1998-VIL-115-ITAT-DEL

Equivalent Citation: ITD 070, 161, TTJ 071, 810,

Income Tax Appellate Tribunal DELHI

Date: 27.10.1998

ARJUN KAPUR.

Vs

DEPUTY COMMISSIONER OF INCOME-TAX

BENCH

Member(s)  : B. M. KOTHARI., U. B. S. BEDI.

JUDGMENT

Per B. M. Kothari, Accountant Member - This appeal by the assessee is directed against the order dated19-12-1997 passed by the CIT(A) for assessment year 1994-95.

2. The assessee has raised as many as 9 grounds in this appeal. But all the grounds relate to the following two points :-

"(a) Whether profits on sale of shares of Rs. 72,60,985 derived by the appellant is assessable as long-term capital gains as declared by the assessee or the same is assessable as income from business and whether the shares in question sold by the assessee in the year under consideration were held by the appellant as 'investment' or as 'stock-in-trade'.

(b) If the aforesaid gain of Rs. 72,60,985 is held to be assessable as long-term capital gains, whether the assessee is entitled to grant of exemption under section 54F of Income-tax Act, 1961."

3. The appellant was a Mechanical Engineer and was running a small scale industrial unit before joining Delhi Stock Exchange (DSE). In the year 1990, the appellant became a Member of Delhi Stock Exchange Association and started the business of purchase and sale of shares on behalf of his clients under the trade name of M/s. Arjun Kapur & Co. Under the same banner, the assessee carried on his own business of purchase and sale of shares. Besides the aforesaid business, the appellant was also purchasing and selling shares in his individual name and investment in such shares were shown by him as 'investment'. The assessee maintained separate books of account in relation to his trading transactions carried out under the name and style of M/s. Arjun Kapur & Co. and in respect of investment in shares made by him which were held as 'investment' the shares which were held by the assessee as "investment", were got registered in his name in the records of the respective companies and income by way of dividend thereon were shown as dividend income and were assessed as such by the Assessing Officer in assessment year 1992-93 to assessment year 1993-94. The dealings in shares made by the assessee on behalf of his clients as well as the trading of shares done by the assessee as a part of his business under the name and style of M/s. Arjun Kapur & Co. were not registered in the name of the assessee and, therefore, the question of receiving any dividend thereon did not arise.

3.1 The Assessing Officer observed that the assessee apart from showing business income from dealing in shares, has also shown income from house property, income from short-term and long-term capital gains arising from sale of shares. The assessee also disclosed income from other sources on account of dividend and interest. The ITO observed that except for shares of Hindustan Livers and M/s. Kesoram Industries, shares of all other companies claimed to have been held as 'investment' were purchased by the assessee after he became a Member of DSE in July, 1990. The said Hindustan Livers shares and Kesoram Inds. Shares were sold during the year under consideration from which capital gains has been declared at 5.73 lakhs. As a Stock Broker of DSE, the assessee frequently dealt in purchase and sale of shares of various companies. The Assessing Officer observed that 'at best' the shares purchased by him prior to July, 1990 when he started his career as a regular Share Broker of DSE could be considered as having been acquired for non-business purposes as 'investment' to earn dividend income. Such shares when sold, would give rise to capital gains. On that basis the gains arising from the sale of shares of Hindustan Liver and Kesoram Inds. could be considered under the head 'Capital Gains'. But the capital gains derived on the remaining shares sold in the year under consideration, cannot be treated as capital gain as the shares acquired after becoming the Member of the DSE in its entirety should be treated as stock-in-trade. The profit derived on sale of all other shares acquired after July, 1990, should be treated as assessable under the head 'Income from Business'. The assessee had derived total capital gain of Rs. 75,94,531 in the year under consideration, which was claimed to be exempt under section 54F of Income-tax Act, 1961 on account of investment made in acquisition of the residential house in Defence Colony. The Assessing Officer further observed that the judgment of Hon'ble Supreme Court in the case of CIT v. Holck Larsen [1986] 160 ITR 67 / 26 Taxman 305 relied upon by the assessee, instead of supporting the assessee's case, supports the case of the Department. The Assessing Officer in view of the elaborate reasons given in the assessment order held that the income arising from sale of following shares excluding shares of Hindustan Liver Ltd. and shares of Kesoram Inds. which were acquired prior to 1990, has to be assessed as income from business :-

Saleconsideration of Essar Shipping 69,550

Less: Cost of acquisition 28,965 40,585

-------

Saleconsideration of Malwa Cotton 89,300

Less: Cost price 79,000

------ 10,300

Saleamount of JCT Ltd. 77,520

Less: Cost of acquisition 60,000

------ 17,520

Saleconsideration of India Glycol 24,400

Less: Cost 42,000

------ (-) 17,600

Saleof TVS Suzuki 1,00,800

Less:Cost 9,400

----- 91,400

Saleof Indian Hotels 80,01,000

Less: Consideration 10,09,220

--------- 69,81,780

Saleof Reliance Inds. 5,10,000

Less: Cost of Purchase 3,73,000

--------- 1,37,000

--------

72,60,985

--------

3.2 The Assessing Officer further observed that even if it is accepted that the income from sale of shares as above, has to be assessed under the head 'Capital Gains', the assessee will not be entitled for deduction under section 54F in view of the following reasons:-

3.3 The assessee purchased a residential House in Defence Colony in December, 1993. At that time the assessee was already owner of another residential property i.e. 73, Khan Market,New Delhi, which was acquired by him on11-5-1992. It was contended on behalf of the assessee that he has been utilising flat at Khan Market for commercial purposes by opening the office there, and hence it cannot be regarded as a residential house in his possession for the purposes of Section 54F of Income-tax Act, 1961. This plea of the assessee was rejected by the Assessing Officer on the ground that section 54F refers to the nature of the property and not the user of the same. The flat constructed as a residential unit will not cease to bear the character of a residential unit merely because the same has been put to use for official purposes by the owner. The Assessing Officer observed that section 54F refers to 'residential house, and not 'House used for residential purposes'. Thus according to the Assessing Officer, the actual user of the house is not a relevant consideration for determining the relief under section 54F. He, therefore, denied the assessee's claim for grant of deduction under section 54F.

3.4 The ld. CIT(A) confirmed the action of the Assessing Officer of treating the aforesaid transaction of purchase and sale of share as trading transaction and further held that the Assessing Officer was justified in taxing income shown under the head 'Short-term capital gain' and 'Long-term capital gain' as income from business. The CIT(A) further held that since the income shown under the head 'Long-term capital gain' has been confirmed by him as business income, the question of deduction under section 54F becomes an academic issue only. The CIT(A), however, further observed that the assessee has already acquired a residential flat on11-5-1992at 73, Khan Market,New Delhi. The said flat as per records of the M.C.D., was a residential property. The assessee had taken possession of the said flat on11-5-1992and he became its owner by virtue of provisions of section 2(47) of Income-tax Act, 1961 on that date. The assessee was, therefore, not entitled to deduction under section 54F even if he had earned any income from long-term capital gains. The CIT(A) thus confirmed the action of the Assessing Officer on this point also.

3.5 The ld. counsel for the assessee invited our attention towards detailed written submissions dated26th September, 1997submitted before the CIT(A). In the said written submissions, the facts explaining the urgent necessity of purchasing a residential house have been explained. It has been further pointed out that the shares held by the assessee as 'investment' had to be disposed of in order to meet the sources for purchase of the residential house property at Defence Colony. The major gain had occurred on account of sale of shares of Indian Hotels Ltd. The date of acquisition of shares of this company were furnished in the said letter. The details of sale of 8,200 shares of the said company sold for total sale price of Rs. 80.01 lakhs was also submitted. It was pointed out that 6,600 shares of the said company were purchased on12-11-1991. Out of that, 600 shares were sold in February, 1992. The profit derived on sale thereof was assessed as Capital Gains in assessment year 1992-93. The appellant continued to hold 6,000 shares as on31-3-1992. M/s. Indian Hotels issued the Right shares to the existing shareholders on23-7-1992. The appellant applied for 3,000 rights shares on17-8-1992. However, Indian Hotels allotted 2,287 rights shares. The assessee sold 8,200 shares of Indian Hotels in the accounting year ended on31-3-1994. The aforesaid shares along with the shares of few other public companies held by the assessee were sold in the year under consideration to meet the urgent need of purchasing a residential house property. The assessee was residing in a rented premises at No. 2,Mall Road,Delhisince October, 1973. In the year 1987, the landlady filed eviction suit in the court of Additional Rent Controller, Tis Hazari,Delhistyled as Suit No. E-38/87. The landlady unfortunately expired in the year 1987-88. Her son filed proceedings before the Hon'ble Delhi High Court praying for substitution of his name in place of his deceased mother. The case is styled as C.R. No. 190/93. Subsequently, the deceased's son filed a suit for eviction styled as Suit No. 175/94. In view of the aforesaid litigation, the appellant decided to find an alternative accommodation. With that purpose, the appellant entered into an Agreement for purchase of a residential house property at Defence Colony on22nd December, 1993. The ld. counsel also invited our attention towards copy of the said Agreement placed at page 87 of the Paper Book. He drew our attention particularly towards clauses 2 and 3 which contain the stipulations relating to payment of the total purchase price of Rs. 99 lakhs  in various instalments as indicated in clauses 2 and 3 of the said agreement.

3.6 The ld. lawyer also invited our attention towards second written submission dated26-12-1997submitted before the CIT(A) (page 128 to 133 of Paper Book). In this letter, the appellant had, inter alia, pointed out that he has maintained separate books of Account in respect of his transactions as a share broker under the trader name of Arjun Kapur & Co. The transactions related to brokerage, purchasing shares to be dealt in and transacted within the short span of time. The income from such business activities were disclosed by the assessee as business income. Apart from the above, the assessee maintained separate books of account described to be 'Arjun Kapur' in which the transactions relating to purchase of shares to be held as investments for a considerable long time, purchase of house property at Defence Colony, disbursement for income-tax, wealth-tax, LIC, household expenses etc. were recorded.It was further mentioned in the said letter that transactions as per the said separate personal set of books including transactions of shares held as 'investment' have been accepted in the assessments of the appellant till assessment year 1992-93. The various judgments were also referred and relied upon in the said written submissions.

3.7 The ld. counsel then invited our attention towards a chart placed at pages 26 to 29 of the compilation which gives the complete details of the shares of various companies held by the assessee as 'investments' since 1-4-1989 to 31-3-1994. This chart was submitted with a view to show that there are few transactions of sale of shares held as 'investment' in the accounting years commencing from1-4-1989till31-3-1993. In the accounting year ended on31-3-1994, more number of shares had to be sold for meeting the necessity of funds required for purchase of residential property at Defence Colony. The ld. counsel also invited our attention particularly towards the shares of all the 7 companies which were sold during the year under consideration and the income derived therefrom have been treated by the Assessing Officer as Business Income as against the income from capital gains declared by the assessee. The ld. counsel also invited our attention towards the statement of long-term capital gains considered as Business Income by the Assessing Officer placed at page 1 of the Paper Book.

3.8 The ld. Counsel placed reliance on judgments - Raja Bahadur Kamakhya Narain Singh v. CIT [1970] 77 ITR 253 (SC), CIT v. Madan Gopal Radhey Lal [1969] 73 ITR 652 (SC) and H. Holck Larsen's case (supra) to support his contention that a dealer of shares or a Member of Stock Exchange can validly hold some shares as 'investment', not forming part of his trading activities as a dealer or broker of shares. It will depend on the facts and circumstances of each case as to whether investments in particular share were made as investor and not as a trader. The ld. counsel also submitted that in assessment years 1992-93 and 1993-94, the gain derived by the assessee on the sale of shares held as 'investment, has been assessed to tax as Capital Gains. He was fair enough to point out that assessment for assessment year 1993-94 has been reopened under section 147 of Income-tax Act. But the assessment for assessment year 1992-93 has not been reopened.

3.9 The ld. counsel submitted that the assessee is clearly entitled to grant of deduction under section 54F against the long-term capital gains on sale of shares as claimed by the assessee. He pointed out that the flat at Khan Market bearing flat No. 73 was purchased vide Agreement to Sell executed on11th May, 1992. The registration of the said house property has not yet been executed in favour of the assessee. He submitted that section 54F uses the expression 'purchase' as against 'transfer' used in section 45 and section 2(47). Therefore, the rights in flat at Khan Market acquired vide Agreement dated11th May, 1992cannot be equated with purchase of a flat. The transaction of purchase of the flat will be treated as having been made only when the property is registered in favour of the assessee. The ld. counsel also pointed out that the flat at Khan Market was purchased by the assessee for his business office. The assessee was running a small scale industry at Sahibabad Industrial Estate nearDelhifrom 1973 till 1989. On account of competition from fairly large industrial houses, the assessee had to close the said business. In April, 1990, he was allotted Membership of Delhi Stock Exchange on account of the policy of the Stock Exchange to take the technical and professional persons as their Members. At that time the assessee was looking for a place for his office and was able to locate the flat at First Floor at Khan Market. The flat was purchased for business purposes. The office of the assessee's business is located at the said premises. He further pointed out that various other business concerns are using the flats at first and second floor at Khan Market for their business purposes in similar manner. A list of such business offices located in other flats of the same building at Khan Market has been submitted at page 127 of the paper book. The ld. counsel further pointed out that flat at Khan Market purchased and used by the assessee for its own business cannot be considered as owning one more residential for the purposes of section 54F. It was pointed out that the proviso to section 54F clearly provides that the assessee should not own or purchase within the prescribed period any residential house, the income from which is chargeable under the head 'Income from house property'. He drew our attention to section 22 of Income-tax Act, 1961 which specifically excludes the building or portion of such property as the assessee may occupy for the purposes of any business or profession carried on by him. Therefore, the annual value of the flat at Khan Market which is used by the assessee for its business purposes ever since its purchase, cannot be treated as chargeable to Income-tax under the head 'Income from House Property'. He, therefore, submitted that the flat at Khan Market acquired by the assessee, even if it is treated to have been purchased without their being a Registered Deed, would not disentitle the assessee to get deduction under section 54F because the annual value of the said flat used for business purposes is not chargeable under the head 'Income from House property'. The ld. counsel also invited our attention towards written submissions dated26th September, 1997submitted to the CIT(A) to point out that Assessing Officer had allowed deductions in respect of electricity charges, Municipal Tax and depreciation on the cost of the said flat at Khan Market while computing the business income of the assessee.

3.10 The ld. counsel also relied upon judgments in CIT v. NewIndiaMaritime Agencies (P.) Ltd. [1994] 207 ITR 392 (Mad.), CIT v. Vazir Sultan Tobacco Co. Ltd. [1988] 173 ITR 290 (AP) and Bhilai Engg. Corpn. Ltd. v. Dy. CIT [1997] 63 ITD 223 (Nag)(SB) to support the various submissions made by him with regard to grant of deduction under section 54F.

3.11 The ld. council thus strongly urged that all the grounds raised by the assessee in his appeal should be allowed. The income derived on sale of shares should be treated as assessable under the head 'Capital Gains' and the Assessing Officer should be directed to grant deduction under section 54F against the income from Long-Term Capital Gains on sale of shares.

3.12 The ld. D.R. submitted that the order of the CIT(A) is an elaborate and speaking order. It contains detailed reasons on the basis of which the CIT(A) has confirmed the findings given by the Assessing Officer. The ld. D.R. also pointed out that the distinctive number of shares sold by the assessee have not been given in the absence of which it cannot be ascertained whether the shares sold in the year under consideration were out of the old shares held by the assessee as 'investment' as on 1-4-1992 or 1-4-1993 or the shares sold during the year were out of the purchase of shares of those companies in the year under consideration itself. He also relied upon the elaborate reasons mentioned in the assessment order. The ld. D.R. further submitted that the shops at Khan Market are registered as residential flats.The nature of the property has to be determined on the basis of the fact whether the flat is capable of being used as a residence or not. The assessee can use the same flat for residence. The mere fact that the residential flat is being used for business purposes would not alter the nature of the property. He strongly relied upon the reasons mentioned in the assessment order as well as in the order of the CIT(A).

3.13 We have carefully considered the submissions made by the ld. representatives of the parties and have gone through the orders of the Ld. Departmental Authorities, various documents submitted in the compilation to which our attention was drawn during the course of hearing and also the various judgments relied upon by the ld. representatives of both sides.

3.14 The assessee has submitted a chart at page 1 of the Paper Book, the contents of which are reproduced hereunder. Statement of long-term capital gains considered as business income by Assessing Officer (DCIT)

Name of the scrip

Date Sold

Qty. Amount Date Bought

Qty. Amount Gain

Rupees

Essar

Shipping25-9-1993200 12,05017-09-1990600 26,400

21-03-1994500 57,50001-02-1991100 2,565

------------- -------------

700 69,550 700 28,965 40,585

------------- -------------

Malwa

Cotton31-01-1994100 40,30028-02-1992200 79,000

23-02-1994100 49,000

------------- -------------

200 89,300 200 79,000 10,300

------------- -------------

JCT Ltd22-01-19941200 77,52028-12-19921200 60,000 17,520

IndiaGlycol20-04-1993500 20,50016-08-1991600 42,000

23-06-1993100 3,900

------------- -------------

600 24,400 600 42,000 17,600

------------- ------------

TVS

Suzuki14-02-1994500 71,00003-04-1991400 5,200

17-02-1994200 29,80005-04-1991300 4,200

------------- ------------

700 1,00,800 700 9,400 91,400

------------- ------------

Indian

Hotels26-04-1993900 2,48,40012-11-19916000 8,82,000

02-03-19947300 77,52,60001-10-19922287 1,37,220  Ave. Cost 8200 10,08,520

-------------- --------------

8200 80,01,000 8200 10,08,520 69,92,480

Reliance Ind.14-08-19932,000 5,10,00005-08-19921000 1,76,500

11-08-19921000 1,96,500

--------------- --------------

2000 5,10,000 2,000 3,73,000 1,37,000

-------------- -------------- ---------

Total 72,71,685

---------

3.15 The aforesaid chart shows that the major amount of long-term capital gains relates to sale of 8200 shares of Indian Hotels. The details of investment in shares submitted at page 26 to 29 were also examined. These details coupled with the facts mentioned in the aforesaid chart show that the assessee had purchased 6,600 shares during the financial year ended on31-3-1992. Out of the same, 600 shares were sold in the same financial year ended on31-3-1992. The profit on sale of these shares was charged to tax as Capital Gains. Such a submission was specifically made before the Lower Authorities, which has not been controverted by the Assessing Officer or by the CIT(A) nor by the Ld. D.R. before us. The assessment made for assessment year 1992-93 has also not been reopened under section 147 or revised under section 263. The assessee was left with 6,000 shares of this company as on1-4-1992. The assessee further acquired 2,287 shares as right Shares in the financial year ended on31st March, 1993. No shares of this company were sold in the year. The assessee held 8,287 shares at the beginning of the year under consideration on 1 -4-1993. Out of that the assessee sold 8,200 shares in the accounting year under consideration. The assessee did not purchase any shares of this company in the year under consideration. The assessee also did not purchase any shares of this company from the market in the preceding year also. The assessee only acquired Right Shares, which were offered by the company to its existing shareholders. It is an undisputed fact that investment made in the aforesaid shares was reflected as 'investments' in the personal set of books of account separately maintained by the assessee and these shares were not incorporated in the books of account of the business concern which carried on the business of dealer and brokers of shares under the name and style of M/s. Arjun Kapur & Co. The assessee has also explained the reasons which necessitated the sale of such shares held as 'investment'. The aforesaid shares held as 'investment' were sold by the assessee for purchase of a residential house property at Defence Colony,New Delhi. There appears to be no justification in holding that the gain of Rs. 69,92,480 derived by the assessee on the sale of 8,200 shares of Indian Hotels is assessable as business income and not as income from long-term capital gains as claimed by the assessee. Regarding gain of Rs. 40,585 derived on sale of 700 shares of Essar Shipping:

3.16 The details at page 27 of the compilation show that the assessee had purchased 1600 shares of this company in the accounting year ended on31st March, 1991. The assessee further acquired 9000 shares in the year ended on31-3-1992. It also sold 500 shares in the same accounting year. As on1-4-1992, the assessee held 10100 shares. He further purchased 2200 shares in the accounting year ended on31-3-1993. The assessee also sold 11200 shares in the accounting year ended on31-3-1993. The profit derived on the sale of the said shares was originally assessed as capital gain but the assessment for assessment year 1993-94 has been reopened under section 147 of the Income-tax Act. The assessee was left with 1100 shares as on1-4-1993. He further purchased 2200 shares of this company in the year under consideration. The assessee sold 700 shares in the year under consideration ended on 31 -3-1994 and was left with 2600 shares at the end of the year on 31 -3-1994. The ld. counsel for the assessee was required to state as to whether the distinctive number of the 700 shares sold during the year under consideration were submitted to the lower authorities or that information is available in the compilation or not. He pointed out that no such information was called for by the Assessing Officer nor the said information was furnished. This query was made with a view to ascertain as to whether 700 shares sold during the year were out of the opening balance of 1100 shares held by the assessee as on 1-4-1993 or those were sold out of 2200 shares purchased during the year under consideration itself. A perusal of the chart placed at page 27 indicates that in the year ended on 31-3-1991, the assessee had purchased 1600 shares and no sale of shares of this company was made in that year. However, in Financial year 1991-92,the assessee purchased 9000 shares and sold 500 shares. Again in financial year 1992-93, the assessee purchased 2200 shares of this company and also sold 11200 shares. In financial year 1993-94, he purchased 2200 shares and also sold 700 shares. The frequency of purchase and sale of shares of this company is more as compared to shares of other companies held by the assessee as investment. The assessee also could not show as to whether the 700 shares sold in this year were out of shares purchased in the year under consideration or out of purchase of shares made in the earlier years. It is true that the deduction in respect of the cost of shares claimed by the assessee and allowed by the Assessing Officer indicates that the 700 shares claimed as sold were acquired on17-9-1990and1-2-1991. The 1600 shares purchased in the year ended on31st March, 1991clearly appear to have been purchased with a view to make investment in the shares of that company. This is proved by the fact that no share was sold in financial year 1990-91 and the investment made was shown as investment in the personal set of books. There is no evidence on record to show that 1600 shares originally purchased in financial year 1990-91 and held as 'investment' were converted as stock-in-trade at a latter point of time. If the 700 shares sold during the year under consideration are part of those very shares which were acquired on17-9-1990and1-2-1991as claimed by the assessee, the same would be assessable as long-term capital gains. However, if these 700 shares sold during the year under consideration, are out of the shares purchased in the year under consideration, the same cannot be considered as long-term capital gains. In order to ascertain the true facts, it is necessary to restore back the matter to the Assessing Officer for verifying the distinctive numbers of the 700 shares sold by the assessee in the year under consideration. If the 700 shares sold during the year are found to be out of 2200 shares purchased in this very year, the view of the Assessing Officer that the gain of Rs. 40,585 is assessable as business income will have to be upheld in view of assessee's own submissions made in written submissions dated 26-12-1997 submitted before the CIT(A) in which the assessee inter alia state, that shares purchased for being transacted within short span of time were treated as part of his business transactions. The mere fact that the purchase of 2200 shares of this company in the year under consideration was accounted for in the personal books of account will not alter the true nature of the transaction of purchase and sale of shares of this company made by the assessee. The determination of the nature of profit on sale of shares of Essar Shipping is, therefore, restored back to the Assessing Officer for deciding the same afresh after verification of the correct distinctive numbers of the shares sold during the year and the date of its purchase by the assessee. Profit of Rs. 1,37,000 derived on sale of 2000 shares of Reliance Industries

3.17 The fact relating to the profit derived from sale of shares of Reliance Industries are also almost similar as that of profit derived on sale of shares of Essar Shipping as discussed in the preceding para. The assessee sold 2000 shares on14-8-1993. The distinctive number of shares of this company sold by the assessee were not furnished before the Departmental authorities nor before us. The assessee had been purchasing and selling shares of this company from the financial years 1990-91 to 1993-94. In the year under consideration, the assessee purchased 2250 shares of this company. He also sold 2000 shares in this very year in the absence of details as to distinctive numbers, it is not possible to ascertain whether the shares sold during the year under consideration were out of the shares purchased during the year under consideration or those were out of the purchases of shares made by the assessee in the earlier year, as claimed by the assessee. The Assessing Officer should examine the relevant documents of sale as well as corresponding purchase of shares, which have been sold in this year. This matter is also restored back to the Assessing Officer for deciding the nature of profit of Rs. 1,37,000 afresh after ascertaining the true and correct facts including the distinctive numbers, the date of purchase and sale of the shares in question sold in the year under consideration.

4. As regards the profit derived by the assessee on the sale of shares of remaining companies in question,we have gone through the relevant details furnished in the charts at page 26 to 29 of the Paper Book and find that the assessee did not purchase any shares of Malwa Cotton, JCT Ltd., India Glycol and T.V.S. Suzuki in the year under consideration. The shares sold during the year under consideration were purchased in prior years which were held as 'investment'. There is no material on record to justify the view taken by the Assessing Officer for holding the amount of gain derived on the sale of shares of these other companies as assessable under the head 'Income from Business'. The profit/loss derived by the assessee on the sale of shares of Malwa Cotton, JCT Ltd., India Glycol and T.V.S. Suzuki are held as assessable to tax under the head 'Long-term capital gains'.

4.1 It may be relevant here to mention that while considering the aforesaid point, we have borne in mind the principles of law laid down by the Hon'ble Supreme Court in the various judgments cited by the ld. representatives of both sides during the course of hearing. It would be imperative to reproduce the relevant extracts from the various judgments cited by the ld.representatives.

4.2 The CIT(A) while confirming the view taken by the Assessing Officer, had taken into consideration the judgment of Hon'ble Supreme Court in the case of Raja Bahadur Kamakhya Narain Singh (supra) and has quoted the extracts from the said judgment at page 8 of the impugned order. The Hon'ble Supreme Court in the aforesaid case had reversed the judgment of Patna High Court in Raja Bahadur Kamakhya Narain Singh of Ramgarh v. CIT [1964] 53 ITR 663. Before we reproduce the relevant extracts from the judgment of the Hon'ble Supreme Corn t, it may be relevant to reproduce the findings given by the Patna High Court which have been reversed by the Hon'ble Supreme Court in the said judgment:-

"An Income-tax Officer making an inquiry as contemplated by the Income-tax Act for the purpose of assessing a person is not a court and the rule of res judicata applicable to the decisions of civil Courts does not apply to the decisions of the Income-tax Officer. Nor do the decisions of such officers in assessing the income constitute estoppel by record against the income-tax officials. Though an Income-tax Officer is not bound by the rule of the res judicata or estoppel by record, he can, however, reopen a matter of assessment only if fresh facts come to light which on investigation would entitle him to come to a different conclusion. There is, therefore, no bar to the Income-tax Officer coming to a conclusion that the assessee was a dealer in shares in the relevant year, even though in the earlier years, on somewhat similar facts, he had been held not to be a dealer. Where, owing to the isolated transactions then coming to the knowledge of the Appellate Tribunal the assessee was held only to be an investor in shares in certain years, but later, in the relevant accounting year, the Appellate Tribunal took into account: (i) the frequency with which the assessee purchased and sold shares; (ii) the shortness of the interval between the purchase and the sale of several cases; (iii) the largeness of the amount of money being reserved by the assessee for this activity; and (iv) the borrowing by the assessee of nearly 5 lakhs of rupees for purchase of shares, and held that the assessee was a dealer in shares in that year :

Held that the Tribunal had before it fresh material for coming to the conclusion that the assessee was a dealer in shares."

4.3 The Hon'blePatnaHigh Court had also considered the question whether gold was sold by the assessee only for the pressing necessities or for the purpose of deriving profit therefrom, is a question of fact. The findings in relation to that point are not reproduced as it does not have any significant bearing to the point in issue.

4.4 The Hon'ble Supreme Court in the judgment in Raja Bahadur Kamakhya Narain Singh 's case (supra), reversed the aforesaid judgment of Hon'ble Patna High Court. It may be worthwhile to reproduce the findings given by the Hon'ble Supreme Court at page 262 of the said judgment:-

"It is fairly clear that where a person in selling his investment realises an enhanced price the excess over his purchase price is not profit assessable to tax but it would be so, if what is done is not a more realisation of the investment but an act done for making profits. The distinction between the two types of transactions is not always easy to make. The distinction whether the transaction is of one kind or the other depends on the question whether the excess was an enhancement of the value by realising a security or a gain in an operation of profit-making. If the transaction is in the ordinary line of the assessee's business there would hardly be any difficulty in concluding that it was a trading transaction, but where it is not, the facts must be properly assessed to discover whether it was in the nature of trade. The surplus realised on the sale of shares, for instance, would be capital if the assessee is an ordinary investor realising his holding; but it would be revenue if he deals with them as an adventure in the nature of trade. The fact that the original purchase was made with the intention to resell if an enhanced price could be obtained is by itself not enough but in conjunction with the conduct of the assessee and other circumstances it may point to the trading character of the transaction. For instance, an assessee may invest his capital in shares with the intention to resell them if in future their sale may bring in higher price. Such an investment, though motivated by a possibility of enhanced value, does not render the investment a transaction in the nature of trade. The test often applied is, has the assessee made his shares and securities the stock-in-trade of a business.

4.5 The extracts reproduced by the CIT(A) from the aforesaid judgment of the Hon'ble Supreme Court without giving the context in which it were given, has resulted in mis-application of the ratio of the said judgment on the facts of the present case. The Patna High Court in the aforesaid judgment has held that the assessee was a dealer in shares in the relevant accounting year. The Hon'ble Supreme Court has reversed that finding and has held that the profits made on the same of shares on the facts of the said case were on capital account and not on revenue account. In the present case also, the Assessing Officer has not brought any material on record to show that the shares held by the assessee as 'investment' from the earlier years were converted as stock-in-trade of his business.

4.6 The ld. counsel for the assessee had placed reliance on the following judgments to support his contention that a trader of shares may also acquire shares for his own purposes and hold the same as 'investment' apart from the stock-in-trade of his business of dealer in shares :-

(i) CIT v. Madan Gopal 73 ITR 652

"Held, (i) that, at the relevant time, under the Income-tax Act, 1922, issue of bonus shares by capitalisation of the accumulated profits was not treated as distribution of dividend; and it was well-settled that bonus shares given by a company in proportion to the holding of equity capital by a shareholder were, in the absence of any express provision to the contrary, liable to be treated as capital and not income. The bonus shares, by the mere fact that they were received by the assessee in respect of their stock-in-trade and as accretion thereto, did not became part of their stock-in-trade; the bonus shares were received as capital and they could be converted by the assessees into their stock-in-trade or retained as their capital asset. A trader may acquire a commodity in which he is dealing for his own purposes, and hold it apart from the stock-in-trade of his business. There is no presumption that every acquisition by a dealer in a particular commodity is acquisition for the purpose of his business; in each case the question is one of intention to be gathered from the evidence of conduct by the acquirer and his dealings with the commodity."

(ii) CIT v. H. Holck Larsen, 160 ITR 67

"Held, (i) that the question whether the transactions of sale and purchase of shares were trading transactions or were in the nature of investment was a mixed question of law and fact;

(ii) affirming the decision of the High Court, that the Tribunal fell into error in not taking into consideration properly and fully the fact that if the right shares were not subscribed by the assessee, his original shares would depreciate in value, that the assessee was also in need of money - he had an overdraft with bank and he had to remit money to Denmark for the purchase of a house - and further when right shares were issued, had he not subscribed to them, there might have been adverse effect on the market so far as the shares of the company were concerned. In the background of the correlation of these factors, the action of the assessee was like a prudent investor and not of a plunger in the waters of trade. The attitude of a person entitled to right shares was not viewed by the Tribunal in proper dimension resulting in non-consideration of a vital factor leading to an erroneous inference and the High Court was justified in interfering with the conclusion reached by the Tribunal and right in holding that the respondent was not a dealer in shares. Consideration of all relevant facts involves appreciation of all the facts in their proper perspective. If that is not done, it cannot be said that there has been consideration of all relevant factors. 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 in 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."

4.7. In view of the aforesaid judgments, it is clear that in order to determine whether an assessee held the shares as "investment' or a stock-in-trade, facts and circumstances of each case will have to be examined and totality of the facts will have to be borne in mind and the correct legal principles will have to be applied to those facts.

4.8 In the present case, it is undisputed fact that the assessee has shown such shares as "investment" in a separate personal set of books of account. The shares purchased by the assessee in the course of his business as dealer of shares have been accounted for in the separate books of account maintained under the name and style of M/s. Arjun Kapur & Co. It is true that entries in the books of account or the treatment given by the assessee in his balance-sheet is not conclusive, but it is a relevant evidence which cannot be brushed aside in the absence of any material or evidence brought on records to show that the apparent as claimed by the assessee is not true and correct. It is also well-settled law that the onus of proving that the apparent is not real is on the person who asserts the same. In the present case, the Revenue has alleged that the shares sold by the assessee should be treated as stock-in-trade and not as investment as claimed by the assessee. Therefore, the burden lies on the Revenue to prove that the shares were held by the assessee not as investment as claimed by him but that represent stock-in-trade. No such evidence has been brought on records by the Revenue to discharge such a burden. On the other hand, the assessee submitted that shares which were acquired in the course of business were separately accounted for in the account of the business concern, those shares were not got registered in the name of the assessee in the records of the respective companies and no dividend income was received on those shares which were representing stock-in-trade of the assessee. The shares purchased by the assessee and held as "investment" have been accounted for in the separate personal set of books of account. All those shares were duly got registered in the name of the assessee. When part of such investment portfolios were sold, those were transferred by the assessee in favour of the transferor. Dividend income received on those shares was duly accounted for and assessed to tax as income from dividend. These shares were generally retained by the assessee for a long period. The shares purchased in the course of business activities as a dealer were purchased for short span of time. It is difficult to exactly define what is the short span of time or long span of time. While giving the findings for acceptance of assessee's contention in relation to long-term capital gains, we have also kept in view that shares held for a period of one year, which is treated as a long-term capital gains as per the provisions of I.T. Act, should be considered as shares acquired and held for a long span of time. We have also taken note of the fact that profit on sale of some of the shares held as "investment" has been subjected to tax as long-term capital gains in assessment year 1992-93 in assessee's own case. The assessment made for assessment year 1992-93 has neither been reopened under section 147 nor subjected to revision under section 263.

4.9. Considering the totality of the facts and circumstances of the present case, in the light of the legal principles enunciated in the aforesaid judgments, we have held herein before that the capital gain derived by the assessee on the sale of shares of the following companies should be treated as assessable as long-term capital gains and not as business income :-

Sr. No. Name of the Company No. of shares

1. Malwa Cotton 10,300

2. JCT Ltd. 17,520

3. TVS Suzuki 91,400

4. Indian Hotels 69,81,780 71,01,000

Less : Long-term capital loss on shares of

IndiaGlycol (-) 17,600

Long-term capital gains 70,83,400

4.10 We have further held that the matter relating to determination of nature of profit on sale of shares of Essar Shipping Co. Rs. 40,585 and on sale of shares of Reliance Inds. Rs. 1,37,000 should be restored back to the Assessing Officer for passing a fresh order after ascertaining the relevant facts and distinctive numbers of the shares sold etc.

5. We will now consider the assessee's claim for grant of deduction under section 54F.

5.1 It will be worthwhile to reproduce the provisions of section 54F of the Income-tax Act, 1961 :-

"Capital gain on transfer of certain capital assets not to be charged in the case of investment in residential house.

54F. (1) Subject to the provisions of sub-section (4), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of any long-term capital asset, not being a residential house (hereinafter in this section referred to as the original asset), and the assessee has, within the period of one year before or (two years) after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house (hereinafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,-

(a) if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45;

(b) if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45 :

Provided that nothing contained in this sub-section shall apply where the assessee owns on the date of the transfer of the original asset, or purchases, within the period of one year after such date, or constructs, within the period of three years after such date, any residential house, the income from which is chargeable under the head "Income from house property", other than the new asset."

5.2 It may also be necessary to reproduce section 22 of the Act.

"Income from house property -

22. The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portion of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head "Income from house property".

5.3 The ld. counsel for the assessee contended that since no Purchase Deed was registered in favour of the assessee in relation to flat acquired by the assessee in Khan Market, it should not be held that the assessee has purchased or owned other residential property other than the residential house purchased at Defence Colony. This contention cannot be accepted. The ld. CIT(A) has given a finding of fact that the assessee had entered into an agreement for purchase of flat No. 73, Khan Market, New Delhi vide Agreement dated 11-5-1992 and it also received the possession of the said property on 11-5-1992. The definition of Section 2(47) of Income-tax Act, 1961 is very wide and includes such a transaction within its ambit. The provisions of Section 2(47) are clearly applicable in relation of interpretation of all the provisions relating to determination of capital gain liable to tax. Therefore, the CIT (A) has rightly held that the assessee became owner of the flat No. 73, Khan Market, New Delhi on 11 -5-1992 in view of the clear provisions of Section 2(47).

5.4 However, the other argument made by the ld. counsel for the assessee that the flat at Khan Market cannot be treated as a property, the income of which is chargeable under the head "Income from House Property" deserves acceptance, as the said flat at Khan Market was used as assessee's business office ever since its purchase and the same clearly falls outside the scope of income chargeable to tax under the head "Income from House Property". The Assessing Officer has himself granted deduction in respect of Municipal Tax, electricity expenses and depreciation on the cost of the said flat at Khan Market, in view of the undisputed fact that it was wholly and solely used for business purposes of the assessee. He derived support from the plain language of the proviso to section 54F and section 22 of the Income-tax Act, 1961.

5.5 The ld. counsel also placed reliance on the judgment in the case of Vazir Sultan Tobacco Co. Ltd. (supra), the Head Note thereof is reproduced hereunder :-

"The assessee owned certain buildings which it allotted for the occupation of its directors and other senior executives. It did not collect any rent from them. The Income-tax Officer held that notional income from these properties should be determined and assessed as income from house property but the Tribunal held that it was assessable as income from business. The assessee claimed that the buildings should be treated as business assets for purposes of section 40A(5) of the Income-tax Act, 1961. It also claimed that the cost of repairs to buildings owned by the assessee and those taken on lease by it and allotted to its employees, expenditure incurred for replacement of crockery used by the employees in the buildings allotted to them, the reimbursement of medical expenses of its employees, the difference between the concessional rate of interest and the prevailing market rate of interest on loans advanced to the employees and the expenditure on account of sweepers, watchmen and gardeners could not be considered as perquisites for purposes of section 40A(5).

Held, (i) that the properties were occupied for the business purposes of the assessee. The income from the properties was, therefore, assessable as income from business."

5.6 He also relied upon the judgment in the case of New India Maritime Agencies (P.) Ltd. (supra). The Head Note is reproduced hereunder :-

"Held, that when a company gives its house as residence to its director, it is doing so only in the course of its business. The principle is that if the owner of a property carries on business with a property owned by him, the income from that property must be assessed as only 'income from business'. Since the Tribunal found that the house property had been used by the assessee as a part of the business and treated as business, the finding of the Tribunal that the income from the property could not be assessed separately as income from house property and included in the assessee's total income was correct."

5.7 A plain reading of the proviso to section 54F and section 22 of Income-tax Act, 1961 clearly indicates that the benefit allowable under section 54F can be denied only in a case where the assessee owns one more residential house property other than the new residential house property purchased out of capital gains derived by the assessee for which deduction under section 54F has been claimed. The other residential house which can disentitle the assessee from getting the benefit of deduction under section 54F should be such a house, the income from which is chargeable under the head "Income from House Property". In the present case, the flat at Khan Market has undisputedly been used for office premises of the business carried on by the assessee. The annual value of such a flat used for assessee's own business cannot be charged to tax as income from house property in view of the clear provisions of section 22 of the Income-tax Act, 1961. We are, therefore, of the considered opinion that the assessee is entitled to get deduction under section 54F in respect of long-term capital gains on sale of shares held as "investment" which is stated to have been utilised for purchase of a residential house at Defence Colony,New Delhi. The Assessing Officer is directed to grant deduction in accordance with the provisions of section 54F of the Income-tax Act, 1961.

6. In the result, the appeal is treated as partly allowed for statistical purposes.

 

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