to hold that the sale of shares was of shares held as stock-in-trade. Thus, the profit that the assessee made on the sale of shares was assessable as capital gains and not as business income.”
20. In Asstt. CIT v. Satpal Singh Sethi in ITA No.3650/Mum/2010 (AY: 2006-2007) dated 30.9.2011, the co-ordinate bench of the Tribunal after following the ratio of the decision of the Hon’ble Jurisdictional High Court in the case of CIT v. Darius Pandole  330 ITR 485/11 taxmann.com 262 (Bom.) and Gopal Purohit (supra) has held that “…Since in the earlier years the Department has accepted the income from shares as falling under the head ‘Capital gains’, in our considered opinion and respectfully following the above judgments, that the ld. CIT(A) was justified in upholding the assessee’s stand.”
21. In Hitesh Satishchandra Doshi v. Jt. CIT  46 SOT 336/12 taxmann.com 79 (Mum.), the Tribunal while observing that there is no indication of holding period of 30 days finds place either in the statute or in the circular/instructions as well as judicial pronouncements held that the ld. CIT(A) was not justified in treating the share transaction as business transactions in the case where the holding period is less than 30 days and further held that the income arisen from purchase and sale of shares held by the assessee is investment, cannot be treated as business income.
22. In Dev Ashok Karvat (supra) it has been held as under :-
“16. Applying the ratio of the above decisions to the facts of the present case it becomes abundantly clear that the transactions in the shares and mutual funds were made by the assessee as investor and not as a trader, therefore, the profit earned from the said transactions is short term capital gain, not business income and accordingly, we while reversing the orders of the AO and the ld. CIT(A) on this account direct the AO to treat the profit from purchase and sales of shares and mutual funds of Rs.10,52,137/- as income from short term capital gains and not business income. The grounds taken by the assessee are, therefore, allowed.”
23. The judgments thus referred to above point out the principle that the question as to whether the assessee is engaged in dealing in shares as a course of business activity or not, rests on appreciation of materials, the starting point being the purchase of shares as an investment or stock-in-trade. If the purchase is a mere investment, then the result on the sale must necessarily be taken to the logical end to treat it as an asset yielding to capital gains. However, when investment itself is for the purpose of making it as a business then the income earned on dealing with such shares is to be treated as business income only.
24. In the backgrounds of the above decisions, when we analyse the facts of this case we find that there is no dispute that the assessee is maintaining two separate portfolios i.e. investment portfolio and trading portfolio. The A.O. has admitted the said position consistently in the past. It is pointed out that the shares in question which are subject matter of short term capital gain and long term capital gain are part of the investment port folios and were not part of the trading portfolio. Since the assessee has long term and short term capital gain out of the investment portfolio and it is not the case of the Revenue that any point of time the assessee has mixed up the above two portfolio and merely because the assessee had sold the shares in the relevant year and made substantial gain does not mean that transactions of investment portfolio were not as an investor but as a trader. The ratio of sales and purchases may be relevant in a particular case but when the assessee liquidates any investment the said ratio will always be termed as long term and short term capital gains. The ld. D.R. 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 Hon’ble Gujarat High Court (supra). In this view of the matter we are of the view that the ld. CIT(A) was not justified in upholding the order of the A.O. in treating the long term and short term capital gains as business income. The A.O. is directed to exclude the long term and short term capital gains from the business income and tax the same separately under the head long term/short term capital gains. The ground taken by the assessee is, therefore, allowed.
25. Ground No. 2 reads as under:-
“The learned Commissioner of Income Tax (Appeals) erred in law and in fact in disallowing Securities Transaction Tax of Rs. 1,15,213/- being Securities Transaction Tax related to clients and recovered through brokerage.”
26. Brief facts of the above issue are that it was inter alia observed by the A.O. that the assessee has debited the securities transaction tax (STT) of Rs. 1,15,213/- to the brokerage account and had credited to P&L account by brokerage of Rs. 10,04,900/- which is net of STT and other debts. The assessee was asked to explain the debits to the P&L account. In response it was submitted by the assessee that “assessee is doing purchase and sale of shares on behalf of clients through JHP Securities Pvt. Ltd. Broker through his bill charges Securities Transactions Tax which is debited to separate account of your assessee. Your assessee does not recover Securities Transaction Tax from the clients being sub broker. Hence STT element related to clients is debited to brokerage account. Assessee’s own STT is reflected in Balance sheet as an asset and as such is not debited to profit and loss account as provided in the Act.” However the A.O. did not accept the assessee’s submission. The A.O. in view of the provisions of section 40(ib) of the Act disallowed the deduction of Rs. 1,15,213/- and added the same to the total income of the assessee. On appeal the ld. CIT(A) while agreeing with the views of the A.O. confirmed the disallowance made by the A.O.
27. At the time of hearing the ld. counsel for the assessee while reiterating the same submissions as submitted before the A.O. and the ld. CIT(A) further submits that the A.O. was not justified in disallowing the claim of the assessee and the same be allowed to the assessee.
28. On the other hand the ld. D.R. supports the order of the A.O. and the ld. CIT(A).
29. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the claim of the assessee is that the assessee has not charged security transaction tax and has maintained separate accounts in his books of accounts. However, in the absence of any supporting material and keeping in view that this issue requires fresh investigation at the end of the A.O., we consider it fair and reasonable that the matter should go back to the file of the A.O. and accordingly we set aside the order passed by the Revenue Authorities on this account and send back the matter to the file of the A.O. to decide the same afresh in the light of our observation hereinabove and according to law after providing reasonable opportunity of being heard to the assessee. The ground taken by the assessee is, therefore, partly allowed for statistical purpose.
30. Ground No. 3 reads as under :-
“The learned Commissioner of Income-tax (Appeals) erred in law and in fact in disallowing net loss of Rs. 2,589/- being loss on unexpired contracts related to Futures and Options.”
31. At the time of hearing the ld. counsel for the assessee submits that he does not want to press the above ground which was not objected to by the ld. D.R.
32. That being so and in the absence of any supporting material placed on record by the ld. counsel for the assessee, the ground taken by the assessee is, therefore, rejected being not pressed.
33. Ground No. 4 & 5 are general in nature which requires no adjudication and accordingly the same are rejected.
34. In the result, the assessee’s appeal stands partly allowed for statistical purposes.