ACIT 25(3), MUMBAI v. NAISHADH V. VACHHARAJANI, MUMBAI

1 ITA NO.6429/MUM/2009 & C.O. NO. 136/MUM/2010. IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH B MUMBAI BEFORE SHRI N.V. VASUDEVAL JUDICIAL MEMBER AND SHRI J. SUDHAKAR REDDY ACCOUNTANT MEMBER I.T.A. NO. 6429/MUM/2009. ASSESSMENT YEAR : 2006-07. ASSTT. COMMISSIONER OF INCOME-TAX NAISHADH V. VACHHARAJANI 25(3) MUMBAI. VS. B-21 HARMONY NEAR CHARKOP VILLAGE M.G. ROAD KANDIVALI(W EST) MUMBAI 400067. PAN : AAWPV4880H. APPELLANT RESPONDENT. AND C.O. NO. 136/MUM/2010. (IN ITA NO. 6429/MUM/2009) ASSESSMENT YEAR : 2006-07. NAISHADH V. VACHHARIAJANI ASSTT. COMMISSIONER OF MUMBAI. VS. INCOME-TAX 25(3) MUMBAI. CROSS OBJECTOR. RESPONDENT. DEPARTMENT BY : SHRI S.K. MOHANTY. AS SESSEE BY : SHRI PRAMOD KUMAR PARIDA AND MS. SANJUKTA CHOWDHARY. O R D E R PER J. SUDHAKAR REDDY A.M. : THIS IS AN APPEAL FILED BY THE REVENUE DIRECTED AG AINST THE ORDER OF THE CIT(APPEALS)-35 MUMBAI DATED 29-09-2009 ON THE FOL LOWING GROUND : 2 ITA NO.6429/MUM/2009 & C.O. NO. 136/MUM/2010. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) ERRED IN DIRECTING THE A.O. TO ACCEPT THE CL AIM OF SHORT TERM CAPITAL GAIN AND LONG TERM CAPITAL GAIN ON PROFIT ARRIVING FROM PURCHASE & SALE OF SHARES INSTEAD OF BUSINESS INCOME TREATED BY THE A. O. WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE IS DEALING IN LARGE VOLU ME OF SHARES MOST OF THE SHARES ARE BOUGHT AND SOLD WITHIN SHORT PERIOD WHI LE SOME ARE NOT SOLD DUE TO MARKET CONDITIONS AND THEIR HOLDING WITH ASSESSE E REMAINS BEYOND FEW DAYS IT WILL NOT CHANGE THE NATURE OF TRANSACTIONS AND THE ASSESSEE IS VERY WELL ENGAGED IN THE BUSINESS OF SHARE TRADING WHIC H DENOTE THAT THE MOTIVE OF THE ASSESSEE IS TO CARRY ON BUSINESS IN SHARES T O BOOK PROFIT RATHER THAN INVESTMENT IN SHARES. 2. THE ASSESSEE IS A MARINE CONSULTANT. HE ALSO HAS INVESTMENT IN SHARES. THE ASSESSEE ALSO HAS INCOME FROM SPECULATIVE PROFIT AN D FUTURE OPTION TRADING IN SHARES. AT PARA 4.1.2 AND 4.1.3 THE AO HAS BROUGHT OUT THE FOLLOWING FACTS: 4.1.2 IN THE RETURN OF INCOME ASSESSEE HAS SHOW N INCOME UNDER THE F FOLLOWING HEADS : INCOME FROM OTHER SOURCES 10 83 896 LONG TERM CAPITAL GAIN 29 84 026 SHORT TERM CAPITAL GAIN 13 48 030 SPECULATION PROFIT 1 10 469 F&O TRADING 9 90 189 INCOME FROM PROFESSION 2 36 261 THIS SHOWN THAT ALL THE RECEIPTS OF ASSESSEE ARE AR ISING OUT OF TRANSACTIONS IN SHARES AND SECURITIES EXCEPT BANK INTEREST AND INCO ME FROM PROFESSION. THIS GIVES RISE TO THE QUESTION THAT WHETHER THE IN COME ARISING OUT OF SOME OF THE TRANSACTIONS IN SHARES CARRIED OUT BY THE AS SESSEE BE CLASSIFIED AS CAPITAL GAINS AND THE REST AS BUSINESS. IN VIEW OF THE REGULARITY VOLUME TURNOVER PERIOD OF HOLDING OF THE SHARES AND VALUE OF THE TRANSACTIONS IN SHARES IT IS REQUIRED TO BE EXAMINED WHETHER SHORT TERM CAPITAL GAINS & LONG TERM CAPITAL GAINS OFFERED BY ASSESSEE FALLS INTO T HE CATEGORY OF CAPITAL GAINS 3 ITA NO.6429/MUM/2009 & C.O. NO. 136/MUM/2010. OR WHETHER THE SAME CAN BE SAID TO BE PART OF BUSIN ESS INCOME OF THE ASSESSEE. THE ASSESSEE IS AN INDIVIDUAL AND IS REGULARLY TRAD ING IN SHARES DERIVATES F & O TRANSACTIONS AND ALSO IN SPECULATION. ASSESSEE IS MAINTAINING REGULAR BOOKS OF ACCOUNTS FOR HIS PURPOSE. FROM THE DETAILS OF SHARE TRANSACTIONS FILED ALONG WITH THE RETURN OF INCOME AND ALSO DURING THE COURSE OF ASSESSMENT THE MAGNIT UDE OF DELIVERY BASED TRANSACTIONS OF ALE AND PURCHASE DONE BY THE ASSESS EE IS AS UNDER :- SHORT TERM CAPITAL GAINS NO OF SHARES BOUGHT AND SOLD 2 00 066 PURCHASE AMOUNT 1 04 33 159 SALES AMOUNT 1 17 81.189 NO. OF TRANSACTIONS 222 GAIN 13 48 030 LONG TERM CAPITAL GAINS NO OF SHARES BOUGHT AND SOLD 9469 PURCHASE AMOUNT 503397 SALES AMOUNT 3487423 NO. OF TRANSACTIONS 26 GAIN 2984062 4.1.3 IN ADDITION TO THIS AS PER THE STATEMENT O F TRADING IN SHARES FILED ALONG WITH THE RETURN OF INCOME IT IS OBSERVED THAT ASSESSEE HAS SPECULATED IN VARIOUS SCRIPS THEREBY EARNING A SPECULATIVE PROFIT OF RS.1 10 469/-. THE ASSESSEE HAS ALSO TRADED IN FUTURES AND OPTIONS AND EARNED A PROFIT OF 9 90 189/- AND NETTED A BROUGHT FORWARD SPECULATION LOSS OF RS.5 29 282/-. THEREAFTER THE AO BY RELYING ON NUMBER OF CASE LAWS AS WELL AS AFTER QUOTING CIRCULAR NO. 4 OF 2007 DATED 15-06-2007 OF THE CBDT HELD THAT THE INCOME ARISING FROM PURCHASE AND SALE OF SHARES IS TO BE A SSESSED AS BUSINESS INCOME. AGGRIEVED THE ASSESSEE CARRIED THE MATTER IN APPEA L. THE FIRST APPELLATE AUTHORITY 4 ITA NO.6429/MUM/2009 & C.O. NO. 136/MUM/2010. AFTER CONSIDERING THE ARGUMENTS OF THE ASSESSEE HE LD THAT THE INCOME IN QUESTION IS ASSESSABLE UNDER THE HEAD CAPITAL GAINS. AGGRIEVE D THE REVENUE IS IN APPEAL. 3. THE CROSS OBJECTION FILED BY THE ASSESSEE IS ONL Y TO SUPPORT THE ORDER OF THE FIRST APPELLATE AUTHORITY. 4. WE HAVE HEARD MR. S.K. MOHANTY LEARNED DR ON BE HALF OF THE REVENUE AND MR. PRAMOD KUMAR PARIDA LEARNED COUNSEL FOR THE AS SESSEE. 5. ON A CAREFUL CONSIDERATION OF THE FACTS AND CI RCUMSTANCES OF THE CASE A PERUSAL OF THE PAPERS ON RECORD AND THE ORDERS OF T HE AUTHORITIES BELOW AS WELL AS THE CASE LAWS CITED WE HOLD AS FOLLOWS. 6. THE ASSESSEE IN THIS CASE HAS FILED A PAPER BOOK RUNNING INTO 47 PAGES. AT PAGE 10 THE DETAILS OF THE SHARES WHICH WERE SOLD AND WHICH GAVE RISE TO LONG TERM CAPITAL GAINS WERE LISTED OUT. A PERUSAL OF T HIS LIST SHOWS THAT IN THE CASE OF SATYAM COMPUTERS THE ASSESSEE HELD THE SHARES FROM MORE THAN 12 YEARS. IN THE CASE OF KITPLY INDUSTRIES THE SHARES WERE HELD FROM MORE THAN 10 YEARS. IN THE CASE OF PIDILITE INDUSTRIES AND RADICO KHAITAN THE SHARE S WERE HELD FOR MORE THAN 13 YEARS AND 11 YEARS. THE SHARES OF IFCI WERE ALSO HE LD FOR 11 YEARS AND 6 MONTHS. A PERUSAL OF THE PERIOD HOLDING DEMONSTRATES THAT TH E ASSESSEE HAS ACTED AS INVESTOR AND HAS HELD THESE 12 SCRIPS AS AN INVESTOR AND NOT AS A TRADER. THUS THE INCOME ARISING OUT OF SALE OF THESE 12 SCRIPS IN OUR HUMB LE OPINION IS TO BE ASSESSED ONLY UNDER THE HEAD LONG TERM CAPITAL GAINS. 7. COMING TO THE SALE OF SHARES WHICH RESULTED IN S HORT TERM CAPITAL GAINS WE DO NOT FIND ANY INTRADAY TRADING. IN THE CASE OF SP IC SHARES THE PERIOD OF HOLDING WAS MORE THAN 330 DAYS. SIMILARLY IN MANY CASES LIK E TATA TELE THE PERIOD OF HOLDING WAS MORE THAN 200 DAYS. MOST OF THE SHARES AS POINTED OUT BY THE 5 ITA NO.6429/MUM/2009 & C.O. NO. 136/MUM/2010. CIT(APPEALS) WERE HELD FOR A PERIOD OF 2 TO 5 MONT HS. THE ASSESSEE HAS OFFERED THE INCOME FROM SPECULATION AND INCOME FROM FUTURES AND OPTIONS AS BUSINESS INCOME. KEEPING IN VIEW THE FACTS OF THE CASE WE A RE OF THE CONSIDERED OPINION THAT THE ORDER OF THE CIT(APPEALS) AT PARA 5 WHICH IS EXTRACTED BELOW IS TO BE UPHELD : 5. DECISION WITH REASONING: 5.1 I HAVE CONSIDERED THE SUBMISSIONS OF THE REPR ESENTATIVE AND THE STAND TAKEN BY THE A.O. AS SEEN FROM THE ASSESSMENT ORDER DATED 31.10.2007 FOR A.Y. 2005-2006 THE A.O. HAS ACCEPTED THE CLAIM OF LONG TERM CAPITAL GAIN AND SHORT TERM CAPITAL LOSS IN RESPECT OF SHARES WH ICH WERE TAKEN DELIVERY AND SOLD THROUGH THE DEMAT ACCOUNT OF THE APPELLANT . IT IS ALSO SEEN THAT THE APPELLANT HAS SHOWN SPECULATION LOSS OF RS.5 29 282 /- FOR A.Y. 2005-2006. THUS THE A.O. DID NOT ASSESS THE LONG TERM CAPITAL GAIN AND SHORT TERM CAPITAL GAIN UNDER THE HEAD BUSINESS FOR A.Y. 2005-2006. ME RELY BECAUSE THE APPELLANT WAS HAVING SPECULATIVE BUSINESS IN SHARES THAT DOES NOT MEAN THAT EVEN THE DELIVERY BASED TRANSACTIONS OF SHARES SHOU LD BE ASSESSED UNDER THE HEAD BUSINESS. THE HONBLE HYDERABAD TRIBUNAL IN TH E CASE OF SHAH-LA INVESTMENTS AND FINANCIAL CONSULTANTS PVT. LTD. VS. DY. CIT (2 SOT 371) HELD THAT THERE IS NO BAR FOR THE SAME ASSESSEE TO DO BUSINESS IN SHARES AND HOLD SOME SHARES AS INVESTMENT. FURTHER AS CONTENDE D BY THE REPRESENTATIVE THE APPELLANT HAS NO BORROWED FUNDS EITHER AS ON 31 .03.2005 OR AS ON 31.03.2006 AS PER THE BALACE SHEET WHEREAS THE A.O. HELD IN THE ASSESSMENT ORDER AS [PARA 4.1.5] THAT THE APPELLANT BORROWED LOANS FOR THE PURPOSE OF DOING SHARE BUSINESS WHICH IS TOTALLY INCORRECT. FU RTHER THE APPELLANT HAS BROUGHT TO THE NOTICE OF THE A.O. BY LETTER DATED 1 5.10.2008 THAT THE SHARES ON WHICH LONG TERM CAPITAL GAIN WAS OFFERED WERE HE LD FOR MORE THAN 3-5 YEARS AND THE SAME ARE SHOWN AS INVESTMENT IN THE B ALANCE SHEET BUT THE A.O. HELD THAT ONLY SOME SHARES WERE HELD FOR MORE THAN A MONTH AND OTHER SHARES WERE HELD FOR A VERY SHORT PERIOD. EVEN IN R ESPECT OF SHORT TERM CAPITAL GAIN THE APPELLANT HAD ALREADY SUBMITTED BEFORE TH E A.O. THEY WERE HELD FOR ATLEAST 2-5 MONTHS AND FURTHER SUBMITTED THE DETAIL S OF DEMAT ACCOUNT TO PROVE THIS CLAIM. BUT THE A.O. MERELY HELD THAT THE SHARES WERE HELD FOR VERY SHORT PERIOD EXCEPT VERY FEW SHARES WHICH WERE HELD FOR MORE THAN A MONTH. THUS I FIND THAT THE A.O. DID NOT APPRECIATE THE F ACTS OF THE CASE CORRECTLY. AS SEEN FROM THE DETAILS OF LONG TERM CAPITAL GAIN WORKING SUBMITTED BY THE APPELLANT SOME SHARES SERE HELD EVEN FOR MORE THAN 12 YEARS. FOR EG. THE 6 ITA NO.6429/MUM/2009 & C.O. NO. 136/MUM/2010. APPELLANT PURCHASED SHARES OF SATYAM COMPUTER IN TH E YEAR 1992 AND THE SAME WERE SOLD DURING THIS YEAR AFTER HOLDING THEM FOR MORE THAN 12 YEARS. SIMILARLY SOME OTHER SHARES WERE HELD FOR MORE THA N 8 YEARS AND ONLY SHARES OF MC.DOWELL COMPANY WERE HELD FOR SLIGHTLY MORE TH AN A PERIOD OF ONE YEAR. ALL OTHER SHARES WERE HELD FOR MINIMUM OF TWO YEARS AND MAXIMUM OF 13 YEARS. THUS THERE IS NO REASON TO ASSESS LONG T ERM CAPITAL GAIN UNDER THE HEAD BUSINESS. SIMILARLY FOR SHORT TERM CAPITAL GAI N IT IS SEEN THAT MOST OF THE SHARES WERE HELD FOR MORE THAN A MONTH AND SOME SHA RES WERE HELD EVEN FOR MORE THAN 300 DAYS LIKE SPIC COMPANY SHARES. MOST O F THE SHARES WERE HELD FOR MORE THAN 100 DAYS WHILE IT IS TRUE THAT VERY F EW SHARES WERE HELD FOR LESS THAN 100 DAYS. THUS THE FINDING OF THE A.O. I S INCORRECT IN AS MUCH AS THE REMARK THAT ONLY FEW SHARES WERE HELD FOR MORE THAN ONE MONTH. WHEN THE A.O. HAS ACCEPTED THE BALANCE SHEET OF THE LAST YEAR IN WHICH THESE SHARES WERE SHOWN AS INVESTMENT HE CANNOT HANGE THE OPENI NG INVESTMENT AS STOK- IN-TRADE DURING THIS YEAR OTHERWISE IT WOULD BE CO NTRARY TO THE STAND TAKEN BY THE A.O. HIMSELF IN THE EARLIER YEAR. FURTHER I T IS SEEN THAT THE APPELLANT HAS PAID STT IN RESPECT OF SHARE TRANSACTIONS AS AP PLICABLE TO THE INVESTMENT. 5.2 FURTHER THE HONBLE ITAT IN THE CASE OF GOPAL PUROHIT VS. JCIT (29 SOT 117) HELD AS UNDER IN PARA 8.1 IN OUR VIEW THE LEGISLATIVE CHANGE OF THIS NATUR E WHEREBY NO CHANGE HAS BEEN MADE IN RESPECT OF NATURE AND MODUS OPERANDI O F SUCH SHARE TRANSACTIONS RESULTING INTO ANY ADVANTAGE CANNOT B E TAKEN AWAY BY THE REVENUE AUTHORITIES IN THIS MANNER AND IN THESE CIR CUMSTANCES WE ARE OF THE VIEW THAT PRINCIPLE OF CONSISTENCY THOUGH IT IS A N EXCEPTION TO THE PRINCIPLE RES JUDICATA MUST BE APPLIED HERE. IT IS FURTHER S O BECAUSE THE PAYMENT OF SECURITIES TRANSACTION TAX IS MANDATORY I.E. WHETHE R AN ASSESSEE EARNS THE PROFIT OR NOT OR SUFFERS A LOSS AND BY IMPOSITION O F SUCH TAX THE LEGISLATURE HAS NOT GIVEN ANY BENEFIT TO INDIVIDUAL(S) ENTERING INTO THESE TRANSACTIONS. THUS IN OUR VIEW IN THE FACTS AND CIRCUMSTANCES O F THE CASE ON THE BASIS OF PRINCIPLE OF CONSISTENCY ALONE THE ACTION OF THE R EVENUE AUTHORITIES IS LIABLE TO BE QUASHED.. 5.3 FURTHER THE HONBLE MUMBAI ITAT IN THE CASE O F JANAK S. KANGWALA VS. ACIT (11 SOT 627) HELD AS UNDER ON THE PRINCIPL E OF CONSISTENCY AND THE ISSUE OF MAGNITUDE OF TRANSACTIONS: THE MERE VOLUME OF TRANSACTION TRANSACTED BY HE ASSESSEE WOULD NOT ALTER THE NATURE OF TRANSACTION. IT IS AN ESTABLISH ED PRINCIPLE THAT INCOME IS TO BE COMPUTED WITH REGARD TO THE TRANSACTION. THE TRA NSACTION IN WHOLE HAS TO 7 ITA NO.6429/MUM/2009 & C.O. NO. 136/MUM/2010. BE TAKEN INTO CONSIDERATION AND THE MAGNITUDE OF TH E TRANSACTION DOES NOT ALTER THE NATURE OF TRANSACTION. THOUGH THE PRINCIP LE OF RES JUDICATA DOES NOT APPLY TO THE INCOME-TAX PROCEEDINGS AS EACH YEAR IS AN INDEPENDENT YEAR OF THE ASSESSMENT BUT IN ORDER TO MAINTAIN CONSISTENCY IT IS A JUDICIALLY ACCEPTED PRINCIPLE THAT SAME VIEW SHOULD BE ADOPTED FOR THE SUBSEQUENT YEARS UNLESS THERE IS A MATERIAL CHANGE IN THE FAC TS. THEIR LORDSHIPS OF HONBLE SUPREME COURT IN THE RADHASOAMI SATSANG V C IT [1992] 193 ITR 321 HAVE CATEGORICALLY HELD AS UNDER : STRICTLY SPEAKING RESJUDICATA DOES NOT APPLY T O INCOME-TAX PROCEEDINGS. THOUGH EACH ASSESSMENT YEAR BEING A U NIT WHAT WAS DECIDED IN ONE YEAR MIGHT NOT APPLY IN THE FOLLOWING YEAR WHERE A FUNDAMENTAL ASPECT PERMEATING THROUGH DIFFERENT ASSESSMENT YEAR S HAS BEEN FOND AS A FACT ONE WAY OR THE OTHER AND PARTIES HAVE ALLOWED THAT POSITION TO BE SUSTAINED BY NO CHALLENGING THE ORDER IT WOULD NOT BE AT ALL APPROPRIATE TO ALLOW THE POSITION TO BE CHANGED IN A SUBSEQUENT YEAR. THE SAME VIEW HAS BEEN TAKEN BY THE HONBLE DELHI COURT IN CIT V. NEO POLY PACK (P) LTD. [2000] 245 ITR 492. IN THE FACTS OF THE PRESENT CASE THE ASSESSEE IS HOLDING THE SHARES AS INVESTMENT FROM YEAR TO YEAR. IT IS THE INTENTION O F THE ASSESSEE WHICH IS TO BE SEEN TO DETERMINE THE NATURE OF TRANSACTION CONDUCT ED BY THE ASSESSEE. THOUGH THE INVESTMENT IN SHARES IS ON A LARGE MAGNI TUDE BUT THE SAME SHALL NOT DECIDE THE NATURE OF TRANSACTION. SIMILAR TRANS ACTION OF SALE AND PURCHASE OF SHARES IN THE PRECEDING YEARS HAVE BEEN HELD TO BE INCOME FROM CAPITAL GAINS BOTH ON LONG TERM AND SHORT TERM BASIS. THE P URCHASE OF SHARES IS SAME AS IN THE PRECEDING YEARS AND THE SAME MERITS TO BE ACCEPTED AS SHORT TERM CAPITAL GAINS. THERE IS NO BASIS FOR TREATING THE ASSESSEE AS A TRADER IN SHARES WHEN HIS INTENTION WAS TO HOLD THE SHARES I N INDIAN COMPANIES AS AN INVESTMENT AND NOT AS STOCK-IN-TRADE. THE MERE MAGN ITUDE OF TRANSACTION DOES NOT CHANGE THE NATURE OF TRANSACTION WHICH AR E BEING ASSESSED AS INCOME FROM CAPITAL GAINS IN THE PAST SEVERAL YEARS . 5.4 WHEN VIEWED IN THE LIGHT OF THE ABOVE JURISDIC TIONAL TRIBUNAL DECISIONS AND FOR THE OTHER REASONS GIVEN ABOVE I FIND THAT THE CLAIM OF THE APPELLANT HAS TO BE ACCEPTED. ACCORDINGLY THE A.O. IS DIRECTED TO ACCEPT THE CLAIM NOF SHORT TERM CAPITAL GAIN AND LONG TERM CAP ITAL GAIN. THE A.O. SHALL WITHDRAW REBATE ALLOWED U/S.88E OF THE I.T. ACT BY ORDER U/S. 154 DATED 03.02.2009 SO FAR AS IT RELATES TO CAPITAL GAIN. 8 ITA NO.6429/MUM/2009 & C.O. NO. 136/MUM/2010. 7. IN THE RESULT THE APPEAL OF THE REVENUE IS DISM ISSED. 8. AS FAR AS THE CROSS OBJECTION IS CONCERNED IT H AS BEEN FILED JUST TO SUPPORT THE ORDER OF THE CIT(APPEALS). HENCE IT REQUIRE NO SEPARATE ADJUDICATION. ACCORDINGLY THE CROSS OBJECTION IS DISMISSED. 9. IN THE RESULT THE APPEAL FILED BY THE REVENUEAS WELL AS THE CROSS OBJECTION FILED BY THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 25 TH FEBRUARY 2011. SD/- SD/- (N.V. VASUDEVAN) (J. SUDH AKAR REDDY) JUDICIAL MEMBER. A CCOUNTANT MEMBER MUMBAI DATED: 25 TH FEBRUARY 2011. WAKODE COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR B-BENCH (TRUE COPY) BY ORDER ASSTT. REGISTR AR ITAT MUMBAI.