Vildirect: IncomeTax-caselaws-2010-VIL-419-ITAT-MUM

2010-VIL-419-ITAT-MUM

Equivalent Citation: [2010] 1 ITR 783

Income Tax Appellate Tribunal MUMBAI

Date: 06.01.2010

SURESH KUMAR SEKSARIA AND URMILA SEKSARIA

ASSISTANT COMMISSIONER OF INCOME-TAX

The order of the Bench was delivered by Rajendra Singh (Accountant Member).-These appeals are directed against identical orders dated June 19, 2007 by the Commissioner of Income-tax (Appeals) for the assessment year 2004-05 in the case of the assessees under reference who are husband and wife. As an identical dispute is involved in both the appeals, these are being disposed of by a single consolidated order for the sake of convenience. The dispute is regarding treatment of income from sale of shares, viz., whether it should be treated as long-term capital gain as declared by the assessees or it should be treated as business income as held by the Assessing Officer.

BENCH

Order

JUDGMENT

Briefly stated the facts of the case are that the Assessing Officer during the assessment proceedings noted that the assessees were dealing in shares having a large number of transactions with heavy volumes into several scrips. In addition to declaring profit/loss from trading in shares, the assessees also declared long-term capital gain of Rs. 20,89,926 and Rs.4,18,358 respectively arising from several purchases and sales of shares with heavy volume. The Assessing Officer after examining the frequency, volume, quantum of trade and the time spent in share transaction activities, observed that the assessees were engaged in the business of dealings in share transactions on full time. He referred to several judgments to point out that even a single transaction of purchase and sales outside the assessee's line of business could constitute adventure in the nature of trade. It was observed by him that, in this case, the transactions from which longterm capital gain had been declared were numerous involving high volume which clearly showed that the assessees were involved in the business activities and therefore he did not accept the claim of the assessee that certain transactions were investments while others were trading transactions. Accordingly he treated the long-term capital gain shown by the assessees as their business income.

In appeal the assessee submitted that the investment and trading in shares were two separate activities for which separate accounts had been maintained in the books. Merely because the assessees were also trading, could not be ground to hold that the assessee could not be an investor in shares. It was pointed out that in earlier years also, the shares were held as investments and these had been accepted by the Department and therefore the Revenue could not deviate from the accepted position in the past. The Commissioner of Income-tax (Appeals) was however not satisfied by the explanation given by the assessee. It was observed by him that entries made in the books were not conclusive in understanding the true nature of the transaction which has to be decided on the principles of law. The assessees undoubtedly were dealing in high volume of shares. Some shares were bought and sold in a few days while others were not sold and were held beyond more than one year due to market conditions. The frequency and volume of transactions was large running into hundreds of scrips. He referred to several judgments to point out that while determining the nature of the transactions, the magnitude of purchase and sale, the period of holding and motive behind it are required to be seen. Considering the volume of transactions, the number of scrips dealt in and the fact that the assessees were already engaged in trading of shares, the Commissioner of Income-tax (Appeals) concluded that the assessees had wrongly bifurcated some transactions as trading and some as investments with a view to evade tax. The investments shown in the books of account were nothing but stock-in-trade wrongly classified as investment. Accordingly he upheld the order of the Assessing Officer assessing the capital gain declared as profits from business. Aggrieved by the said decision, the assessee is in appeal.

Before us the learned authorised representative for the assessee reiterated the submissions made before the lower authorities that in addition to trading in shares, the assessees were also investors who had maintained separate accounts of investments and trading in shares. He referred to the balance-sheet placed on page 29 of the paper book to show that the investment in shares and the closing stock of trading shares had been shown separately on the assets side. Similarly in the profit and loss account placed at page 30 of the paper book, income from long-term capital gain and profit from trading in shares had been shown separately. It was submitted that at the time of purchase itself, the assessee was classifying a particular transaction as either trade or investment in the books. It was pointed out that similar patterns of investment and trade in the balance-sheet for the assessment years 2002-03 and 2003-04 (pages 71 to 92 of the paper book) had been accepted. The learned authorised representative also pointed out that the Commissioner of Income-tax (Appeals) was not correct in stating that in earlier years, investments had been accepted summarily under section 143(1). He referred to the copy of the assessment order for the assessment year 2001-02 placed at pages 98 to 102 of the paper book in which the investment and the long-term capital gain had been accepted by the after scrutiny under section 143(3).

The learned authorised representative further submitted that no borrowed funds had been utilised for making investments. He referred to the profit and loss account placed at page 32 of the paper book in which the entire interest expenditure had been claimed against the income from trading in shares which showed that no borrowed funds were utilised for making investments. It was pointed out that even in Circular No. 4 of 2007 ([2007] 291 ITR (St.) 384) dated June 15, 2007, the Central Board of Direct Taxes clearly stated that it was possible for a taxpayer to have two portfolios, i.e., an investment portfolio comprising of securities which will be treated as capital assets and a trading portfolio comprising of stock-intrade which have to be treated as trading assets. The learned authorised representative further stated that the investments in stock had been sold after a gap of several years. He referred to the computation of capital gain placed at page 34/35 of the paper book to point out that the shares had been acquired in the financial years 1998-99 and 1999-2000 and some in 1992-93 which had been sold in the financial year 2003-04 after a gap of several years. Therefore there was no case for treating the investments as trading in stock. He also referred to several decisions of the Tribunal in support of the case. The specific reference was made to the order of the Tribunal dated November 12, 2009 in I. T. A. No. 7267/M/2008. In that case also shares had been declared as investments in earlier years and sold after a gap of several years. The Tribunal observed that it was possible to make investments and also trade in the shares of the same company. If separate accounts have been maintained in which no defects have been pointed out, the claim of the assessee that he was making investments in certain scrips could not be rejected.

The learned Departmental representative on the other hand strongly supported the orders of the authorities below. He emphasised the volume and number of transactions to argue that these have the attributes of trading transactions. He however agreed that both the cases were identical.

We have perused the records and considered the rival contentions carefully. The dispute is regarding nature of income from certain share transactions. The assessees are trading in shares and also making investments for which separate accounts have been maintained about which there is no dispute. In the earlier years similar transactions of investment and trading have been undertaken by the assessees have been accepted by the Department and income from capital gain along with separate income from trading transactions has been accepted. In the assessment year 2001-02, the similar claim was accepted even in scrutiny assessment under section 143(3). The assessees had made investments from surplus funds. Though the assessees had also made borrowings but interest on borrowings had been claimed against trading of shares which clearly shows that investments had been made from own funds. Most of the investments in shares had been acquired in the financial years 1998-99 and 1999-2000 and some even in the financial year 1992-93 and these have been sold after a gap of three years which clearly shows the intention of the assessee to hold the shares as investments.

The volume and number of transactions is not decisive in understanding the true nature of the transactions. The volume and number will depend upon the quantum of investments being made. If funds invested are huge, obviously the number of transactions and volumes will become high. In case a large number of transactions are confined within the same year, i.e., both the purchases and sales are within the same year, this definitely will give the indication that the assessee is trading in shares but in case the number of transactions is large but sales made during the year is in respect of purchases made long ago, then it could not be said that the assessee is trading in shares merely because volume is heavy and manner of transactions is large. There is no bar on the assessee keeping a separate portfolio for trading and investments which has been accepted even by the Board in the Circular No. 4 of 2007 dated June 15, 2007. Moreover the shares sold in this year have been acquired in the earlier years in which these have already been accepted as investment. Therefore the nature of the investment cannot be changed in the year of sale. Considering the entirety of facts and circumstances mentioned above we see no reason for treating the long-term capital gain declared from sale of shares as business income. The order of the Commissioner of Income-tax (Appeals) confirming the stand taken by the Assessing Officer cannot be sustained. We therefore set aside the order of the Commissioner of Income-tax (Appeals) and allow the claim of the assessees in both the cases. In the result both the appeals of the assessees are allowed.

The order was pronounced in open court on January 6, 2010.

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