Vildirect: IncomeTax-caselaws-2012-VIL-950-ITAT-MUM

2012-VIL-950-ITAT-MUM

Income Tax Appellate Tribunal MUMBAI

IT Appeal No.6345/Mum/2010

Date: 18.01.2012

DEV ASHOK KARVAT

DEPUTY COMMISSIONER OF INCOME-TAX, RANGE-14 (3)

BENCH

G.E.VEERABHADRAPPA, D.K.AGARWAL, JJ.

JUDGMENT

D.K. Agarwal, Judicial Member –

This appeal preferred by the Assessee is directed against the order dated 16.6.2010 passed by the ld. CIT(A) for the assessment year 2006-07.

2. Briefly stated facts of the case are that the assessee is an Insurance Agent. The return of income was filed showing an income of Rs. 49,56,545/-consisting income from insurance commissions, house property, capital gains and income from other sources. During the course of assessment proceedings the AO noted that the assessee has purchased shares amounting to Rs. 39,88,567/- and the same were sold at Rs.50,40,704/- declaring short term capital gain of Rs. 10,52,137/-. Considering the frequency of transactions of purchase and sales of shares, the short interval between purchases and sale of shares, the profit motive, which is clearly latent in these transactions and intention, the assessee was asked to show cause as to why short term capital gain shown at Rs. 10,52,137/- should not be treated as business income in stead of capital gains. In reply, the assessee vide letter dated 24.12.2008 while giving a note on style of operation, time devotion and number of transactions submitted as under :

"(a) From the working on record it can be clearly seen that the average length of holding of a share is more than 125 days which is close to 4 months

(b) The assessee has not borrowed any amount from outsider on loan to invest in the shares.

(c) The assessee has only deployed funds with a long term view as amounts are only borrowed from family members having liquid capital available with them as the members in turn also have not borrowed money from any outsider

(d) the primary business activity pursued by he assessee is that of an insurance agent earning commission income from government insurance companies."

However, the AO did not accept the assessee's explanation. He observed that the claim of the assessee of treating share transaction as capital gain is not acceptable in view of he following criteria :

"1. Transactions are carried out regular and frequently.

2. Quantities of purchase/sales are huge.

3. Assessee has contact, access to information and necessary qualification and competence to carry out business by own or through persons.

4. Intention to earn the profit.

5. There is no intention to make the investment and earn the dividend there from, as no dividend earned by the assessee.

6. There is no intention to wait till he gets the bonus shares in view to minimize the cost of investment and to earn regular interval dividend there from."

The AO after applying the above test to the facts of the present case observed that considering the volume of transactions, number of shares involved, the short period of its holding and the regularity of trading of shares shown, intention of the assessee to earn profit then to earn dividend, further observed that the profit motive is clearly patent in these transactions held that the profit and on sale of the aforesaid shares cannot be treated as capital profit and accordingly he assessed the same under the head "profit and gains from business or profession". To support his view, the reliance was placed on decisions in (a) G. Venkata Swami Naidu & Co. v. CIT [1959] 35 ITR 594 (SC), (b) H. Mohammad & Co. v. CIT [1977] 107 ITR 637 (Guj) (c) Raja Bahadur Kamakhya Narain Singh v. CIT [1970] 77 ITR 253 (SC), (d) Maganlal Chhaganlal (P.) Ltd. (11 SCC 557) and (e) CIT v. Sutlej Cotton Mills Supply Agency Ltd. [1975] 100 ITR 706 (SC). The AO after making some other disallowances completed the assessment at an income of Rs. 49,68,170/- vide order dated 26.12.2008 passed u/s 143(3) of the Income Tax Act, 1961 (in short the Act).

3. On appeal, the ld. CIT(A) observed that once the volume of transactions are found to be large and frequency of transactions are found to be recurring such transactions are bound to be considered as trading in nature, the appellant has not denied that the borrowings from the family members having not invested for purchase of shares, in the capital account an amount of Rs. 18,114/- has been debited under the head share trading expense and huge amount was shown as liability payable in the name of L.K.P Merchant Financing Ltd. and Jamnadas Virji who are stated to be share brokers, therefore, the appellant has been purchasing the shares on credit basis as well. The ld. CIT(A) while applying the ratio of the decisions of the Tribunal in the case of ACIT v. Mr. V. Nagesh and Vice-versa in ITA No. 5410/Mum/2008 and C.O. No. 151/Mum/2009 (AY:2005-06) dated 24.9.2009 and in the case of Sadhana Nabera v. ACIT in ITA No. 2586/Mum/2009 dated 26.3.2010 held that the AO was justified in treating the short term capital gain of Rs. 10,52,137/- as business income.

4. Being aggrieved by the order of the ld. CIT(A), the assessee is in appeal before us challenging in all the grounds the order of the ld. CIT(A) in treating the income of Rs. 10,52,137/- as business income instead of short term capital gains.

5. At the time of hearing, the ld. Counsel for the assessee while reiterating the same submissions as submitted before the AO and the ld. CIT(A) further submits that the assessee is an Insurance Agent earning substantial income in the form of commission from insurance business as under :

Assessment year	Insurance Commission income
2004-2005	39,51,977
2005-2006	1,20,41,137
2006-2007	60,32,400

He further submits that the assessee is a regular investor in shares and has made investment in shares of various companies since last so many years. The year-wise details of investment are as under :

Assessment Year	Share Investment (Closing Balance)
2004-05	9,85,734
2005-06	27,76,950
2006-07	56,39,333
2007-08	61,39,991
2008-09	67,22,069
2009-10	71,39,352

He further submits that during the financial year 2005-06 relevant to the assessment year 2006-07, the assessee has gained long term capital gains of Rs. 29,729/ on sales of shares and Rs. 4,25,443/- on sale of units of mutual funds aggregating to Rs. 4,55,172/- which has been accepted by the AO as shown by the assessee. He further submits that the assessee has also earned short term capital gains of Rs. 10,28,646/- on sale of shares and Rs. 23,491/- aggregating to Rs. 10,52,137/-. However, the AO did not accept the same as short term capital gain but assessed as income from business. He further submits that the short term capital gain was earned in respect of total 52 scripts and units of HDFC Cash Management Fund. The number Transactions per script are very less and in most of the cases, there is only one transaction in particular script. The details are as under :

No. of Scripts	No. of Transactions per script
39	1
7	2
3	3
2	5
1	7

He further submits that holding of the shares is also reasonably long which is as under :

Period Range	STCG	% of total STCG
More than 250 days	1,20,926	11.76%
Between 150 to 250 days	1,72,282	16.75%
Between 100 to 150 days	2,69,305	26.18%
Between 60 to 100 days	4,881	0.47%
Between 30 to 60 days	4,08,471	39.71%
Less than 30 days	52,781	5.13%
Total	10,28,646	100%

He further submits that the shares are shown as Investments in the Balance Sheet of the assessee. The share investment the assessee at the beginning of the year is Rs. 27,76,950/- and the same at the end of the year is Rs. 56,39,333/- which is evident from the copy of the Profit & Loss Account, Capital account and Balance Sheet filed in the assessee's paper book. He further submits that investments in shares was made mainly out of own capital of the assessee. The unsecured loan from family members are Rs. 7,54,334.84 (Bhavi Karvat Rs. 90,000/- and Ashok Karvat 6,64,334.84). However, against this total, Rs. 27,29,497.33 are advanced to various family members and group concerns as can be seen from Loans & Advances on the asset side of the Balance Sheet. Further, the loans from family members are also not bearing any interest. He further submits that the stock markets in the country has experienced substantial boom during the financial year 2005-2006. Due to the bull-run in the stock market the capital appreciation was fast. The amount of capital gains for all the assessees in general was very high during this period as compared to other years. In other words, at the end of March, 2005 it was 6492.84 and it moved to 11279.96 at the end of March 2006. Thus the sensex had gained 4787.14 points and in percentage terms, the yeary gain of sensex was 73.73%. In support, he placed on record chart showing the BSE Sensex during the financial year 2005-2006 and the printouts from the web-site of the BSE Sensex during financial year 2005-06 appearing at pages 13 to 17 of the assessee's paper book.

5.1 On the frequency of transactions, the ld. Counsel for the assessee submits that the assessee has earned short term capital gain in respect of total 52 scripts and the maximum frequency of transactions in any particular script is 7 and that too just one script at the short interval. Thus, the transactions per scrip in the case of the assessee are very nominal. Out of 52 scripts, there are 39 scripts where there is only one transaction and 7 scripts where there are two transactions maximum in any script is 7 in the year and that also just in one script. In support, the ld. Counsel for the assessee placed reliance on the decision of Tribunal in Janak S.Rangawala v. ACIT [2007]11 SOT 627 (Mum) wherein it has been held that mere volume of transaction transacted would not alter the nature of transaction, it is the intention of the assessee which is to be seen to determine the nature of transaction conducted by the assessee.

5.2 On the issue of short intervals between the purchases and sales, the learned counsel for the assessee submits that there are many transactions where the period of holding is more than 250 days, 150 days, 100 days 60 days etc. In fact, 54.69% of the total gain has been earned by the assessee in the transaction with holding period of more than 100 days. Further only Rs. 52,781/- out of Rs. 10,28,646/- has been earned from the transactions with less than 30 days of holding. He further submits that section 2(14) of the Act defines the term "capital asset" do not provide for any minimum period of any asset to be qualified as capital asset. Further as per section 2(42A) a short term capital asset is defined to mean a capital asset held by an assessee for not more than thirty six months (twelve months in case of shares). He further submits that though the section has provided for an outer limit of time, there is no mention about the minimum period for which the assessee has to be held for qualifying to be a capital asset. As such period of holding is not very relevant as to whether the asset is a stock in trade or it is a capital asset. The reliance was also placed on the decision of the Tribunal in the case of Gopal Purohit v. JCIT [2009] 29 SOT 117 (Mum) upheld by the Hon'ble Jurisdictional High Court.

5.3 On the issue of no dividend has been earned, the ld. Counsel for the assessee submits that earning of dividend is no more relevant criteria and most of the times the investment decisions are based on the expected growth in the market valuation of companies rather than dividends. Return from investments can be either in the form of dividends or appreciation of capital invested. Once an investor is in a position to get his desired return in either of these forms, he is not bothered about the form of return. However, he submits that in the subsequent assessment year, the assessee has received substantial amount of dividend i.e. Rs. 3,96,900/- for assessment year 2007-08 and Rs. 8,01,503/- for assessment year 2008-09.

5.4 On the issue of investment out of borrowed funds, he submits that in the balance sheet as on 31.3.2005, there was a loan from family member Shri Manisha Dodia Rs. 6,64,300/- which has been paid in the year under consideration and a new loan of Rs. 90,000/- from family member Shri Bhavi Karvat was taken that was without interest, therefore, no borrowed funds were utilized for investment in shares and no interest was paid.

5.5 With regard to the objection of the AO that the assessee has mostly traded in the same scripts such as Kothari Pet, ION Exchange, KGN Denim, Venus Remedies etc., he submits that Kothari Pet is at Sr. No. 12, ION Exchange is at Sr. No. 19, KGN Denim is at Sr. No. 23 and Venus Remedies is at Sr. No. 52 of details of script-wise short term capital gain on sale of shares appearing at pages 3 to 6 of the assessee's first paper book. As can be seen there from only 7 sales transactions in Kothari Pet, 5 transactions in ION Exchange, 3 transactions in KGN Denim and 5 transactions in Venus Remedies are taken place. Thus, maximum number of transactions are 7 in the year which cannot be said to be a large transactions by any stretch of imagination and it nowhere proves that the assessee is a dealer in shares.

5.6 As regard, the activity of insurance agency does not require much efforts, the ld. Counsel for the assessee submits that the Insurance Agency is a service oriented industry and if one does not give proper service to the customers on time, the customer is not likely to give any business. Secondly the insurance agency is a highly competitive business and one has to keep oneself updated in various aspects to keep in touch with the latest developments in the field of insurance to get good business from the clients.

5.7 As regard the intention of the assessee to make quick profit and not that of investment, the ld. Counsel for the assessee submits that as explained earlier the capital gain earned from the shares with period of holding of less than 30 days is very nominal. 54.69% of the total short term capital gains are arising out of the shares held for more than 100 days. There are transactions with long term holding also which has been accepted as long term capital gains.

5.8 The ld. Counsel for the assessee while distinguishing the decisions relied on by the AO and the ld. CIT(A) relied on the following decisions:

Sr. No.	Name of the Case	Citation
1	G. Venkataswami Naidu & Co. v. CIT	35 ITR 594 (SC)
2	CIT v. Associated Industrial Development Co. Pvt. Ltd.	82 ITR 586 (SC)
3	Karamchand Thapar & Bros. Pvt. Ltd. v. CIT	82 ITR 899 (SC)
4	Gopal Purohit v. JCIT	29 SOT 117 (Mum.)
5	Sarnath Infrastructure (P.) Ltd. v. ACIT	120-TTJ-216 (Luck.)
6	Janak S. Rangwala v. Asst. CIT	11 SOT 627 (Mum.)
7	CIT v. Girish Mohan Ganeriwala	260 ITR 417 (P & H)

He, therefore, submits that the profit on sale of shares and mutual funds shown by the assessee at Rs. 10,52,137/- be treated as short term capital gain and not as business income.

6. On the other hand, the ld. DR supports the order of the AO and ld. CIT(A).

7. We have carefully considered the submissions of the rival parties and perused the material available on record.

8. Section 2(14) of the Act defines "capital asset" to mean property of any kind held by an assessee, whether or not connected with his business or profession. The definition of "capital asset" does not, however, include "stock-in-trade" held for the purpose of business. Section 2(22) of the Act defines "dividend" to include any distribution by a company of accumulated profits, whether capitalized or not. Section 2(42-A) defines "short-term capital asset" to mean a capital asset held by an assessee for not more than thirty six months immediately preceding the date of its transfer. Section 2(42-B) defines "short term capital gain" to mean capital gain arising from the transfer of a short term capital asset. Under Section 28(i) of the Act, the profits and gains of any business carried on by the assessee, at any time during the previous year, is chargeable to income tax under the head "profits and gains of business or profession". Under Section 45(1) of the Act any profits or gains, arising from the transfer of a capital asset effected in the previous year, is deemed to be income of the previous year in which the transfer took place. Section 111-A, inserted by Finance Act, 2004, relates to tax on short term capital gains in certain cases and, under sub-section (1) thereof, where the total income of an assessee includes any income chargeable under the head "capital gains", arising from the transfer of a short term capital asset being an equity share in a company and such transaction is chargeable to securities transaction tax, the tax payable by the assessee shall be the aggregate of the amount of income tax calculated, on such short term capital gains, at the rate of fifteen per cent.

9. If the shares purchased by the assessee are held to be capital assets, sale of such shares could fall within the ambit of Section 111A of the Act, and such capital gains would be subject to tax at a lower rate. If the shares are held by the assessee as stock in trade, profit on the sale of such shares would constitute business income, and be subject to tax at a higher rate. As noted hereinabove, Section 2(14) (i) of the Act defines a capital asset as not including stock in trade. If the assessee had held the shares as "stock in trade", and not as investment, then such shares would stand excluded from the definition of "short term capital asset", and the profit earned on the sale of such shares would not be exigible to tax as "short term capital gain", but as "profits and gains from business".

10. In order to ascertain as to whether the shares were purchased by the assessee as investment or stock in trade, the most relevant aspect which is to be seen is the intention of the assessee behind the purchase of shares and such intention has to be gathered from the facts of the case including the conduct of the assessee.

11. Recently, in the case of DCIT v. Securities Capital Investment India Ltd. [2011] 47 SOT 9 (Mum-Trib), the Co-ordinate Bench of the Tribunal has applied the guidelines/principal laid down by the Tribunal in the case of Sarnath Infrastructure (P.) Ltd. v. ACIT [2010] 124 ITD 71 (Luck) which are enumerated below :

"(1) What is the intention of the assessee at the time of purchase of the shares (or any other item). This can be found out from the treatment it gives to such purchase in its books of account. Whether it is treated as stock-in-trade or investment. Whether shown in opening/closing stock or shown separately as investment or non-trading asset. (2) Whether assessee has borrowed money to purchase and paid interest thereon? Normally, money is borrowed to purchase goods for the purposes of trade and not for investing in an asset for retaining. (3) What is the frequency of such purchases and disposal in that particular item? If purchase and sale are frequent, or there are substantial transactions in that item, it would indicate trade. Habitual dealing in that particular item is indicative of intention of trade. Similarly, ratio between the purchases and sales and the holdings may show whether the assessee is trading or investing (high transactions and low holdings indicate trade whereas low transactions and high holdings indicate investment). (4) Whether purchase and sale is for realizing profit or purchases are made for retention and appreciation in its value? Former will indicate intention of trade and latter, an investment. In the case of shares whether intention was to enjoy dividend and not merely earn profit on sale and purchase of shares. A commercial motive is an essential ingredient of trade. (5) How the value of the items has been taken in the balance sheet? If the items in question are valued at cost, it would indicate that they are investments or where they are valued at cost or market value or net realizable value (whichever is less), it will indicate that items in question are treated as stock-in-trade. (6) How the company (assessee) is authorized in memorandum of association/articles of association? Whether for trade or for investment? If authorized only for trade, then whether there are separate resolutions of the board of directors to carry out investments in that commodity? And vice versa. (7) It is for the assessee to adduce evidence to show that his holding is for investment or for trading and what distinction he has kept in the records or otherwise, between two types of holdings. If the assessee is able to discharge the primary onus and could prima facie show that particular item is held as investment (or say, stock-in-trade) then onus would shift to Revenue to prove that apparent is not real. (8) The mere fact of credit of sale proceeds of shares (or for that matter any other item in question) in a particular account or not so much frequency of sale and purchase will alone will not be sufficient to say that assessee was holding the shares (or the items in question) for investment. (9) One has to find out what are the legal requisites for dealing as a trader in the items in question and whether the assessee is complying with them. Whether it is the argument of the assessee that it is violating those legal requirements, if it is claimed that it is dealing as a trader in that item? Whether it had such an intention (to carry on illegal business in that item) since beginning or when purchases were made? (10) It is permissible as per CBDT' s Circular No. 4 of 2007 of 15th June, 2007 that an assessee can have both portfolios, one for trading and other for investment provided it is maintaining separate account for each type, there are distinctive features for both and there is no intermingling of holdings in the two portfolios. (11) Not one or two factors out of above alone will be sufficient to come to a definite conclusion but the cumulative effect of several factors has to be seen."

12. Keeping in view the above principal/guidelines to the facts of the present case, we find that even according to the AO, the nature of the assessee's business is Insurance Agent inasmuch as the AO in column No. 10 of the facts sheet appearing at page 1 of the assessment order has treated the nature of the business of the assessee as 'Insurance Agent'. We further find that the assessee in assessment years 2004-05 and 2005-06 has shown long term capital gains and short term capital gains on sale of shares and even in the year under consideration i.e. in assessment year 2006-07 the AO has treated the investment in shares and mutual funds as long term capital gain amounting to Rs. 4,55,172/-. We further find that the assessee has maintained regular books of account, wherein he has treated investment in shares and mutual funds as investment and has shown gain arising therefrom as long term capital gain and short term capital gains. The AO neither treated the said entries recorded in the books of accounts as non genuine entries nor has rejected the books of account while treating the income arising from short term capital gains on sale of shares and mutual funds as business income instead of short term capital gains claimed by the assessee. We further find that the average period of holding of shares sold by the assessee giving rise to the short term capital gains is as under :

Period Range	STCG	% of total STCG
More than 250 days	1,20,926	11.76%
Between 150 to 250 days	1,72,282	16.75%
Between 100 to 150 days	2,69,305	26.18%
Between 60 to 100 days	4,881	0.47%
Between 30 to 60 days	4,08,471	39.71%
Less than 30 days	52,781	5.13%
Total	10,28,646	100%

We further find that the investment in share was made by the assessee out of his own funds plus non-interest bearing funds. In other words, the assessee neither paid any interest nor claimed any other expenses relating to the sale transactions of such shares and mutual funds. There was neither any intra-day transaction made by the assessee in shares nor there was any trading in shares on "future and option" basis. The percentage of capital gain of less than 30 days is only 5.13% which is very negligible considering the total amount of short term capital gain of Rs.10,28,646/- .

13. In The ACIT v. Shri Satpal Singh Sethi in ITA No. 3650/Mum/2010 (AY: 2006-2007) dated 30.9.2011, the co-ordinate bench of the Tribunal after following the ratio of the decision of the Hon'ble Jurisdictional High Court in the case of CIT v. Darius Pandole [2011] 330 ITR 485 (Bom.) and CIT v. Gopal Purohit [2011] 336 ITR 287 (Bom) has held that "...Since in the earlier years the Department has accepted the income from shares as falling under the head 'Capital gains', in our considered opinion and respectfully following the above judgments, that the ld. CIT(A) was justified in upholding the assessee's stand."

14. In Hitesh Satischandra Doshi v. JCIT [2011] 46 SOT 336(Mum), the Tribunal while observing that there is no indication of holding period of 30 days finds place either in the statute or in the circular/instructions as well as judicial pronouncements held that the ld. CIT(A) was not justified in treating the share transaction as business transactions in the case where the holding period is less than 30 days and further held that the income arisen from purchase and sale of shares held by the assessee is investment, cannot be treated as business income.

15. In Mr. Chetan R. Parikh v. ITO in ITA No. 1569/Mum/2010 (AY:2006-07) dated 25.5.2011, it has been held by the Tribunal that the units of mutual funds are not generally a trading instrument because of comparatively low fluctuation and number of transactions in units are also not large. Therefore in our view the purchase and sale of units has to be considered as investment activity.

16. Applying the ratio of the above decisions to the facts of the present case it becomes abundantly clear that the transactions in the shares and mutual funds were made by the assessee as investor and not as a trader, therefore, the profit earned from the said transactions is short term capital gain, not business income and accordingly, we while reversing the orders of the AO and the ld. CIT(A) on this account direct the AO to treat the profit from purchase and sales of shares and mutual funds of Rs. 10,52,137/- as income from short term capital gains and not business income. The grounds taken by the assessee are, therefore, allowed.

17. In the result, the assessee's appeal stands allowed.

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