IT: Where number of scrips, transactions of purchase and sale, stock turnover ratio and holding period suggested assessee's intention to quickly realize profits and not to wait for dividend or capital appreciation, gain on such transactions would be assessed as business income and not as capital gains
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[2013] 37 taxmann.com 208 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'F'
Assisstant Commissioner of Income-tax, Circle 16(1)
v.
Veena S. Kalra*
I.P. BANSAL, JUDICIAL MEMBER
AND D. KARUNAKARA RAO, ACCOUNTANT MEMBER
AND D. KARUNAKARA RAO, ACCOUNTANT MEMBER
IT APPEAL NO. 2403 (MUM.) OF 2012
[ASSESSMENT YEAR 2008-09]
[ASSESSMENT YEAR 2008-09]
JULY 10, 2013
Section 28(i) of the Income-tax Act, 1961 - Business income - Chargeable as [Share dealings] - Assessment year 2008-09 - Assessee was engaged in business of dealing in derivatives and F&O - In her return, she claimed certain amount of gain on share transactions as short-term capital gain - Assessing Officer treated such gain as business income - Facts revealed that assessee picked up six common scrips for business of F&O as well as STCG and she could not explain on what basis certain transactions involving same scrips were treated as business and others as STCG - Number of scrips, transactions of purchase and sales suggested increasing trends for making quick business profits - Stock turnover ratio with 1:16 reflected assessee's intention to quickly realize profits and not to wait for dividend or capital appreciation - Entries in books of account were found incredible - Whether on facts amount of STCG claimed by assessee was rightly assessed as assessee's business income - Held, yes [Paras 17 & 19] [In favour of revenue]
FACTS
Facts
| ■ | The assessee was engaged in the business of dealing in derivatives and F&O. | |
| ■ | During relevant assessment year, she had shown certain short-term capital gain (STCG) on sale of shares. | |
| ■ | The Assessing Officer noticed that the holding period of the short-term shares was not longer than a period of 100 days in many transactions; and that the assessee dealt with the common scrips and had only segregated certain shares/business profits as short-term capital gains for the benefits of the tax rate. Hence, he treated impugned gains as 'business income of assessee. | |
| ■ | On appeal, the Commissioner (Appeals), considering the assessee's submissions, held that the STCG offered by the assessee should be accepted without any disturbance. He, however, confirmed the Assessing Officer's finding in respect of part of gain which was relatable to re-entered scrips. | |
| ■ | The assessee accepted decision of the Commissioner (Appeals), but the revenue filed appeal before the Tribunal. |
Revenue's arguments
| ■ | Whatever had been purchased was mostly sold leaving the opening stock more or less equal in value to the closing stock which indicated the intention of quicker realization of profits, a trait in the business world and not of the investment activity. | |
| ■ | The 'holding period' of the shares being mostly less than 100 days indicated the business nature of the transactions. | |
| ■ | The stock: turnover ratio with 1:16 and capital: turnover ratio with 1:10 reflected the business nature of the transactions. |
HELD
| ■ | The undisputed facts are that there is no clarity on preparation and furnishing of the complete balance sheets of various assessment years to demonstrate the book entries of the shares as investments including that of the assessment year 2007-08. Columns in the balance sheet were kept blank. It is also a fact that the assessee dealt with 31 common scrips, six (6) of which are commonly traded as stocks as part of F&O business and also earned STCG out of unloading of such shares. In fact, there are common scrips qua the LTCG too. Assessee has the history of re-entering into the same scrips too and the relevant gains constitutes Rs. 21,50,410. | |
| ■ | The issue whether a particular transaction constitutes capital gain transaction or business transaction is a mixed question of law and fact. The answer to the dispute depends on the facts of each case. Further, it is also a settled law that the principle of estoppel or res judicata does not apply to the tax proceedings. Further also, the rule of consistency should be followed as long as the facts are not different. Regarding the intention of the assessee, the decision of the Tribunal in the case of Dy. CIT v. Mukeshbhai Babulal Shah [2013] 32 taxmann.com 6/57 SOT 45 (Rajkot) is relevant for the proposition 'where intention of the assessee behind purchase and sales of the shares was quickly to realize profits and not to earn dividend from them, the income would be assessable as business income. [Para 13] | |
| ■ | In the instant case, volumes/turnovers, number of scrips/transaction nos., opening/closing stock position, ratios, etc., show distinctly increasing tendency for the assessment year 2008-09 aimed at making quick profits. [Para 15] | |
| ■ | Regarding the intention of the assessee, normally entries originally made in the books of account soon after a purchase transaction is complete, become relevant factor or indicating factor for deciding the said intention. It is the case of the assessee that the relatable investments are made for short-term gains purpose. Now the question is how to demonstrate the same if not with the help of the books of account and entries therein and of course, stand by the same without yielding to the temptation of making quick profits and ideally to earn the dividend income on one side and the capital appreciation on the other. In this case, the assessee failed to demonstrate the same with the help of the books. The conduct of the assessee demonstrates different. There are problems in filing balance sheet copies for relevant assessment years, there are problems in not sticking to the investments, the assessee buys a scrip on a particular day and sell it when there is raise in index in open market for profits, assessee buys the same scrip later only for unloading later for profits again. This conduct of the assessee does not congruous with her claims in the return. It is the claim of the assessee that as an individual, she is not under obligation to prepare and file balance sheets. This view point may be correct, had the assessee not been involved in the transactions of this magnitude claiming engaged in the business at least undisputedly for the extent of F&O. Therefore, this part of the explanation of the assessee is rejected on facts of the instant case. Thus, the assessee has failed to demonstrate the book entries involving each of the transactions. Further, on the intention related arguments, it is an admitted position that the assessee accepted the decision of the Commissioner (Appeals) with regard to the business nature of the gains relatable to the re-entered transactions in the same scrip. With no appeal of the assessee against the order of the Commissioner (Appeals), it is agreed position now that the so-called book entries on the share transactions as investment (with reference to the said re-entered transaction) have to be now deemed as 'business transactions'. These developments indeed raised many issues relating to the (i) quality of so-called book entries for other scrips, (ii) the credibility of the assessee's claim relating to the original intention, (iii) why not the other transactions are also to treated as business transactions as well, etc. With the said developments, the onus now shifts to the assessee to demonstrate that the other transactions do not constitute business transaction and assessee failed to do so. Thus, the assessee has forfeited the original claim of investment nature of the transactions for the gain of Rs. 21,50,410 clearly and, therefore, for others too. Thus, such conduct of the assessee in matter of the claims made in the return with respect to STCG is unacceptable. Therefore, the views of the Assessing Officer are sustainable and, hence, the conclusion of the Commissioner (Appeals) on the balance of the STCG is reversible. [Para 16] | |
| ■ | The assessee purchased shares worth Rs. 25.37 crore during the year and unloaded the shares to the value of more than Rs. 28.92 Crore. These volumes indicate that what is purchased in the year is completely sold. Thus, inescapable inference is that the assessee intends to realize the investment and also to quickly realize the relatable profits in the year itself. Out of Rs. 28.92 crore of sale proceeds, the assessee again purchased shares worth Rs. 2.19 crores and Rs. 36,800 in the succeeding assessment years. Assessee completely exited by the end of assessment year 2011-12. These facts go against the assessee's claim and confirm the Assessing Officer's allegation that the assessee believes in quick profits and not in the short-term investment activity. Assessee maintains uniformly the closing stock worth Rs. 17 to Rs. 18 lakhs in all recent assessment years. The same is case with opening stock of shares too. In fact, the opening and closing values are more or less equal. The number of scrips, transactions of purchases and sales also suggest the increasing trends for making quick business profits. Thus, the decision of the Tribunal in the case of Mukeshbhai Babulal Shah (supra), which is relevant for the proposition that 'where intention of the assessee behind purchase and sales of the shares was quickly to realize profits and not to earn dividend from them, the income would be assessable as business income, helps the revenue. Further, with the stock turnover ratio of 1:16, it is commonsense to infer that the assessee's intention is to quickly realize the profits and not to wait for the dividend or capital appreciation. In any case, the issue of establishing the real capital appreciation of the shares is difficult for the assessee in the capital market of rapid fluctuations of relevant indices. [Para 18] | |
| ■ | To sum, the facts about the entries in the books of account are inconclusive. By not contesting the conclusion of the Commissioner (Appeals) with regard to so-called STCG Rs. 21,50,410, the assessee forfeited the claims relating to the credibility of the book entries at least with reference to the transactions involving the re-entered scrips. With this, with regard to claims of investment in other scrips, the onus shifts to assessee and assessee failed to discharge the same. The intention of acquiring the shares as investment for capital appreciation is not translated and instead the symptoms of going for quick profits are evident. The stock: turnover ratio at 1:16 goes against the claims of the assessee. Other data relating to opening stocks and closing stocks on one side and the assessee's final exiting from the so-called claim of STCG at the end of 2011-12 indicates the assessee's conduct for quick profits and not for investment. Of course, the holding period particulars also confirm the Assessing Officer's conclusions. Therefore, in view of facts and the legal propositions narrated above, the conclusions of the Commissioner (Appeals) on the balance of the STCG are reversed and order of the Assessing Officer is restored. [Para 19] |
CASE REVIEW
Dy. CIT v. Mukeshbhai Babulal Shah [2013] 32 taxmann.com 6/57 SOT 45 (Rajkot) (para 18) followed.
CIT v. Gopal Purohit [2010] 188 Taxman 140/[2011] 336 ITR 287 (Bom.) (para 15) distinguished.
CASES REFERRED TO
Smt. Harsha N Mehta v. Dy. CIT [2011] 43 SOT 332 (Mum.) (para 3.1), Dy. CIT v. Mukeshbhai Babulal Shah [2013] 32 taxmann.com 6/57 SOT 45 (Rajkot) (para 7), Asstt. CIT v. Hitesh S Bhagat [IT Appeal No. 6586 (Mum.) of 2010, dated 15.5.2013] (para 7), CIT v. Gopal Purohit [2010] 188 Taxman 140/[2011] 336 ITR 287 (Bom.) (para 9), Dy. CIT v. SMK Shares & Stock Broking [2010] 8 taxmann.com 120 (Mum.) (para 9), ACITv. Smt. Datta Mahendra Shah [IT Appeal No. 6094 (Mum.) of 2011, dated 27-2-2013] (para 9) and New Jahangir Valkil Mills Ltd. v. CIT [1963] 49 ITR 137 (SC) (para 13).
O.P. Meena for the Appellant. Ms. Jelvis Henriques for the Respondent.
ORDER
D. Karunakara Rao, Accountant Member - This appeal filed by the Revenue on 11-4-2012 is against the order of CIT (A)-27, Mumbai dated 31-1-2012 for the assessment year 2008-2009. In this appeal, Revenue raised the following effective ground which reads as under:
"1. On the facts & circumstances and in law, the Ld CIT (A) has erred in treating the transaction of purchase and sale of shares as STCG instead of business income."
3. The facts necessary for the adjudication of the said ground are the assessee is an individual and field the return declaring the total income of Rs. 3.16 Crs (rounded of). The return was revised u/s 139(5) of the Act making downward revisions of his income to Rs. 2,78,55,600/-. In the revised return of income, assessee made a significant revision qua the Short Term Capital Gains (STCG) from Rs. 2,54,92,016/- to Rs 2,17,24,104/-. Thus, as per the revised return of income, STCG is Rs. 2,17,24,104/-; income from other sources is Rs. 1,70,071/-; business income is Rs. 60,03,269/-. In addition, the dividend income declared is Rs. 9,68,732/- and the LTCG is Rs. 8,65,373/-. Assessee is admittedly engaged in the business of dealing in derivatives and F&O. During the assessment proceedings, AO raised the issue of treating the STCG as business income of the assessee. Assessee submitted the following reply which is as under:
| "(a) | All investments have been made from own funds, no borrowed funds…. | |
| (b) | She has earned dividend as well as LTCG, which show the intent……. | |
| (c) | In the AYs 2006-07 & 2007-08, the assessee has returned STCG as well as LTCG and classified her share holdings as "investment" and not as "Stock in Trade". An investment register is maintained on FIFO basis. It shows the intent of the assessee. | |
| (d) | Following chart has been furnished, to establish her intention as investor: |
| AY 2008-2009 | AY 2007-2008 | AY 2006-2007 | ||
| Business income | 59,30,192/- | 5,82,866/- | 86,178/- | |
| STCG | 2,17,24,104/- | 1,93,69,822/- | 16,50,313/- | |
| LTCG | 8,65,373/- | 5,53,412/- | 17,05,546/- | |
| Dividend income | 9,98,163/- | 7,85,782/- | 6,28,208/- | |
| Income from OS | 1,70,071/- | 1,13,213/- | 1,50,993/- |
| (e) | The total number of scrips are 31, number of purchase transactions 70 and sale transactions 104. Number of days on which transactions took place are less than 150. Therefore, it cannot term as trading...." |
3.1 On examining the submissions of the assessee, AO noticed that the assessee did not submit the balance sheets showing the nature of holding of shares and noted that the data pertaining to the current assessment year is distinguishable vis-Ã -vis the particulars relevant for the assessment years 2006-07 and 2007-08. Details as given in the table in the subsequent paragraphs were relied. AO also noticed that the holding period of the short term shares was not longer than a period of 100 days in many transactions. AO reasoned that the assessee, who is already in the business of dealing in shares, derivatives, Futures & Options and dealt with the common scrips qua the capital gains transactions, is only segregated certain shares/business profits as short term Capital Gains for the benefits of the tax rate. Further, he distinguished the decision relied upon by the assessee. Finally, relying on the decision of the Tribunal in the case of Smt. Harsha N Mehta v. Dy. CIT [2011] 43 SOT 332 (Mum.) and also keeping in view the contents of Circular No.4/2007 of the CBDT, dated 15-6-2007, AO treated the impugned STCG of Rs. 2,17,24,104/- as business income of the assessee which is the subject matter of the appeal before us. The variation in rates of taxation to STCG and business income makes the difference and other-wise the total income determined by the AO is Rs. 2,79,89,373/- against the revised income of Rs. 2,78,55,600/-. Aggrieved with the above, assessee filed an appeal before the first appellate authority.
4. During the proceedings before the CIT(A), the assessee made submissions contending each of the allegations of the Assessing Officer and pleaded for treating the impugned gains as STCGs and reversing the order of the AO. The table imported vide para 4 of the impugned order contains the allegation-wise discussion. Arguments - counter arguments revolve around the common scrips, akinness of the business & STCG transactions, shorter holding periods, nature of the scrips, intention of the assessee, source of funds being own funds, re-entered transactions etc. Relying on Circular No.4/2007 of the CBDT, assessee submitted that 'assessee is empowered to do two portfolios in the capacity of the investor as well as jobber. For demonstrating the consistency of claim of STCG over the years, which is accepted by different AOs, assessee furnished the details of share holdings and particulars of scrips, transactions, turnover of purchase and sales, market value etc. Further, on being called to furnish certain details relating to scrips re-entered by the assessee, it was submitted that in 11 cases of scrips, assessee had the history of reentry in to the same scrips and the relatable profits works out to Rs. 21,50,410/-. Before the CIT(A), the question came up for debate on why should the assessee sell a particular scrip today and acquire the same subsequently if the intention is to hold the same as an investment?. Assessee could not answer the same with logic/evidence. Assessee quantified the attributable profits of such reentered share transactions and the same works to Rs. 21,50,410/-. After considering the submissions of the assessee and the data furnished, CIT (A) came to the conclusion that the STCG offered by the assessee should be accepted without any disturbance. He, however, confirmed the AO's finding to the extent of Rs. 21,50,410/- and denied the gains relatable to the reentered scrips. Thus, assessee's appeal was partly allowed on this issue. Relevant discussion is given in para 7, 8.1 to 8.7 of the impugned order. Aggrieved with the above, Revenue filed the present appeal before us. However, the assessee accepted the decision of the CIT(A) qua the CIT(A)'s treatment of Rs 21,50,410/- as "Profits and Gains from business or profession" instead of "Short term Capital Gains" as originally claimed by the assessee in the returns.
5. During the proceeding before us, Ld DR relied heavily on the order of the AO. He mentioned that entire Short term capital gains (STCG) offered by the assessee amounting to Rs. 2,17,24,104/- should be treated as business income instead of merely a sum of Rs. 21,50,410/-. Ld DR relied heavily on the fact that the assessee conceded the AO's allegation regarding the original intention of the assessee as investor and the same is evident from the way assessee accepted for taxing the profits of Rs 21,15,410/- as business income instead of original claim of STCG. The parties have accepted the fact that assessee has not filed any appeal before us against the CIT (A) qua the sustaining of the conclusion of CIT(A) to the extent of Rs. 21,15,410/-. It is the claim of the Revenue that assessee when engaged in the business of dealing in F&O, the short term investment in shares constitutes an allied business activity more so when the scrips are admittedly common. DR brought attention to the said para 4 for details. Regarding intention, it was mentioned that assessee did not file relevant papers of balance sheet to demonstrate conclusively the facts about the book entries of the said shares. Admittedly, the balance sheet copies were not filed. Further, AO is of the opinion that with 31 scrips invested / traded for 174 times which includes sales and purchase transactions over the period of 150 days in the year involving purchase and sales of Rs. 25.37 Crs and Rs. 28.92 Crs respectively. He also mentioned that whatever have been purchased are mostly sold leaving the opening stock more or less equal in value to the closing stock. It indicates the intention of quicker realization of profits, a trait in the business world and not of the investment activity. Further, it was mentioned that there is no one to know that the investment was made out of own funds only. The "holding period" of the shares being mostly less than 100 days also indicates the business nature of the transactions.
6. Further, Ld DR is of the opinion that assessee's conduct in re-entering into the same scrips for trading indicates the intention of business activity which was appreciated by the CIT (A) and accepted by the assessee. The profit earned by the assessee relatable to such reentered transactions amounting to Rs. 21,50,410/- was held as trading profits of the assessee. In these factual circumstances where assessee accepted part of its impugned profits as business income and the balance of gains should also have been considered as business income of the assessee. Criticizing the book entries based argument on intention of the assessee, Ld DR contends that the reentered transactions though claimed to have been entered as investment register and not as stock in trade in the books of account, assessee accepted such rejection of books. When the assessee so accepts the decision of the CIT(A) to the extent of Rs 21,50,410/-, there is no reason why the AO should accept the assessee's explanation on the balance of gains. Meaning thereby, the entry in the books of account is no difference vis-Ã -vis intention of the assessee.
7. Submitting further, Ld DR mentioned that the real investor with a goal of long term investment is not tempted to unload the shares being the temporary fall for the short term benefits and not tempted by the market conditions. He mentioned that the short term gain reported is in fact business transactions akin to the business of dealing in derivatives and F & O. Attributing to the assessee's failure to furnish the original balance sheets for the AYs 2007-2008 and 2008-2009 and also considering the lack of scrutiny assessment proceedings for the earlier assessment years, there is no fact of finding that the consistency related rules do not apply here. Further, Ld DR submitted that the holding period of the shares, being very short (94% of the transactions involved less than 100 days), is in favour of the Revenue. The quantify aspects of repurchase of shares as held by the Ld DR is in favour of the Revenue. No investor shall unload the shares again to purchase the same share but for the business intentions, the sale and purchase turnover, with the turnover of Rs. 28.92 Crs and Rs. 25.37 Crs respectively, reflects the trading nature of the transactions. Submitting the details of various business ratios, the Stock: turnover ratio with 1:16 and capital: turnover ratio with 1:10 reflects the business nature of the transactions and relied on the decision of the ITAT, Rajkot Bench in the case of Dy. CIT v. Mukeshbhai Babulal Shah [2013] 32 taxmann.com 6/57 SOT 45. The opening stock (Rs. 18.29 lacs) and closing stock (Rs. 18 lacs rounded of) are almost the same. Whatever shares were purchased in the year were sold, which shows the business nature and absence of the long term investment intentions. It is also made out with scrips treated in F & O as well as short term scrips are the same and therefore, the so called STCG has to be treated as business income of the assessee. With 264 transactions in the year, assessee is almost engaged in the transactions every day on an average basis. Normally, investor makes investment occasionally not on day-to-day basis. Further, Ld DR relied on the order of the Tribunal in the case of Asstt. CIT v. Hitesh S Bhagatvide ITA No.6586/Mum/2010 (AY: 2007-08) and ITA No.5711/Mum/2011(2008-09) dated 15-5-2013 for the proposition that the income arising in sale of shares has to be taxed as business income and relied on the contents of para 5 to 5.6 of the said Tribunal's order. In the said paras, Ld DR made out that the holding period varies from 1 to 244 days involving repetitive transactions. He also mentioned vide para 5.3, the principles of res judicata as well as estoppels are not applicable to matters of taxation because each unit is a separate unit and has to be taxed on the peculiar facts of the case in the said assessment year. The Hon'ble Supreme Court judgment in the case of Gopal Purohit was relied for the said proposition. Further, ld DR also relied on the decision of the ITAT, Rajkot Bench in the case of Mukeshbhai Babulal Shah (supra) for the proposition that 'whether dominant intention of the assessee behind purchase and sale of shares was to quickly realize profits by frequently turning over the stock of shares and not to earn dividend from the income would assessed as business income'. The said decision also relied for the proposition that the stock turnover ratio and capital turnover ratio are more than 1:14. This is the character of a business activity and not investment activity. Thus, the Ld DR concluded by saying that the CIT (A) should have confirmed the decision of the AO in treating the capital gains as a business income of the assessee.
8. On the other hand, Ld Counsel for the assessee narrated the facts of the case and mentioned that the STCG earned by the assessee amounts to Rs. 2,17,24,104/-which was considered by the AO as business income of the assessee and applied the provisions of section 14A read with Rule-8D and made disallowance of Rs. 1,32,933/- as expenditure relatable to the exempt income. Ld Counsel argued vehemently stating that the decision of the CIT (A) is incorrect and not consistent that the Departmental stand taken in the assessee's own case for the earlier years. Ld Counsel mentioned that the assessee declared the said shares are investments in the books of account. He relied on the detailed arguments submitted before the CIT (A) which are reproduced in para 4 and 5 of the impugned order.
9. Bringing our attention to the table in para 4 of the impugned order, Ld Counsel mentioned that the STCG- related transactions involve 31 scrips. The scrips are common/similar to those dealt in the business of F&O category. Further, Ld Counsel mentioned that there are common scrips qua LTCG also. However, he argued that the same should be a matter deviating from the claim of the assessee considering the entries in the books of the assessee and the original intention of the assessee. Ld Counsel reasoned that assessee is a housewife and she does not need to earn business income and therefore, she is always for capital appreciation. It is reiterated that assessee bought and sold the shares for 128 days in the financial year. It is admitted that assessee earned 1.73 Crs as gains involving single scrip on 4 distinct days. Balance of Rs. 40 lacs was earned on other scrips sold on 4 distinct days. The said STCG was therefore earned in 8 days. He also mentioned that investment was made out of her own funds without involvement of any borrowed funds. It was also reasoned that the holding period of all the scrips varies from 1 to 188 days. While mentioning that all her family members are Chartered Accountants, husband and son, and there is no need to earn shares on shares as livelihood. She also relied on the book entries showing the scrips as investments in the share register. As per the assessee's Counsel, the shares transactions involved only in listed companies involving independent companies. Relying on the CBDT Circular No.4/2007, dated 15.6.2007, Ld Counsel reasoned that the said Circular allows the individual to do business as well as investment. Regarding rule of consistency, Ld Counsel mentioned that the Department has consistently accepted the claim of the assessee and the claim is disturbed this year. He also mentioned that the volume and number of transactions are more or less the same and relied on the table containing details of share holdings for the 8 assessment years i.e., AY 2004-05 to 2011-2012. Ld Counsel also brought our attention that major STCG was earned out of 61 transactions with a period of holding of 3 months or less. He also admitted that the assessee is engaged in the repetitive transactions involving reentry into the same scrips and considering the business nature of the said transactions assessee did not file further appeal on the decision of the CIT (A). Otherwise, CIT (A) segregated the STCG relatable to such reentered transactions and confirmed the disallowance to the tune of Rs. 21,50,410/- out of STCG of Rs. 2,17,24,104/-. He reiterated the CIT (A)'s reasoning and submitted that the order of the CIT (A) should be confirmed without any interference. In respect of the assessee's claim relating to the principles of consistency, Ld Counsel relied on the decision of Apex Court in the case of CIT v. Gopal Purohit [2010] 188 Taxman 140/[2011] 336 ITR 287 (Bom.). Further, Ld Counsel relied on the order of the ITAT, Mumbai in the case of Dy. CIT v. SMK Shares & Stock Broking [2010] 8 taxmann.com 120 in his favour. He also relied on another decision of the ITAT Mumbai in the case of Asstt. CIT v. Smt. Datta Mahendra Shah IT Appeal No. 6094/M/2011 and CO No.155/M/2012 dated 27-2-2013 regarding motive and intentions. However, the Ld Counsel for the assessee could not establish a single decision out of the ones relied upon by him where the facts are exactly comparable with those of the present case.
Tribunal Decision:
10. We have heard both the parties and perused the orders of the Revenue and the facts placed before us. The undisputed facts are that the is no clarity on preparation and furnishing of the complete balance sheets of various AYs to demonstrate the book entries of the shares as investments including that of the AY 2007-2008. Columns in the balance sheet were kept blank. It is also a fact that the assessee dealt with 31 common scrips, six (6) of which are commonly traded as stocks as part of F & O business and also earned STCG out of unloading of such shares. In fact, there are common scrips qua the LTCG too. Assessee has the history of re-entering into the same scrips too and the relevant gains constitutes Rs. 21,50,410/-. Other undisputed facts include (i) assessee has not filed any appeal against the taxing of Rs. 21,50,410/- as business income; (ii) The total purchases are of the value of Rs. 25.37 Cr and total sales of Rs. 28.92 Cr, (iii) closing stock of Rs. 17.96 lacs is very close to opening stock of Rs. 18.29 lacs. (iv) It is also a fact that AY 2008-2009 (current AY) reportedly is distinguishable on facts qua the number of scrips purchased, the number of transactions (162 + 184= 346) against other years' single or double digits. (v) Stock turnover ratio is 1:16 ad capital turnover ratio is 1:10 (these are the features of business activity).
The case of the Revenue: With the above undisputed facts, the case of the Revenue is that the alleged transactions of LTCG is akin with the activities of the F&O qua the intention of the assessee and scrips traded by the assessee during the year. The transactions for the current year are factually distinguishable with that of the earlier and later years, therefore, the 'principle of consistency' qua the ratio of the Hon'ble Supreme Court judgment in the case of Gopal Purohit (supra) has no application to the assessment year under consideration. Proper balance sheets were not prepared and furnished by the assessee for many years to read the intention of the assessee and the entries in the books of account. It is an accepted position that some of the so called STCG were agreed to be the business transaction as confirmed by the CIT (A). The stock turnover ratio and the capital turnover ratios indicates business incomes and decision of the ITAT, Rajkot in the case of Mukeshbhai Babulal Shah (supra) confirms the departmental views. Therefore, notwithstanding the claims of the assessee in the returns, the AY under consideration and the other AYs, the conclusions of the AO are required to be upheld.
11. Per contra, the case of the assessee is that in view of the principle of consistency which the Revenue has been accepting the claims in the returns of the assessee, the impugned income should be taxed as STCG not as a business income. On the transactions involving reentry, assessee has nothing to state except relying on the detailed replies given by the assessee during the first appellate proceedings, which are enumerated in the table given in para 4 of the impugned order. Briefly, commonality of the scrips dealt as F&O and the LTCG is not a determining factor. When the assessee is invested her own funds in listed scrips involving individual companies, they have treated as STCG only. As per the assessee, all the gains were actually earned in 8 years although it involved only 31 scrips. Further, it was asserted that the said transactions were entered in the books as investments and assessee is authorized by the CBDT Circular No.4/2007 to do both the activities namely investment as well as stock-in-trade. Otherwise, assessee reiterated the submissions made before the lower authorities for the proposition that the scheme of STCGs should be accepted.
12. We have considered the above divergent stands of the Ld Representatives of the parties in dispute. Core issue for adjudication in this appeal of the revenue relates if the balance of Short Term Capital gains (Rs. 2,17,24,104/- minus Rs 21,50,410/-) are assessable to tax under the head "profits and gains from business or profession". The STCG of Rs 21,50,410/-, which are attributable to the re-entered scrips, are held assessable as business profits by the CIT(A) and the assessee accepted the said decision. Assessee has not filed appeal against such decision and therefore, so far as the head of income for sum of Rs 21,50,410/- is concerned, the finality is attained. Hence the nature of the balance gains of Rs. 2,17,24,104/- is the dispute before us.
13. Regarding the legal scope of the issue under consideration, it is a settled position that the issue relating to a particular transaction constitutes capital gain transaction or business transaction is a mixed question of law and fact. The answer to the dispute depends on the facts of each case. Further, it is also a settled law that the principle of estoppels or res judicata does not apply to the tax proceedings as held by the ITAT, Mumbai in the case of Hitesh S. Bhagat (supra) and the judgment of the Hon'ble Supreme Court in the case of New Jahangir Valkil Mills Ltd. v. CIT [1963] 49 ITR 137. Further also, the rule of consistency should be followed so long as the facts are not different as held by the Hon'ble Supreme Court in the case of Gopal Purohit(supra). Regarding the intention of the assessee, the decision of ITAT, Rajkot in the case of Mukeshbhai Babulal Shah (supra) and it is relevant for the proposition "where intention of the assessee behind purchase and sales of the shares was quickly to realize profits and not to earn dividend from them, the income would be assessable as business income". This proposition was drawn on the facts of the stock turnover ratio of 1:16 and capital turnover ratio of 1:14. Order of the Tribunal in the case of Hitesh S. Bhagat (supra) relied upon by the Ld DR is relevant for the proposition that the STCG claimed by the assessee were treated as business income on the facts that which involve 86 transactions on sale with the holding period of 1 to 44 days. In the said decision, the Tribunal held "acceptance of the claim for the earlier year would not operate res judicata or estoppels on the Assessing Officer for deciding the issue for the year under consideration when the facts are not strictly identical".
14. Facts of the Assessee's case: CIT(A) incorporated a table containing relevant data for many AYs 2004-05 to 2011-12 for purpose of comparison and distinguishing the figures for the present AY 2008-2009 from that of the other AYs. Data relate to the number of scrips, shares purchased and sold, opening and closing stocks, volumes/turnovers, no of transactions of sale and purchases, turnovers of purchase and sales and ratios etc. The said table is as under:
VEENA KALRA
| 1. DETAILS OF SHARE HOLDINGS | |||||||||
| Sr.No | PARTICULARS | A.Y.2004-05 | A.Y. 2005-06 | A.Y.2006-07 | A.Y.2007-08 | AY.2008-09 | AY.2009-10 | A.Y.2010-11 | A.Y.2011-12 |
| 1 | No. of scrips held on 1st April | 16 | 15 | 20 | 23 | 26 | 17 | 16 | 14 |
| Value of Opening of Investments | 435,750 | 435,750 | 868,020 | 1817.575 | 1,829,470 | 1,795,971 | 1,745.747 | 1,767,517 | |
| 2 | No. of scrips Purchased during the year | 1 | 13 | 8 | 25 | 29 | 7 | 1 | |
| 3 | No. of purchase transactions | 1 | 11 | 12 | 36 | 162 | 37 | 1 | - |
| Total Purchase Value | 42,750 | 2.290,631 | 1,668,036 | 43.645479 | 253731,195 | 21.901,757 | 36,800 | - | |
| 4 | No. of scrips Sold during the year | 7 | 12 | 10 | 22 | 31 | 5 | 2 | 2 |
| 5 | No. of sale transactions | 8 | 27 | 12 | 95 | 184 | 16 | 2 | 2 |
| Total Sale Value | 341,229 | 6,274,810 | 3,282.258 | 63,586,557 | 289,185,001 | 78,198,148 | 40,813 | 877,792 | |
| 6 | No. Of scrips held on 31st March | 15 | 20 | 23 | 26 | 17 | 16 | 14 | 14 |
| 7 | 7 Value of closing Investments | 435,750 | 868,020 | 1,817,575 | 1,829,470 | 1,795,971 | 1,745,747 | 1,767,517 | 1,764,815 |
| 8 | Closing Capital (Networth) | 561,311 | 5,018,919 | 9,114,788 | 28,388,420 | 51,192,133 | 22,830,751 | 22,055,550 | 23.325,885 |
| 9 | Share Investment as % of Capital | 77,63% | 17,29% | 19,94% | 64,4% | 35,1% | 7.65% | 80,1% | 7,57% |
| 10 | Amt. of Dividend Received during the year | 397,349 | 1,270,955 | 628,208 | 785,778 | 968,732 | 825,504 | 1.025,021 | 1,129,702 |
| 11 | LTCG/(LTCL) earned | 224,962 | 4.361,595 | 3,538,792 | 571.256 | 873,908 | 2,646,634 | (9.186) | 873,592 |
| 12 | STCG/(STCL) earned | - | 115,509 | 1,650,313 | 19,369.822 | 21,724,104 | (61,017) | - | - |
| 13 | Market value of Investments | 14,513,729 | 31,986,968 | 56,274,598 | 50,066,292 | 46,830,702 | 47,675,649 | 74,556,328 | 98,338,042 |
15. From the above it is evident, that the figures for the AY 2008-2009 are not comparative qua the earlier and subsequent assessment years. The chart is prepared for comparing 13 parameters and most of them i.e. volumes/turnovers, number of scrips/transaction no, opening/closing stock position, ratios etc. show distinctly increasing tendency for the AY 2008-09 aimed at making quick profits. The data for the year under consideration is clearly distinguishable from that of the other years. Therefore, the judgment in the case of Gopal Purohit (supra) will not help the assessee in matters of 'principle of consistency'. Therefore, the related arguments of Ld Counsel for the assessee are dismissed. As such it is a settle legal position that the principles of res judicata and the estoppels do not apply to the proceedings under the Act.
16. Regarding the intention of the assessee, normally entries originally made in the books of account soon after a purchase transaction is complete, becomes relevant factor or indicating factor for deciding the said intention. It is the case of the assessee that the relatable investments are made for short term gains purpose. Now the question is how to demonstrate the same if not with the help of the books of account and entries therein and of course, stand by the same without yielding to the temptation of making quick profits and ideally to earn the dividend income on one side and the capital appreciation on the other. In this case, the assessee failed to demonstrate the same with the help of the books. The conduct of the assessee demonstrates different. As discussed above, there is problems in filing Balance Sheet copies for relevant AYs, there are problems in not sticking to the investments, the assessee buys a scrip on a particular day and sell it when there is raise in index in open market for profits, assessee buys the same scrip later only for unloading later for profits again. This conduct of the assessee does not congruous with his claims in the return. It is the claim of the assessee that as an individual, she is not under obligation to prepare and file Balance Sheets. This view point may correct had the assessee not been involved in the transactions of this magnitude claiming engaged in the business at least undisputedly for the extent of F&O. Therefore, this part of the explanation of the assessee is rejected on fact of the present case. Thus, the assessee has failed to demonstrate the book entries involving each of the transaction. Further, on the intention related arguments, it is an admitted position that assessee accepted the decision of the CIT (A) with regard to the business nature of the gains of Rs. 21,50,410/- relatable to the reentered transactions in the same scrip. With no appeal of the assessee against the order of the CIT(A), it is agreed position now that the so called book entries on the share transactions as investment (with reference to the said reentered transaction) have to be now deemed them as 'business transactions'. These developments indeed raised many issues relating to the (i) quality of so called book entries for other scrips, (ii) the credibility of the assessee's claims relating to the original 'intention', (ii) why no the other transactions are also to treated as business transactions as well etc. With the said developments, the onus now shifts to the assessee to demonstrate that the other transactions do not constitutes 'business transaction' and assessee failed to do so not even before us. Thus, the assessee has forfeited the original claim of investment nature of the transactions for the gain of Rs. 21,50,410/- clearly and therefore, for others too. Thus, such conduct of the assessee in matters of the claims made in the return w r to STCG is unacceptable. Therefore, the views of the AO are sustainable and hence, the conclusion of the CIT(A) on the balance of the STCG is reversible.
17. Further, the intentions of assessee for realizing of the quick profits, a business trait, we find that it is an admitted fact that the assessee entered into common scrips for conducting the business of F&O on side and the investment in STCG on the other. In fact, there are common shares for the investment for STCG and LTCG too. Therefore, the allegation of quick profits and the issue of the business akinness, came up in the assessment proceedings. Assessee picked up the six common scrips for business of F&O as well as the STCG. This is the area of dispute between the parties and there is no issue on change of classification of STCG as LTCG or vice versa before us. There is no clarity on what basis certain transactions involving the same scrip are treated as business and others as STCG and the assessee has no explanation in this regard except relying on the book entries, which we rejected already for detailed reasons given above. In the process, the assessee got an unfair advantage of lower tax rates applicable to the STCG. Such advantage is allowable unless the onus cast on the assessee is demonstrated. Assessee could not demonstrate the reasons for such treatment, which turned out to be prejudicial to the interest of the revenue. Considering the failure of the assessee, we are of the opinion the decision of the AO becomes sustainable.
18. Now we shall take up the issues relating to revenue's allegation of quick realization of the profits, which is a business trait. We find that the assessee purchased shares worth Rs. 25.37 Cr. during the year and unloaded the shares to the value of more than Rs. 28.92 Cr. These volumes indicate that what is purchased in the year is completely sold. Thus, inescapable inference is that the assessee intends to realize the investment and also to quickly realize the relatable profits in the year itself. Out of Rs 28.92 cr. of sale proceeds, the assessee again purchased shares worth Rs 2.19 crores and Rs 36,800/- in the succeeding AYs. Assessee completely exited by the end of AY 2011-12. These facts go against the assessee's claim and confirm the AO's allegation that the assessee believes in quick profits and not in the Short Term investment activity. Other relevant data compiled in the table given above shows the business traits of the transactions. Assessee maintains uniformly the closing stock worth Rs 17- Rs 18 lakhs in all recent AYs. The same is case with opening stocks of shares too. In fact, the opening and closing values are more or less equal. The number of scrips, transactions of purchase and sales also suggests the increasing trends for making quick business profits. Thus, the decision of the Tribunal in the case of Mukeshbhai Babulal Shah (supra) which is relevant for the proposition that "where intention of the assessee behind purchase and sales of the shares was quickly to realize profits and not to earn dividend from them, the income would be assessable as business income" , helps the revenue. Further, we have analysed the other undisputed facts narrated in 9 above about the fact of assessee accepting the verdict of the CIT(A) of taxing of Rs 21,50,410/- as business income, purchase and sale TO of Rs. 25.37 Cr and Rs. 28.92 Cr respectively, closing stock of Rs. 17.96 lacs is very close to opening stock of Rs. 18.29 lacs, the number of transactions (162 + 184= 346) against other years' single or double digits and find the said date helps the revenue. Further, we also reiterate that the with the Stock turnover ratio is 1:16, it is commonsense to infer that the assessee intention is to quickly to realize the profits and not to wait for the dividend or capital appreciation. In any case, the issue of establishing the real capital appreciation of the shares is difficult for the assessee in the capital market of rapid fluctuations of relevant indices.
19. To sum, the facts about the entries in the books of account are inconclusive. By not contesting the conclusion of the CIT(A) with regard to so called STCG Rs 21,50,410/-, the assessee forfeited the claims relating to the credibility of the books entries at least with reference to the transactions involving the re-entered scrips. With this, with regard to claims of investment in other scrips, the onus shifts to assessee and assessee failed to discharge the same. The intention of acquiring the shares as investment for capital appreciation is not translated and instead the symptoms of going for quick profits are evident. The stock: turnover ratio at 1:16 does against the claims of the assessee. Other data relating to opening stocks and closing stocks on one side and the assessee's final exiting from the so called claim of STCG at the end of 2011-12 indicates the assessee's conduct for quick profits and not for investment. Of course, the holding period particulars also confirm the AO's conclusions. Regarding the decisions relied upon by the Ld Counsel for the assessee, we find those cases are factually distinguishable and none of them has the record of re-entered transactions, high stock: TO ratio and also the history of causing dent to the original claim of the assessee with regard to the book entries and the intention of the assessee. Therefore, from the facts and the legal propositions narrated above, we are of the opinion that the conclusions of the CIT (A) on the balance of the STCG are reversed and order of the AO is restored. Accordingly, ground raised by the Revenue is allowed.
20. In the result, appeal of the Revenue is allowed.
Regards
Prarthana Jalan
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