THE DY CIT CIR 13(2), MUMBAI v. SHRI HIMANSHU V. MEHTA, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH H MUMBAI BEFORE SHRI SHRI A.L. GEHLOT A.M. & SHRI V. DURGA RAO J.M. ITA NO. 4777/M/2008 ASSESSMENT YEAR: 2005-06 DY. COMMISSIONER OF INCOME-TAX APPELLANT CIRCLE 13(2) R.NO. 477 4 TH FLOOR AAYAKAR BHAVAN M.K. ROAD MUMBAI 400 020. VS. SHRI HIMANSHU V. MEHTA RESPONDENT PROP. OF M/S MEHTA POLYBOARDS 403 CHHEDA BHAVAN 98 SURAT STREET MASJID MUMBAI 400 009. (PAN AACPM2677B) APPELLANT BY : MR. SURENDRA KUMAR RESPONDENT BY : NONE ORDER PER A.L. GEHLOT A.M.: THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAIN ST THE ORDER OF CIT(A)-XIII MUMBAI PASSED ON 19.05.2008 FOR THE A SSESSMENT YEAR 2005-06. 2. THE SOLE GROUND RAISED IN THIS APPEAL IS THAT TH E CIT(A) ERRED IN DIRECTING THE AO TO TREAT RS. 11 46 476/- AS SHORT TERM CAPITAL GAIN INSTEAD OF BUSINESS PROFIT. 3. NONE APPEARED ON BEHALF OF THE ASSESSEE AT THE T IME OF HEARING OF THIS APPEAL. NOTICES SENT ON THE ADDRESS GIVEN IN F ORM NO. 36 WHICH WERE RETURNED BY POSTAL AUTHORITIES WITH A REMARK THAT CLOSED. THEREFORE THE NOTICE ISSUED THROUGH OFFICE OF THE DEPARTMENTAL RE PRESENTATIVE WHICH WAS SERVED FOR HEARING ON 26.4.10. IT WAS POINTED O UT BY THE LEARNED DR THAT THE PRESENT ADDRESS OF THE ASSESSEE READS AS U NDER:- PROP. OF M/S MEHTA POLYBOARDS 403 CHHEDA BHAVAN 98 SURAT STREET MASJID MUMBAI 400 009. ITA NO.4777/M/08 SHRI HIMANSHU V. MEHTA 2 4. BRIEFLY THE FACTS OF THE CASE ARE THAT THE ASSES SEE WAS ENGAGED IN THE BUSINESS OF TRADING IN PAPER & PAPERBOARD IN TH E PROPRIETARY CONCERN M/S MEHTA POLYBOARDS. THE ASSESSEE IS ALSO A DIREC TOR IN M/S TWIN STAR PVT. LTD. THE ASSESSEE DECLARED SHORT TERM CAPITAL GAINS ON PURCHASE AND SALE OF SHARES AT RS. 14 94 869/-. THE AO NOTICED T HAT THE GAINS OF RS. 11 46 476/- PERTAINED TO THE TRANSACTIONS DONE BETW EEN 1 ST OCTOBER 2004 TO 31 ST MARCH 2005. THE AO FURTHER NOTICED THAT THE TRAN SACTIONS ARE TOO NUMEROUS AND MANY A TIME THE SHARES PURCHAS ES ARE SOLD FOR SMALL PROFIT UPWARDS FROM RS. 90/-. THE AO GAVE INS TANCES OF SUCH PURCHASES WHICH IS TABULATED AT PAGE 2 OF HIS ORDE R. AFTER EXAMINING THE MATERIAL THE AO OBSERVED THAT THE ASSESSEE WAS INT ERESTED IN EARNING QUICK PROFITS RATHER THAN DIVIDENDS. THE AO FURTHER NOTICED THAT THE ASSESSEE HAD PURCHASED AND SOLD SHARED IN HUGE QUAN TITIES WITH VARIOUS HOLDING PERIODS FROM ONE DAY TO 3 MONTHS. BEFORE TH E AO THE ASSESSEE EXPLAINED THAT THE ASSESSEE HAD ALWAYS TAKEN DELIVE RY OF STOCKS PURCHASED AND HE HAD BEEN AN INVESTOR FOR THE LAST MANY YEARS AND THAT HE HAD NEVER SHOWN THE INVESTMENTS IN BALANCE SHEET AS STOCK IN TRADE. THE AO EXAMINED THE ISSUE AND NOTED THAT ESSENTIAL CONDITION FOR DETERMINING WHETHER THE INVESTMENTS WERE TRADING AS SETS OR NOT IS TO LOOK AT THE SUBSTANTIAL NATURE OF TRANSACTIONS THE MAGNITUDE OF PURCHASE AND SALES AND THE MOTIVE OF THE ASSESSEE AS TO WHET HER INVESTMENT WAS FOR THE PURPOSE OF DERIVING DIVIDEND INCOME OR A TR ADE/ADVENTURE INTENDING TO EARN PROFIT. THE AO NOTICED THAT IN TH E CASE OF THE ASSESSEE THERE WAS A QUICK TURNOVER AND MATERIAL ON RECORD E VIDENCE SHOW THAT THE FOREMOST INTEREST OF THE ASSESSEE WAS TO TRADE IN THE SHARES SO THAT TRADING PROFIT ARISES AND RECEIVING OF DIVIDEND INC OME WAS ONLY INCIDENTAL. THE AO RELIED UPON THE DECISION OF ITAT AHMADABAD BENCH IN THE CASE OF DCIT VS. SMT. DEEPABEN AMITBHAI SHAH 9 9 ITD 219 WHEREIN THE BENCH HELD THAT THE VOLUME FREQUENCY CONTINUI TY AND REGULARITY OF TRANSACTIONS FOR PURCHASE AND SALE OF SHARES WOULD REVEAL THAT THESE TRANSACTIONS WERE ENTERED INTO BY THE ASSESSEE WITH A PROFIT MOTIVE. SUCH MOTIVE MUST PERVALE THE WHOLE SERIES OF TRANSACTION S EFFECTED BY THE PERSON IN THE COURSE OF HIS ACTIVITY. THE AO FURTHE R NOTED THAT IN THE CASE OF DEEPABEN A. SHAH SHE HAD ACQUIRED SHARES FROM T HE PRIMARY MARKET WHEREAS IN THE ASSESSEES CASE IT WAS PURCHASED FRO M SECONDARY MARKET. THE AO HAS ALSO RELIED UPON THE DECISION OF THE AUT HORITY OF ADVANCE ITA NO.4777/M/08 SHRI HIMANSHU V. MEHTA 3 RULINGS (AAR) 288 ITR 641. IN VIEW OF THE ABOVE DIS CUSSION THE AO MADE THE ADDITION OF RS. 11 46 476/- AS INCOME FROM TRAD ING IN SHARES. THE CIT(A) DIRECTED THE AO TO TREAT THE SAID AMOUNT OF RS. 11 46 476/- AS SHORT TERM CAPITAL OBSERVING AS UNDER:- 2.4 I HAVE CONSIDERED THE CONTENTION OF THE APPELLA NT. WHETHER A TRANSACTION IN SHARES IS TRADING OR INVESTMENT WILL DEPEND ON FACTS. THE CASE LAWS RELIED ON BY THE AO ARE DISTINGUISHAB LE ON FACTS. FURTHER I DO NOT FIND ANY LOGIC BEHIND AOS DECISI ON TO TREAT SHORT TERM CAPITAL GAINS PRIOR TO 1/10/2004 AS SHORT TERM CAPITAL GAIN AND TO TREAT GAINS AFTER 1/10/2004 AS BUSINESS INCOME. THE AO ARGUED THAT THERE WERE NUMEROUS SHARES WHICH WERE HELD ONL Y FOR FEW DAYS. IF THE NUMBER OF DAYS A SHARE IS TO BE HELD TO DET ERMINE THE NATURE OF TRANSACTION THE AO SHOULD HAVE CALCULATED GAINS ACCORDINGLY. THE AO DID NOT DO SO. IT IS SEEN FROM DETAILS OF TRANSA CTIONS THAT A LARGE NUMBER OF SHARES WHICH WERE SOLD AFTER 1/10/2004 WE RE IN FACT PURCHASED IN THE EARLIER ASSESSMENT YEAR. ACCORDIN G TO AOS OWN BASIS PROFITS FROM THESE SHOULD NOT HAVE BEEN TREA TED AS BUSINESS INCOME AND THIS CONSTITUTE A MAJOR PROFIT. HENCE T HE AOS METHOD CANNOT BE RELIED UPON AND SUSTAINED. NOW THE ISSUE COMES WHETHER ON FACTS OF THIS CASE THE TRANSACTION CAN REALLY B E TREATED AS TRADING IN SHARES. THE APPELLANT HAD MADE TRANSACTION IN 95 SCRIPS DURING THE YEAR. THERE IS NO SINGLE TEST TO DETERMINE WHET HER A TRANSACTION IS TRADING OR INVESTMENT. THAT WILL DEPEND ON FACTS . THE ASSESSEES ACCOUNTING METHOD CANNOT BE IGNORED. THE APPELLANT SHOWS HUGE INVESTMENT IN SHARES EVER YEAR. IN FACT THIS METHO D WAS THERE BEFORE THE CHANGE IN RATE OF TAXATION OF SHORT TERM CAPITA L GAIN FROM SALE OF SHARES. IT IS NOT A CASE WHERE SALE OF SHARES WERE SHOWN AS TRADING IN EARLIER YEARS. THE APPELLANT HAD INVESTMENT IN S HARES EVERY YEAR AND THE NUMBER OF SCRIPS INVESTED ARE ALSO QUITE LA RGE. THE APPELLANT WAS ALSO ASSESSED IN EARLIER YEARS AND SHARE TRANSA CTIONS WERE ACCEPTED AS INVESTMENT. IT MAY BE TRUE THAT THE APP ELLANT SOLD SOME WITHIN FEW DAYS OF THEIR ACQUISITION. BUT ONE CANN OT IGNORE THE MARKET CONDITION THAT IS PREVALENT SINCE 2003-04 AN D TILL NOW. HENCE SALE OF SHARES WITHIN A FEW DAYS CANNOT BE I TSELF GROUND FOR REJECTION OF APPELLANTS CLAIM IGNORING SMALL FACTS OF THE CASE. HENCE ON FACTS OF THIS CASE I AM OF THE OPINION THAT THE APPELLANTS TRANSACTION IN SHARES CANNOT BE CONSIDERED AS TRADI NG IN NATURE. THE AO IS THEREFORE DIRECTED TO TREAT RS. 11 46 476/- A S SHORT TERM CAPITAL GAIN. THE GROUND SUCCEEDS. 5. AFTER HEARING THE LEARNED DR ON PERUSAL OF ORDE RS OF CIT(A) AND AO WE FIND THAT THE FACTS NOTED BY CIT(A) AND AO A RE CONTRARY. THE FINDING OF THE AO WITH SUPPORTING INSTANCES THAT TH E ASSESSEE HELD SHARES FOR A FEW DAYS FOR EXAMPLE IN CASE OF SHAR ES OF BANK OF RAJASTHAN OF 1000 SHARES WERE PURCHASED ON 22/12/20 04 AND THE SAME WERE SOLD ON 23/12/2004 AND ANOTHER 1000 SHARES OF BANK OF RAJASTHAN WERE PURCHASED ON 22/12/2004 AND THE SAME WERE SOLD ON 24/12/2004. WHEREAS THE CIT(A) NOTED THAT LARGE NUMBER OF SHARE S WHICH WERE SOLD ITA NO.4777/M/08 SHRI HIMANSHU V. MEHTA 4 AFTER 1 ST OCTOBER04 WERE IN FACT PURCHASED IN EARLIER ASSE SSMENT YEAR. THE FINDING GIVEN BY THE AO IS THAT TOTAL PURCHASES AND SALES OF SHARES OF RS. 14 94 869/- OUT OF WHICH GAINS OF RS. 11 46 47 6/- PERTAINED TO TRANSACTIONS DONE BETWEEN 1 ST OCTOBER04 TO 31 ST MARCH 2005. THE CIT(A) ALSO NOTED THAT THE ASSESSEE HAS FOLLOWED THIS METH OD BEFORE THE CHANGE IN RATE OF TAXATION OF SHORT TERM CAPITAL GAIN FROM SALE OF SHARES. THE CIT(A) ALSO NOTED THAT IT IS NOT A CASE WHERE SALE OF SHARES WERE SHOWN AS TRADING IN EARLIER YEARS. THE CIT (A) FURTHER NOTED THAT THE ASSESSEE IS ASSESSED IN EARLIER YEARS AND SHARE TRANSACTIONS WE RE ACCEPTED AS INVESTMENT. SINCE THE ASSESSEE HAS NOT APPEARED BEF ORE US NOR MATERIAL IS AVAILABLE ON RECORD TO VERIFY WHETHER IN EARLIER YEARS THE ASSESSEE HAS SHOWN SUCH INVESTMENT IN SHARES AS INVESTMENT AND P ROFIT WAS ASSESSED AS BUSINESS INCOME. THERE IS NO MATERIAL AVAILABLE ON RECORD TO VERIFY CONTRARY FACTS NOTED BY THE AO & CIT(A) THAT A NUMB ER OF SHARES WHICH WERE SOLD AFTER 1 ST OCTOBER 2004 WERE IN FACT PURCHASED IN EARLIER ASSESSMENT YEARS. CONTRARY TO THAT THE AO HAS GIVEN A TABLE WHEREIN HOLDING SHARE TRANSACTION WAS VERY LESS I.E. DAYS OR 1 DAY TO THREE MONTHS. TO FIND OUT THE CORRECT FACTS SOME EXPLANAT IONS ARE REQUIRED FROM THE ASSESSEE. NEITHER THE ASSESSEE APPEARED NO R ANY MATERIAL AVAILABLE ON RECORD TO VERIFY THOSE FACTS. NORMALLY A PERSON MAKES INVESTMENT IN SHARES FOR A LONGER PERIOD TO GET GOO D APPRECIATION IN THE VALUE OF ASSETS AND DIVIDEND IS INCIDENTALLY. THE M AIN OBJECT OF INVESTING IN SHARES WHEN THERE IS IN URGENT NEED TO LIQUIDA TE ITS INVESTMENT IN TO CASH. IN THIS CONNECTION WE REFER TO THE DECISION OF ITAT MUMBAI BENCH IN THE CASE OF GOPAL PUROHIT VS. JCIT 122 TT J (MUM.) 87 WHEREIN IT WAS HELD THAT ASSESSEES CLAIM OF SHORT-TERM AND LONG TERM CAPITAL GAINS FROM TRANSACTIONS IN SHARES HAVING BEEN ALLOW ED ON IDENTICAL FACTS IN EARLIER ASSESSMENT YEARS COULD NOT BE DISALLOWE D MERELY BECAUSE IN THE YEAR UNDER CONSIDERATION THE FINANCE ACT 2004 HAD CONFERRED CERTAIN BENEFITS ON THE ASSESSEE ON SUCH TRANSACTIO N; MODUS OPERANDI OF ASSESSEE REMAINING THE SAME ASSESSEES CLAIM DESER VED ACCEPTANCE BY FOLLOWING RULE OF CONSISTENCY. THE TRIBUNAL DECISI ON WAS UPHELD BY THE JURISDICTIONAL HIGH COURT VIDE INCOME TAX APPEAL NO . 1121 OF 2009 VIDE ITS ORDER DATED 6 TH JANUARY 2010. WE FIND FROM THE ORDER OF CIT(A) IN EARLIER YEAR THE REVENUE HAS ACCEPTED SUCH TRANSACT ION AS INVESTMENT. TO MAINTAIN CONSISTENCY THE REVENUE SHOULD HAVE FOLLOW ED THE SAME IN ITA NO.4777/M/08 SHRI HIMANSHU V. MEHTA 5 SUBSEQUENT YEAR. THIS FACT COULD NOT BE VERIFIED BE CAUSE OF NON APPEARANCE BY THE ASSESSEE. AFTER CONSIDERING THE T OTALITY OF THE FACTS OF THE CASE WE DEEM IT THINK AND PROPER TO REMIT THIS MATTER BACK TO THE FILE OF THE CIT(A) WITH DIRECTION TO VERIFY THE REL EVANT AND CONTRADICTORY FACTS RECORDED AND DECIDE THE ISSUE IN THE LIGHT OF ABOVE DISCUSSION AND KEEPING IN VIEW THE RATIO LAID DOWN BY THE DECISION OF JURISDICTION HIGH COURT IN THE CASE OF GOPAL PUROHIT CITED SUPRA AFTE R PROVIDING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. 6. IN THE RESULT THE APPEAL OF THE REVENUE IS TREA TED AS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN OPEN COURT ON THIS 30 TH DAY OF APRIL 2010. SD/- SD/- (V. DURGA RAO) (A.L. GEHLOT) JUDICIAL MEMBER ACCOUNTAN T MEMBER DATED: 30 TH APRIL 2010. COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A) CONCERNED. 4) THE CIT CONCERNED. 5) THE DEPARTMENTAL REPRESENTATIVE H BENCH I.T .A.T. MUMBAI. BY ORDER //TRUE COPY// ASST. REGISTRAR I.T.A.T. MUMBAI. KV S.NO. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON 26.4.10 SR.P.S./P.S 2. DRAFT PLACED BEFORE AUTHOR 27.4.10 SR.P.S/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.P.S./P.S ITA NO.4777/M/08 SHRI HIMANSHU V. MEHTA 6 SR.P.S./PS 6. KEPT FOR PRONOUNCEMENT ON SR. P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER