VIPUL A SHAH, MUMBAI v. ACIT 25(3), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES F MUMBAI BEFORE SHRI S V MEHROTRA ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO JUDICIAL MEMBER ITA NO. 534/MUM/2009 (ASSESSMENT YEAR 2005-06) VIPUL A SHAH 301 PADMA PRIYA APT.ABOVE PNB BANK 42-A PRESIDENCY SOCIETY N S ROAD JVPD SCHEME VILE PARLE (W) MUMBAI-400049 PAN:ABAPS815K . APPELLANT VS THE ACIT 25(3) C-11 BUILDING 3 RD FL. BANDRA KURLA COMPLEX BANDRA (E) MUMBAI-400051 .RESPONDENT APPELLANT BY : SHRI PARESH SHAPARIA RESPONDENT BY : SMT.ASHIMA GUPTA O R D E R PER VIJAY PAL RAO JM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 10.12.2008 OF CIT(A) FOR THE ASSESSME NT YEAR 2005-06. 2. ONLY ISSUE RAISED IN THIS APPEAL IS WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE THE CIT(A) IS JUSTIF IED IN ITA NO. 534/MUM/2009 (ASSESSMENT YEAR 2005-06) 2 CONFIRMING THE TREATMENT TO SHORT TERM CAPITAL GAI N OF RS.26 36 439/- AS BUSINESS INCOME. 3. FACTS OF THE CASE ARE THAT THE ASSESSEE IS AN I NDIVIDUAL AND DURING THE YEAR HAS SHOWN SHARE TRADING INCOME SPECULATIVE LOSS CAPITAL GAINS AND INCOME FROM OTH ER SOURCES. DURING THE ASSESSMENT PROCEEDINGS THE AO NOTICED THAT THE CAPITAL ACCOUNT OF THE ASSESSEE SHOWS THAT THE RECE IPTS OF THE ASSESSEE ARE ARISING OUT OF TRANSACTIONS IN SHARES AND SECURITIES. HOWEVER IN THE COMPUTATION OF INCOME THE ASSESSEE HAS BIFURCATED THESE RECEIPTS AND OFFERED THE PROFIT AND GAINS ON SALE OF SHARES AS CAPITAL GAIN AS WEL L AS BUSINESS INCOME SEPARATELY. THE AO NOTED THAT THE S HORT TERM CAPITAL GAIN SHOWN BY THE ASSESSEE WAS TO THE TUNE OF RS.26 36 439/- AS BUSINESS INCOME. THE AO WAS OF TH E VIEW THAT LOOKING INTO THE VOLUME FREQUENCY AND CONTINU ITY IN THE PURCHASE AND SALE OF SHARES TRANSACTIONS WHICH IS REGULAR IF CAN BE INFERRED THAT THESE TRANSACTIONS MUST HAVE B EEN ENTERED INTO BY THE ASSESSEE WITH THE PROFIT MOTIVE AND ACCORDINGLY THE ENTIRE PROFIT ARISEN OUT OF THE PUR CHASE AND SALES OF SHARES SHOWN AS SHORT TERM CAPITAL GAIN W AS ASSESSED UNDER THE HEAD INCOME FROM BUSINESS. ITA NO. 534/MUM/2009 (ASSESSMENT YEAR 2005-06) 3 4. ON APPEAL THE CIT(A) HAS CONFIRMED THE ACTION OF THE AO VIDE IMPUGNED ORDER. 5. BEFORE US THE LEARNED AR OF THE ASSESSEE HAS SU BMITTED THAT THE ASSESSEE HAS SHOWN SHORT TERM CAPITAL GAI N LONG TERM CAPITAL GAIN AND BUSINESS INCOME FROM THE PURC HASE AND SALE OF THE SHARES. THE ASSESSEE IS MAINTAINING S EPARATE ACCOUNTS FOR THESE ACTIVITIES AND THEREFORE THE ASS ESSEE IS HAVING SEPARATE PORTFOLIO. HE HAS REFERRED THE DET AILS OF THE TRANSACTIONS OF SALE AND PURCHASE AND SUBMITTED THA T THE TOTAL TRANSACTIONS IN THE CASE OF SHORT TERM CAPITA L GAIN WERE ONLY 49 DURING THE PERIOD. HE HAS THEN REFERRED TH E BALANCE SHEET AT PAGE 20 OF THE PAPER BOOK AND SUBMITTED TH AT THE ASSESSEE HAS INVESTED HIS OWN FUND AND THERE IS NO LOAN OR ADVANCE FOR INVESTMENT IN THE SHARES. THE ASSESSEE WAS HAVING HIS OWN FUND OF RS.9 29 02 201/- WHEREAS TH E TOTAL INVESTMENT WAS TO THE TUNE OF RS.9 14 00 000/-. H E HAS FURTHER CONTENDED THAT OUT OF THESE TOTAL INVESTMEN TS MORE THAN RS.3 CRORES WAS IN MUTUAL FUND AND IN STATE BA NK OF INDIA RELIEF BONDS. THEREFORE THE ASSESSEE HAS USED HIS OWN FUND FOR THE INVESTMENT. THE LEARNED AR HAS THEN REFER RED THE DETAILS OF BUSINESS INCOME SHORT TERM CAPITAL GAIN AND LONG TERM CAPITAL GAIN AND SUBMITTED THAT THE ASSESSEE H AS EARNED ABOUT RS.1 60 00 000/- AS LONG TERM CAPITAL GAIN DU RING THE ITA NO. 534/MUM/2009 (ASSESSMENT YEAR 2005-06) 4 PERIOD AND ALSO EARNED DIVIDEND INCOME OF MORE THA N RS.33 LAKHS. THUS THE INTENTION OF THE ASSESSEE IS CLEAR FROM THE INVESTMENT IN SHARES WHICH ARE KEPT FOR LONG TERM AND EARNING THE DIVIDEND INCOME THERE FROM. THE SHO RT TERM CAPITAL GAIN OF THE ASSESSEE IS RS.26 36 000/- AND PART OF IT WAS TAXABLE UNDER NORMAL TAX RATES. THE ASSESSEE W AS HAVING ONLY ONE LOAN OF RS.1 58 000/- FROM ANUSH M SHAH OF THE HUF WHICH WAS TAKEN TEMPORARILY FOR THE PURPOSES OF INVESTING IN IPO AND WAS REPAID IN THE SAME YEAR WI THOUT ANY INTEREST. THE ASSESSEE HAS NOT CLAIMED ANY EXPEND ITURE AGAINST THE CAPITAL GAIN ON SALE OF SHARES AND ALL EXPENSE WERE CLAIMED AGAINST THE INCOME FROM THE TRADING I N SHARES WHICH ARE SEPARATELY SHOWN IN THE BOOKS OF ACCOUNT AS STOCK- IN-TRADE. THE LEARNED AR HAS SUBMITTED THAT FOR THE EARLIER ASSESSMENT YEAR I.E. 2003-04 THE SHORT TERM CAPITA L GAIN AND LONG TERM CAPITAL GAIN SHOWN BY THE ASSESSEE WAS AC CEPTED BY THE DEPARTMENT IN THE ORDERS PASSED U/S 143(3) AN D WHEN THEREFORE THERE IS NO CHANGE IN THE FACTS AND CIRC UMSTANCES OF THE CASE AND PATTERN OF TRANSACTIONS NOW THE REVEN UE CANNOT TREAT THE SAME DIFFERENTLY. THE ASSESSEE HAS BEEN ENGAGED IN THE BUSINESS OF INVESTMENT AND SHARE TRADING EV EN PRIOR TO THE CHANGES IN THE TAX SYSTEM AND ALL TRANSACTIONS IN SHARES WERE ACCEPTED BY THE REVENUE AND ALL THE SHARES TR ANSACTIONS WERE THROUGH RECOGNIZED STOCK EXCHANGES AND REGISTE RED ITA NO. 534/MUM/2009 (ASSESSMENT YEAR 2005-06) 5 STOCK BROKERS. HE HAS RELIED UPON THE CBDT CIRCUL AR AND SUBMITTED THAT WHEN THE SEPARATE PORTFOLIO ARE PER MITTED FOR CARRYING OUT THE INVESTMENTS AS WELL AS TRADING IN SHARES THEN TREATING THE SHORT TERM CAPITAL GAIN AS BUSINESS IN COME IS NOT JUSTIFIED. THE SHORT TERM CAPITAL GAIN REPRESENTS ONLY 11.39 PERCENT OF THE TOTAL INCOME OF THE ASSESSEE AND THE MAJOR PART OF THE TOTAL INCOME REPRESENTS LONG TERM CAPIT AL GAIN AND DIVIDEND INCOME. THE LEARNED AR HAS RELIED UPON TH E FOLLOWING CASE LAW: 1 MUMBAI HIGH COURT ORDER DATED 6.1.2010 CIT V/S GOPAL PUROHIT ITA NO.1121 OF 2009 2 GOPAL PUROHIT V/S JCIT 29 SOT 117 (MUM) 3 ITAT ORDER IN ITA NO.2735/MUM/2009 FOR AY-2005- 06 DT. 23.7.2010 KARISHMA V SHAH V ACIT 4 ITAT ORDER IN ITA NO.2731/MUM/2009 FOR AY-2005- 06 DT.26.2.2010 VINOD V SHAH V SHAH V ACIT 5 ITAT ORDER IN ITA NO.181/MUM/2010 DT.3.12.2010 ACIT V/S VINOD K NEVATIA 6 ITAT ORDER IN ITA NO.2733/MUM/2009 DT.15.12.2010 NEHAL V SHAH V/S ACIT 7 ITAT ORDER IN ITA NO.799/MUM/2009 DT.24.11.2010 DCIT V. M/S SMK SHARES AND STOCK BROKING PVT LTD 8 DELHI HIGH COURT ORDER DATED 18.10.2010 IN THE CASE OF ITA NO.306/2010 CIT V/S PNB FINANCE AND INDUSTRIES LTD ITA NO. 534/MUM/2009 (ASSESSMENT YEAR 2005-06) 6 6. ON THE OTHER HAND THE LEARNED DR HAS SUBMITTED THAT SOME OF THE ANALYSIS FILED BY THE ASSESSEE IN THE PAPER BOOK WERE NOT BEFORE THE AO. HE HAS FURTHER SUBMITTED THAT THE ASSESSEE IS PURCHASING THE SHARES AT LARGE VOLUME A ND TRANSACTIONS ARE CARRIED OUT WITH A PRIOR ASSOCIATI ON OF BUSINESS EXISTENCE OF SCHEME SYSTEM AND IN REGU LAR MANNER. FROM THE VOLUME AND PATTERN OF THE TRANSACT IONS IT IS CLEAR THAT THE ASSESSEE IS NOT A ORDINARY INVESTOR BUT IS DEALING IN SECURITY AS AN ADVENTURE THEREFORE THE ACTIVITIES OF THE ASSESSEE IN PURCHASE AND SALE OF THE SHARES I S NOTHING BUT WITH A MOTIVE TO EARN THE PROFIT. HE HAS RELI ED UPON THE ORDER OF THE CIT(A) AND SUBMITTED THAT WHEN THE A CTIVITIES OF THE SALE AND PURCHASE OF THE SHARES IS SO HIGH AND THE PERIOD OF HOLDING IS NOT SO LONG THEN MOTIVE BEHIND TH E PURCHASE AND SALE OF SHARES IS TO EARN THE PROFIT IN THE SHO RT PERIOD. THEREFORE THE TRANSACTIONS ARE RIGHTLY TREATED AS TRADING ACTIVITIES AND THE INCOME THEREFROM AS BUSINESS INC OME. 7. IN REBUTTAL THE LEARNED AR HAS SUBMITTED THAT T HE CIT(A) WHILE DISCUSSING THE CIRCULAR AND VARIOUS DE CISIONS AS MENTIONED AT PAGE 17 OF THE IMPUGNED ORDER HAS REC ORDED CERTAIN FACTS WHICH DO NOT RELATED TO THE ASSESSEE . IN PARAGRAPH 1 OF THE PAGE 17 THE CIT(A) HAS RECORDE D THE FACT THAT THE PURCHASE AND SALE IN 100 CRORES AND IN LA KHS OF ITA NO. 534/MUM/2009 (ASSESSMENT YEAR 2005-06) 7 SCRIPTS AND THE TRANSACTIONS IS ON DAY TO DAY BASIS . IT IS ALSO RECORDED THAT IT TOOK LOAN FROM PRIVATE PARTIES AN D INSTITUTION. THE MEMBERS OF AOP KEEPING WATCH ON THE MARKET. T HE LEARNED AR HAS SUBMITTED THAT HE IS GUIDED BY WRONG AND INCORRECT FACTS WHICH DOES NOT PERTAIN TO THE ASSES SEE. 8. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND REL EVANT RECORD. THE ASSESSEE IS MAINTAINING TRANSACTIONS IN SHARES AND SECURITIES UNDER SEPARATE HEADS AND PORTFOLIO UNDER TRADING AND INVESTMENTS AND ACCORDINGLY OFFERED TH E INCOME FROM SALE OF SECURITIES UNDER DIFFERENT HEADS. THE ASSESSEE OFFERED THE BUSINESS INCOME SHORT TERM CAPITAL GAI N LONG TERM CAPITAL GAIN DIVIDEND INCOME AND INTEREST. THE DETAILS OF INCOME ARE AS UNDER : HEADS OF INCOME INCOME % OF INCOME BUSINESS INCOME 454 200 1.96% SHORT TERM CAPITAL GAINS 26 36 004 11.39% LONG TERM CAPITAL GAINS 1 60 23 772 69.26% DIVIDEND 33 11 974 14.31% INTEREST 7 11 358 3.07 9. THE ASSESSEE IS HAVING ITS OWN CAPITAL OF RS.7 .45 CRORES AS ON 1.4.2004 AND RS.9.29 CRORES AS ON 31. 3.2005 AS ITA NO. 534/MUM/2009 (ASSESSMENT YEAR 2005-06) 8 AGAINST THE INVESTMENT IN SHARES AT RS.4.49 CRORE S AS ON 31.3.2005 AND RS.3.25 CRORES AS ON 1.4.2004. THUS IT IS CLEAR THE ASSESSEE IS HAVING ITS OWN SUFFICIENT FU ND FOR INVESTMENT IN SHARES AND MUTUAL FUNDS. THE ASSESSE E HAS ALSO CARRIED SPECULATIVE TRANSACTION AND INCURRED LOSS AND ACCORDINGLY THE SAME WAS CLAIMED AS CARRIED FORWARD LOSS. SINCE THE ASSESSEE WAS DEALING IN SHARE TRADING AC TIVITIES THEREFORE THE SPECULATIVE LOSS DOES NOT CHANGE TH E NATURE OF OTHER ACTIVITY UNDER THE SEPARATE PORTFOLIO AND THE INCOME OFFERED BY THE ASSESSEE UNDER DIFFERENT HEADS. IT IS CLEAR THAT THE SUBSTANTIAL INCOME IS EARNED FROM LONG TERM CA PITAL GAIN OF RS.1.60 CRORES AND FROM THE DIVIDEND INCOME RS .33.11 LAKHS AND SHORT TERM CAPITAL GAINS AT RS.26 36 43 9 /- WHICH IS 11.39% OF THE TOTAL INCOME AS CLEARED FROM THE DET AILS REPRODUCED ABOVE. THE AO HAS TREATED THE SHORT TE RM CAPITAL GAIN AS BUSINESS INCOME WHEREAS THE LONG TERM CAPI TAL GAIN WAS ACCEPTED. WE FURTHER NOTE THAT THE TOTAL NUMB ER OF TRANSACTIONS RELATING TO SHORT TERM CAPITAL GAIN DU RING THE PERIOD ON 49. OUT OF WHICH 25 TRANSACTIONS OF SAL E AND 24 TRANSACTIONS OF PURCHASE DURING THE PERIOD GIVING RISE TO THE SHORT TERM CAPITAL GAIN. THUS THE PREDOMINANT IN TENTION OF THE ASSESSEE IN SELLING AND PURCHASING OF THE SHARE S IS EARNING LONG TERM CAPITAL GAIN AND DIVIDEND INCOME. THE ITA NO. 534/MUM/2009 (ASSESSMENT YEAR 2005-06) 9 CIT(A) IN PARAGRAPHS AT PAGE 17 OF THE IMPUGNED O RDER HAS RECORDED CERTAIN FACTS AS UNDER : ON ALL THE THREE COUNTS IT IS CLEAR THAT THE APP ELLANT IS DEALING IN SHARES IN LARGE MAGNITUDE. IT DOES PURCHASE AND SALES OF SHARES IN HUNDREDS CRORES AND IT DEALS IN LACS OF SCRIPTS. VOLUME OF SHARES IS IN HUNDREDS OF CORES OF TRANSACTION. NUMBERS OF SHARES TRANSACTED ARE IN CRORES. IT DOES IT ON DAY TO DAY BASIS. IT TOOK LOAN FROM PRIVATE PARTIES AND INSTIT UTION. IT DOES THE BUSINESS THROUGH BROKERS. MEMBERS O F APO ARE KEEPING COMPLETE WATCH ON MARKET AND DEALING ACCORDINGLY. ALL THIS SHOWS THAT THE APPE LLANT AOP IS ENGAGED IN ADVENTURE IN THE NATURE OF TRADE. IT IS WORTHWHILE TO MAINTAIN THAT 10 FROM THE ABOVE FACTS IT IS CLEAR THAT THESE FAC TS DO NOT PERTAIN TO THE ASSESSEE AND THEREFORE THE ORDER OF THE CIT(A) IS BASED ON ASSUMPTION OF FACTS WHICH DO NOT EME RGE FROM THE RECORD OF THE ASSESSEES CASE. THE ASSESSEE H AS ALSO GIVEN THE DETAILS OF THE HOLDINGS PERIODS OF VARIOU S SCRIPTS FROM WHICH IT IS CLEAR THAT VERY FEW NUMBER OF SCRI PTS VALUED RS.38 57 000/- HAVE BEEN HELD BY THE ASSESSEE FOR L ESS THAN ONE YEAR OUT OF RS.4 49 38 931/- INVESTMENT IN S HARES. THE OTHER SCRIPTS WERE RETAINED BY THE ASSESSEE RANGIN G FROM ONE YEAR TO 20 YEARS. THEREFORE FROM THE FACTS OF THE CASE IN HAND IT CANNOT BE SAID CERTAIN SHARES WHICH WERE P URCHASED AND SOLD DURING THE YEAR OR WITHIN A YEAR WILL CHAN GE THE NATURE OF TRANSACTIONS WHEN THE WHOLE INTENTION OF THE ASSESSEE IS TO INVEST FOR LONG TERM AND EARNING THE DIVIDEND ITA NO. 534/MUM/2009 (ASSESSMENT YEAR 2005-06) 10 INCOME. KEEPING IN VIEW OF THE NUMBER OF TRANSACT IONS GIVING RISE TO THE EARNING SHORT TERM CAPITAL GAIN AND NU MBER OF SCRIPTS AS WELL AS THE AMOUNT OF INVESTMENT THE TR ANSACTIONS OF SALE AND PURCHASE OF SHARES GIVING RISE TO SHOR T TERM CAPITAL GAIN CANNOT BE TREATED AS TRADING IN SHARES AND CONSEQUENTLY BUSINESS INCOME WHEN THE ASSESSEE IS MAINTAINING THE SEPARATE PORTFOLIO. THE CASE OF TH E ASSESSEE IS ALSO COVERED BY THE VARIOUS DECISIONS AS RELIED UPON BY THE ASSESSEE. ACCORDINGLY WE SET ASIDE THE ORDER OF T HE CIT(A) AND ALLOW THE APPEAL OF THE ASSESSEE. 11 N THE RESULT APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 25 FEB 2 011 SD SD (S V MEHROTRA ) (VIJAY PAL RAO) ACCOUNTANT MEMBER JUDICIAL M EMBER MUMBAI DATED 28 TH FEB 2011 SRL:22211 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT CONCERNED 4. CIT(A) CONCERNED 5. DR CONCERNED BENCH BY ORDER TRUE COPY ASSTT. REGISTRAR ITAT MUMBAI