Once the segregation of shares under two different portfolios was made and accepted by Revenue, the mere quantum of turnover and frequency of transactions could not decide the nature of transactions.

Short Overview : Where the assessee had clear intention of being an investor and had held shares by way of investment, assessee was to be treated as investor and any gain arising out of transfer of shares was to be treated as ‘capital gain’ and not ‘business income’.

Assessee-partnership firm derived income from investment activities. AO proceeded to assess the gains derived from share trading as ‘Business income’ as against the ‘Capital gains’ claimed by assessee. AO referred to the objects, as mentioned in partnership deed, and submitted that as firm was formed to carry on business of funding and investment, therefore, it was clear that firm was constituted to carry on business. Further, as transactions were huge, therefore, it was evident that nature of activity was in nature of business and not investment. Assessee submitted that it had two portfolios viz. ‘investment’ and ‘trade’ which was accepted by Revenue since assessment year 2002-03 onwards, therefore, revenue was not permitted to take a contrary view.

 it is held that Intention of assessee at the time of purchase of shares is paramount and where the assessee had clear intention of being a investor and had held shares by way of investment, assessee was to be treated as investor and any gain arising out of transfer of shares was to be treated as ‘capital gain’ and not ‘business income’. Further, once the segregation of shares under two different portfolios was made and accepted by Revenue, the mere quantum of turnover and frequency of transactions could not decide the nature of transactions. Also, CBDT Circular No. 6, dt. 29-2-2016 comes to the aid of assessee wherein it was clarified that where the assessee treated the securities as investment and not stock-in-trade in earlier years, Revenue was not permitted to take a contrary view. Thus, AO was not justified in treating the gains derived from share trading as ‘Business income’ as against the ‘Capital gains’ claimed by assessee.

Decision: In assessee’s favour.

Relied: Pr. CIT v. Bhanuprasad D. Trivedi  2018 TaxPub(DT) 4487 (SC) and CIT v. Vinay Mittal 2012 TaxPub(DT) 2360 (Del-HC).

Referred: Dalhousie Investment Trust Company Ltd. v. CIT (1968) 68 ITR 486 (SC): 1968 TaxPub (DT) 0316 (SC), CIT v. Gopal Purohit (2011) 336 ITR 287 (Bombay): (2010) 228 CTR 582 (Bombay): 2010 TaxPub(DT) 1272 (Bom-HC) and Smt. Sadhana Nabera v. ACIT [ITA No. 2586/Mum/2009]: 2010 TaxPub(DT) 1716 (Mum-Trib).

IN THE ITAT, DELHI BENCH

N.K. SAINI, V.P. & SUDHANSHU SRIVASTAVA, J.M.

ACIT v. Shri Finance

ITA No. 6064/Del/2014

23 October, 2018

Revenue by: K. Tiwari, Sr. DR

Assessee by: U.N. Marwah, CA

Sudhanshu Srivastava, J.M.

This appeal has been preferred by the department against order dated 14-8-2014 passed by the learned Commissioner (Appeals) -XXVI, New Delhi for assessment year 2010-11 and the sole issue in dispute is whether the gain of Rs. 2,14,75,356 from the sale of shares was to be assessed under capital gains or under business income.

2. Brief facts of the case are that the assessee is a partnership firm and derives income from investment activities. The return of income was filed declaring income of Rs. 19,96,804 which included Short Term Capital Gains of Rs. 19,22,796 and interest of Rs. 74,008. The Short Term Capital Gains were arrived at after claiming set off of brought forward short-term capital loss of Rs. 19,53,229 pertaining to assessment year 2007-08. The assessee had also claimed income of Rs. 1,75,54,960 exempt under section 10(38) of the Income Tax Act, 1961 (herein after called as ‘the Act’) and dividend income of Rs. 26,36,252 claimed as exempt under section 10(34)/(35) of the Act. The assessee also claimed carry forward of long-term capital loss amounting to Rs. 41,247. The case was selected for scrutiny and during the course of scrutiny assessment proceedings, the assessing officer formed the opinion that the share transactions entered into by the assessee were in the nature of business operations and not in the nature of investment as claimed by the assessee. Accordingly, the assessing officer proceeded to assess the gains derived from the share trading as ‘business income’ as against ‘capital gains’ as claimed by the assessee. The assessment was completed at an income of Rs. 2,15,49,360 wherein the long-term capital gain of Rs. 1,75,54,960 claimed as exempt under section 10(38) and short-term capital gains of Rs. 19,22,796 were assessed as business income. The consequential effect was that the set off of short-term capital loss of Rs. 19,53,229 was also not allowed.

2.1 Aggrieved, the assessee approached the learned Commissioner (Appeals) challenging the treatment of capital gains as business income. The learned Commissioner (Appeals) directed the assessing officer to assess the gains of Rs. 2,14,75,356 from sale of shares under the head ‘capital gain’ instead of ‘business income’ and thus allowed relief to the assessee.

2.2 Now the department is before the ITAT and has challenged the order of the learned Commissioner (Appeals) by raising the following grounds of appeal :–

“(i) The learned Commissioner (Appeals) has erred in directing the assessing officer to assess profit of Rs. 2,14,75,356 from sale of shares under the head Capital Gain instead of Business Income despite the fact that the assessee was engaged in the business of trading in shares and it was the sole activity of the assessee which is also an admitted object of assessee firm as per Partnership Deed.

(ii) The Commissioner (Appeals) has erred in not correctly appreciating the facts of the case that the statement of purchase and sale and also activity of the assessee proved that he was engaged in the business of purchase and sale of securities in an organized and regular manner and showing income therefrom under the different head is just a strategy to avoid tax.

(iii) The Commissioner (Appeals) has not appreciated that the turnover of the assessee was Rs. 27.5 crores and in the light of guidelines provided by CBDT Circular No. 4/2007, dt. 15-6-2007, the substantial nature of transactions entered into by the assessee can be classified as business activity only.”

3. The learned Sr. Departmental Representative submitted that the assessee firm had used a colourable device to avoid tax or pay tax at a lower rate by claiming business income as income from capital gains. It was submitted that the assessee firm consisted of six partners who had come together to put their funds in a collective manner for better utilisation and, therefore, the activity was purely of business and not of investment. He referred to the objects, as mentioned in the partnership deed, and submitted that even the objects of the partnership firm mentioned that the object of the firm was to carry on business of funding and investments and, therefore, it was very much clear that the partnership had been constituted to carry on business. The learned Sr. Departmental Representative also submitted that the transactions were huge and, therefore, it was evident that the nature of activity was in the nature of business and not investment. The learned Sr. Departmental Representative also placed reliance on the following judicial precedence in support of his contention that the nature of activity of the assessee firm was in fact in the nature of business activity :–

1. Manoj Kumar Samdaria v. CIT (2014) 45 taxmann.com 394 (Delhi) : (2014) 223 Taxman 245 (Delhi) (Mag)

2. Manoj Kumar Samdaria v. CIT (2014) 52 taxmann.com 247 (SC) : (2015) 228 Taxman 63 (SC)

3. Sadhana Nabera v. ACIT [ITA No. 2586/Mum/2009] : 2010 TaxPub(DT) 1716 (Mum-Trib)

4. CIT v. Gopal Purohit (2010) 188 Taxman 140 (Bombay) : (2011) 336 ITR 287 (Bombay) : (2010) 228 CTR 582 (Bombay) : 2010 TaxPub(DT) 1272 (Bom-HC) 

5. Dalhousie Investment Trust Co. Ltd. v. CIT (1968) 68 ITR 486 (SC) : 1968 TaxPub(DT) 0316 (SC) 

4. In response, the learned Authorised Representative submitted that presence of commercial motive is a primary legal requirement for trade whereas in the case of the assessee the period of holding of the investments and earning of substantial dividend income substantiate the assessee’s claim that the shares were not acquired with the intention of trading but were held for investment purposes. It was submitted that the holdings shares which were sold during the year under consideration were held by the assessee firm between a period of one year to five years and, therefore, it could not be said that the activity was in the nature of business or trade. It was also submitted that the assessee firm has been maintaining two portfolios viz. ‘investment’ and ‘trade’ and this has been accepted by the department since assessment year 2002-03 onwards. It was also submitted that during the year under consideration or in earlier years, the portfolios of the shares have not been inter-changed. It was further submitted that once the segregation of shares under two different portfolios has been made and accepted, the mere quantum of turnover and frequency of the transactions will not decide the nature of transactions. Reliance was placed on the judgment of the Hon’ble Apex Court in the case of Pr. Commissioner of Income Tax v. Bhanuprasad D. Trivedi (HUF) (2018) 95 taxmann.com 19 (SC) : 2018 TaxPub(DT) 4487 (SC) wherein the Hon’ble Apex Court had dismissed the department’s Special Leave Petition against the order of the Hon’ble High Court wherein the Hon’ble High Court, by the impugned order, had held that the intention of the assessee at the time of purchase of shares is paramount and where the assessee had clear intention of being a investor and had held shares by way of investment, the assessee was to be treated as investor and any gain arising out of transfer of shares was to be treated as ‘capital gains’ and not ‘business income’. The learned Authorised Representative also placed reliance on CBDT Circular No. 6, dt. 29-2-2016 wherein it has been stated in Para 3(b) that where in respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of transfer, the assessee desires to treat the income arising from the transfer thereof as capital gain, the same shall not be put to dispute by the assessing officer. The learned Authorised Representative also supported the order of the learned Commissioner (Appeals) and submitted that department’s appeal deserved to be dismissed.

5. We have heard the rival submissions and have also perused the material available on record. It is undisputed that 7 scrips under 10 separate transactions were sold which had holding periods ranging between 370 days to 1738 days. Thus, all the scrips were held for more than 1 year and up to approximately 5 years. It is also undisputed that the shares sold by the assessee and treated as long-term capital gains were duly disclosed in the assessee’s balance sheet under the head ‘investment’. Apart from this, the assessee also undertook 20 transactions of purchase and 13 transactions of sale of shares which have been duly disclosed under Short Term Capital Gains taxable at the normal tax rate of 30%. It is also not established by the department that the assessee has made repetitive transactions of purchase and sales of shares. It is also undisputed that the assessee has earned substantial dividend income by holding investments and the dividend income during the year amounted to Rs. 26,36,252. It is also to be noted that the assessee’s two portfolios have been accepted by the department since assessment year 2002-03. The learned Commissioner (Appeals) has given due credence to all these facts and the learned Sr. Departmental Representative has not been able to point out any factual error in the findings so recorded by the learned Commissioner (Appeals). We also note that the judicial precedents relied upon by the learned Sr. Departmental Representative are distinguishable on facts. It is our considered opinion that on the facts of the case, the adjudication by the learned Commissioner (Appeals) cannot be interfered with. We find support from the judgment of the Hon’ble Delhi High Court in the case of CIT v. Vinay Mittal (2012) 22 taxmann.com 151 (Delhi) : 2012 TaxPub(DT) 2360 (Del-HC) wherein the Hon’ble Delhi High Court had dismissed the department’s appeal against the order of the Tribunal on an identical issue after duly noting that in the earlier assessment years transactions in the investment portfolio by the assessee were accepted by the assessing officer. While dismissing the department’s appeal, the Hon’ble Delhi High Court also duly noted the fact that the assessee had been maintaining two separate portfolios viz. investment portfolio and trading portfolio. The Hon’ble Delhi High Court also observed that the quantum or total number of transactions may not be determinative but in a given case, keeping in view the period of holding may indicate intention to make investment. We also find that CBDT Circular No. 6, dt. 29-2-2016 also comes to the aid of the assessee wherein it has been clarified by the CBDT that where the assessee treats the securities as investment and not has stockin- trade in earlier years, the revenue is not permitted a contrary view. It is evident from this Circular that CBDT has given instructions to the assessing officers to treat capital gains on listed shares and securities held for a period of more than 12 months as income from capital gains if the assessee so desires. The dismissal of the Special Leave Petition of the department by the Hon’ble Apex Court in the case of Pr. Commissioner of Income Tax v. Bhanuprasad D. Trivedy (HUF) (SC) also comes to the aid of the assessee wherein the Hon’ble Apex Court upheld the Hon’ble High Court’s impugned order that intention of the assessee at the time of purchase of shares is paramount. Accordingly, in view of our above observations, we find no reason to interfere with the findings of the learned Commissioner (Appeals) from this issue and we dismiss the grounds raised by the department.

6. In the final result, the appeal of the department stands dismissed.