CAPITAL GAINS- Supreme Court dismissed Civil Appeal in case of Gopal Purohit.

[C.A. DEV KUMAR KOTHARI]

Relevant links and references:

The Commissioner of Income Tax Versus Gopal Purohit 2010 -TMI - 203968 - Supreme Court of India

The Commissioner of Income Tax Versus Gopal Purohit 2010 -TMI - 35188 - HIGH COURT OF BOMBAY

Gopal Purohit  v. Joint Commissioner of Income-tax, 25(3), Mumbai 2009 -TMI - 59499 - ITAT BOMBAY-G

CIT vs. Gopal Purohit (Supreme Court) 

The Supreme Court after hearing four counsels  of the Revenue who were present, condoned delay in filing of appeal and then dismissed the special leave petition  vide order dated 15.11.2010 against the judgments of the Bombay High Court in CIT vs. Gopal Purohit   2010 -TMI – 35188.

The High Court  while dismissing the Appeal of revenue against the order of Tribunal had , inter alia held that:

(a) An  assessee can  maintain two separate portfolios, one relating to investment and another relating to business of dealing in shares. This has been described as principal of law by the High Court.

(b) that a finding of fact had been arrived at by the Tribunal as regards the two distinct types of transactions namely, those by way of investment and those for the purposes of business.  

(c) that  Tribunal rightly held that there should be uniformity in treatment and consistency when facts and circumstances are identical particularly in the case of the assessee and  

(d) that intentions of assessee can be gathered from the books of account, nature of final accounts, reflection in P & L account and balance sheet and  valuation  of shares as stock-in-trade  (at lower of  cost or market value ) or as investment (at cost).

(d) that entries in books of account  have a significant bearing to ascertain nature of transactions  but  are not conclusive in determining the nature of income. 

(e) The Court affirmed decision of ITAT about ‘capital gains’ arising on sale of shares held as investment by assessee.

Questions Before the High Court and order of High Court:

Before the Bombay High Court the following questions of law  were framed and referred in appeal filed by the revenue against the judgment of the Income Tax Appellate Tribunal, dated 10^th February 2009:

"a) Whether, on the facts and circumstances of the case and in law, the Hon'ble ITAT was justified in treating the income from sale of 7,59,003 shares for Rs. 5,00,12,879/­as an income from short term capital gain and sale of 3,88,797 shares for Rs.6,65,02,340/­as long term capital gain as against the "Income from business" assessed by the A.O.?

b) Whether, on the facts and circumstances of the case and in law, the Hon'ble ITAT was justified in holding that principle of consistency must be applied here as authorities did not treat the assessee as a share trader in preceding year, in spite of existence of similar transaction, which cannot in any way operate as res­judicata to preclude the authorities from holding such transactions as business activities in current year?

c) Whether, on the facts and circumstances of the case and in law, the Hon'ble ITAT was justified in holding that presentation in the books of account is the most crucial source of gathering intention of the assessee as regards to the nature of transaction without appreciating that the entries in the books of accounts alone are not conclusive proof to decide the income?"

In respect of the above questions the High Court observed and held on the following lines:

1. The Tribunal has entered a pure finding of fact that the assessee was engaged in two different types of transactions involving  investment  and business.
2. As per facts found the first set of transactions involved investment in shares.
3. As per facts found the second set of transactions involved dealing in shares for the purposes of business being  transactions purely of jobbing without delivery.
4. The High Court observed and held that the Tribunal has correctly applied the principle of law in accepting the position that it is open to an assessee to maintain two separate port folios, one relating to investment in shares and another relating to business activities involving dealing in shares.
5. The Tribunal held that the delivery based transactions in the present case, should be treated as those in the nature of investment transactions and the profit received therefrom should be treated either as short term or, as the case may be, long term capital gain, depending upon the period of the holding.
6. A finding of fact has been arrived at by the Tribunal as regards the existence of two distinct types of transactions namely, those by way of investment on one hand and those for the purposes of business on the other hand.
7. The High Court thus, held that Question (a) above, does not raise any substantial question of law.
8.  Regarding  Question (b) High Court observed that, the Tribunal has observed in paragraph 8.1 of its judgment that the assessee has followed a consistent practice in regard to the nature of the activities, the manner of keeping records and the presentation of shares as investment at the end of the year, in all the years.
9. Before High Court revenue contended that the revenue submitted that a different view should be taken for the year under consideration, since the principle of res judicata is not applicable to assessment proceedings.
10. High Court then held that the Tribunal correctly accepted the position, that the principle of res judicata is not attracted since each assessment year is separate in itself. The Tribunal held that there ought to be uniformity in treatment and consistency when the facts and circumstances are identical, particularly in the case of the assessee. This approach of the Tribunal cannot be faulted. The revenue did not furnish any justification for adopting a divergent approach for the Assessment Year in question. Question (b), therefore, does not also raise any substantial question.
11.  Regarding  Question (c) High Court held that  there cannot be any dispute about the basic proposition that entries in the books of account alone are not conclusive in determining the nature of income. The Tribunal has applied the correct principle in arriving at the decision in the facts of the present case. The finding of fact does not call for interference in an appeal under Section 260A.  
12. No substantial question of law is raised.
13. The appeal  was thus  dismissed as there was no substantial question of law.

From above analysis  from the judgment of the High Court we find that the High Court considered  that a principal of law  was involved and that in that regard  “tribunal has correctly applied the principle of law in accepting the position that it is open to an assessee to maintain two separate port folios”  one relating to investment in shares and another relating to business activities involving dealing in shares.

Other aspects as considered by the High Court were question of facts.

Effect of Dismissal of appeal by the Supreme Court:

For ready reference judgment of the Supreme Court in one of the appeal is reproduced below (with highlights added by author):

COURT NO.1               SECTION IIIA 

             S U P R E M E      C O U R T   O F    I N D I A

                             RECORD OF PROCEEDINGS 

Petition(s) for Special Leave to Appeal (Civil)....../2010

(CC 16802/2010)

(From the judgement and order dated 06/01/2010 in ITA No.1121/2009

of The HIGH COURT OF BOMBAY)

C.I.T.                                                  Petitioner(s) 

                   VERSUS 

GOPAL PUROHIT                                           Respondent(s) 

(With appln(s) for c/delay in filing SLP) 

Date: 15/11/2010    This Petition was called on for hearing today.

 

CORAM :

          HON'BLE THE CHIEF JUSTICE

          HON'BLE MR. JUSTICE K.S. PANICKER RADHAKRISHNAN

          HON'BLE MR. JUSTICE SWATANTER KUMAR

 

For Petitioner(s)           Mr.   Goolam E. Vahanvati,AG.

                            Mr.   Deva Datt Kamat,Adv.

                            Mr.   Anoopam N. Prasad,Adv.

                            Mr.   B.V. Balaram Das,Adv. 

For Respondent(s) 

             UPON hearing counsel the Court made the following

                                 O R D E R 

                 Heard learned counsel for the petitioner. 

                 Delay condoned. 

                 The special leave petition is dismissed.  

             [ T.I. Rajput ]                  [ Madhu Saxena ]

              A.R.-cum-P.S.                 Assistant Registrar

From the order of the Supreme Court we find that:

The bench of the Supreme Court consisted three judges.

The order was passed after hearing four counsels  of the Revenue who were present.

There seems no representation of the Assessee, (any name of Advocates appearing for Respondents is not given in the order)

The Supreme Court condoned delay in filing of appeals.

After condoning delay in filing the appeal the Supreme Court dismissed the special leave petition. 

Observations of the author:

The other aspects a decided by the Tribunal in the case, which have not been challenged b y the Revenue can be considered as having attained finality.

The important principal of law that assessee can maintain two portfolio is now final.

If in other cases facts are similar, then the revenue should accept the case of assessee about treatment as capital gains  or business income.

The volume and frequency is not important. In case of Gopal Purohit ,we find that there was volume and frequency both.

When a transaction in security is delivery based, and if the assessee has not treated the security as stock-in-trade or has not converted a capital asset into stock-in-trade, then the gain or loss on transfer of security held as ‘investment’ should be considered as ‘capital gains.

Another angle which also needs consideration:

After introduction of Security Transaction Tax, there has been a complete change in policy about taxation of transactions in securities. The changes in legislative intentions on introduction of security transaction tax and corresponding changes in treatment and taxation of income on sale of shares and  units of mutual funds need to be considered in purpose seeking manner. After these changes, the old rulings on these aspects are not much relevant. Security Transaction Tax (STT) and corresponding benefits of Income-tax are for simplification of tax regime on security transactions.  We find in the  Memorandum Explaining provisions of the Finance (No. 2) Bill, 2004 relevant portions are at 268 ITR (196- 197) (St.) under the heading 

“Levy of Transaction tax and exemption / concession on capital gain arising from securities entered in a recognized stock exchange”. On page 197 it is stated as follows in para 2:

    “With a view to simplify the tax regime on securities transactions, it is proposed to levy a tax at the rate of 0.15 per cent. On the value of all the transactions of purchase of securities that take place in a recognized stock exchange in India. This tax shall be collected by the stock exchange from the purchaser of such securities and paid to the exchequer. The provision relating to the proposed tax are contained in Chapter VII of the Finance (No.2)  Bill,2004, and shall take effect from the date this Chapter comes into force. 

Further, it is proposed to insert clause (38)  in section 10 of the income -tax Act, so as to provide exemption from long-term capital gain arising out of securities sold on the stock-exchange. It is also proposed to insert a new section 111A and amend section 115AD of the Income-tax Act,1961, so as to provide that short-term capital gains arising from sale of such securities to an investor including FIIs shall be charged at the rate of ten per cent.

These amendment will take effect from 1^st April,2005 and will, accordingly, apply to assessment year 2005-06 and subsequent years.” {Chapter VI, and clauses 5,24,25}.” 

As per author the purpose of levy of STT and corresponding concessions under I.T.Act, need to be considered harmoniously and  purpose seeking manner. 

 When STT is paid considering of concessions u/s 111A, 112 and 88E may be considered in a liberal manner.

After these changes in tax policy the assessee can be considered to have options to adopt benefit of taxes under head capital gains or against business under  S.88E as may be found tax advantageous to him.

It need to be considered in a manner that the law grant option to assessee to treat shares and units of mutual fund as stock-in-trade or as capital assets. This is so particularly in view of S.45(2) whereby assessee can treat or convert a capital assets as his stock-in-trade. This option is not given to the tax authorities. 

The options and privileges granted under law may not be considered in a manner so as to burden tax payer with more taxes and litigation. In this regard we can rely on ruling in case of CIT V  Mahindra Mills and others 2000 -TMI - 5784 – (SUPREME Court) in context of S. 32 relating to depreciation. 

Wrong approach of tax authorities in scrutiny assessments:

The policy of government is to rely on the assessee. For that reason we find that a major part of returns are accepted under summary assessment(which is almost as per self assessment of assessee). Only few cases based on some criterion and some on random basis are selected for scrutiny. However, when a case is selected for scrutiny, the approach of tax authorities is altogether different. As a general  rule, they consider that the assessment is to be made with high additions and disallowances. As a result we find high-pitched assessments and also that major demands raised in assessment are reduced in appeals.   

It is unfortunate that tax authorities are applying wrong approach and denying claims of assessee. In similar facts in many cases tax authorities have tried to treat capital gains as business income and in other cases where assessee claimed business head, the tax authorities applied head ‘capital gains’ only with a view to disallow claim of benefits available to tax payer under law. This type of mind set of tax authorities need to be changed.

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