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Shri Rashmikant Chhaganbhai Patel, C/o. Prannath Petroleum Versus Addl. CIT, Range-3, Baroda

2016 (5) TMI 690 - ITAT AHMEDABAD

Share transactions - Capital gain or income from business - Held that:- In the facts and circumstances of the instant case, on the basis of principle of consistency alone, the action of the revenue authorities was liable to be quashed. It was ordered accordingly and the Assessing Officer was directed to accept the claims of assessee in regard to short-term capital gain and long-term capital gain. The ratio laid down in Gopal Purohit vs. JCIT (2009 (2) TMI 233 - ITAT BOMBAY-G ) supports the case .....

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our of assessee - ITA Nos. 2131/Ahd/2014 & 2484/Ahd/2011 - Dated:- 13-5-2016 - Shri Shailendra K. Yadav, Judicial Member And Shri Anil Chaturvedi, Accountant Member For the Petitioner : Shri S. N. Soparkar, AR For the Respondent : Smt. Sonia Kumar, Sr-DR ORDER Per Shailendra K. Yadav, Judicial Member These appeals filed by the assessee are directed against the orders of the CIT(A) for Assessment Years 2008-09 and 2006-07. Both these appeals involve common issues, these were heard together and ar .....

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es leave to add, alter, amend and/or withdraw any ground or grounds of appeal either before or at the time of hearing of the appeal. 3. The assessee has raised following grounds of appeal for Assessment Year 2008-09:- 1. On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the Assessing Officer s finding that the assessee earned business income from sale of shares at ₹ 65,61,832/- as against the claim of the assessee that the aforesaid income was in the .....

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tion, the assessee returned Short Term Capital Gains (STCG) of ₹ 2,00,41,453/- and Long Term Capital Gains (LTCG) of ₹ 70,64,982/-, income from other sources of ₹ 36,63,405/- and tax free dividend of ₹ 6,63,686/-. The Assessing Officer observed that the assessee did substantial and continuous dealings in shares and securities during the year and dealt in not less than 167 different scripts while carrying out multiple trades of buying/selling shares every day. The shares w .....

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no way change the real character of holding of shares held as investment. The Assessing Officer asked the assessee to show-cause as to why investment should not be taken as converted into stock-intrade at the beginning of previous year relevant to A.Y.2006-07 and provisions of section 45(2) be not applied, i.e. difference between fair market value at the beginning of previous year and original cost be taxed in the year of sale of shares as Long Term Capital Gains and difference between sale proc .....

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₹ 38.66 crore during the year and opening stock of shares of ₹ 2.81 crore, the assessee earned dividend income of ₹ 6.63 lakh, which was only 0.16% of the shares held. The Assessing Officer observed that share transactions done by the assessee during the year ran into thousands and proportion of STCG (Rs. 2 crore) to LTCG (Rs.70.64 lakh), i.e., 3:1 also indicated this. The Assessing Officer also made a backward calculation from the interest on borrowings of ₹ 22,81,644/- .....

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r of times like any other stock-in-trade and to earn business income from such roll over. The Assessing Officer also noted increase in closing stock (Rs.9.98 crore) from the opening stock (Rs.2.81 crore), i.e., ratio of 4:1 to infer that during the year, the assessee reinvested income derived from dealing in shares to increase his stock-in-trade. Further, the Assessing Officer noted that ratio of sale/purchase was 0.85, which also indicated that main intention of buying of shares was to roll the .....

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were converted into stock-in-trade at the beginning of previous year relevant to Assessment Year 2006-07 and provisions of Section 45(2) were accordingly applied. The Assessing Officer did not grant benefit of exemption u/s 10(38) on the ground that transfer giving rise to LTCG was not subject to Securities Transaction Tax (STT). Accordingly, the Assessing Officer taxed the difference between sale price and fair market value as on 01.04.2005 as business income. Similar issue arose in A.Y. 2008-0 .....

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e us inter alia submitting that the CIT(A) erred in holding that the income of ₹ 2,00,41,453/- earned by way of Short Term Capital Gains and ₹ 70,64,982/- earned by way of Long Term Capital Gains to be taxed under the head Profits and Gains from Business and Profession . On the contrary, ld. Departmental Representative supported the orders of the lower authorities. 6. After going through the rival contentions and material on record, we find that the main issue before us is with regar .....

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treated as business income by Assessing Officer is required to be treated as LTCG. Nothing contrary was brought to our knowledge in this regard, so concurring the contentions of the assessee, we hold that the LTCG of ₹ 70,64,982/- claimed by the assessee is required to be treated as LTCG. Assessing Officer is directed accordingly. 6.1 With regard to STCG of ₹ 2,00,41,453/- claimed by the assessee and treated the same as business income by the Assessing Officer, the stand of the asse .....

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circumstances of the present case are to be adopted. For determining the criteria adopted, depending upon the frequency of certain transactions, it is observed that purchasing of particular script and selling the whole quantity would comprise a cycle, if such cycle is repeated for more than four times, then the script would be as stock-in-trade. In such a situation, the intention of the assessee cannot be held that the shares as investment. In case, where holding period is more than a month, the .....

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ing out of sale of opening stock, needs to be taxed as Short Term Capital Gain or Long Term Capital Gain, depending upon the holding period and assessee shall be entitled to benefit of section 10[381 of the Act as per law". 6.2 In this background, the Ld. counsel of the assessee submitted the above referred decision of the Hon'ble ITAT in case of Assessee's wife Smt. Chandrikaben R Patel was dated 31-12-2013. Thereafter, the entire trend of the Hon'ble Tribunal as well as the Ho .....

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s, either investment or business profit. For the said purpose, he relied upon the following decisions compiled in the compilation of orders. a) Order of Hon'ble ITAT, Ahmedabad in case of Smruti Shreyans Shah ITA No. 3214, 3180, 3295 and 3296/A/2009 and C.O # 3/A/2010 [A.Y. 2004-05 to 2006-07) decision dt 26-6-2016 b) Order of Hon'ble ITAT, Ahmedabad in case of Shah Investor's Home Ltd. ITA No. 1424/A/2010 [A.Y. 2004-05 to 2006-07) decision dt 16-10-2015 c) Judgement of the Hon'b .....

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015] 378 ITR 304 (Bom.) decided the issue in favor of the assessee. In said decision of Bombay High court, the CIT(A) had laid down certain parameters for trading in sale of shares as capital gain which has been confirmed by ITAT and ultimately, by the Bombay High court. 6.4 We find that the Ld. CIT(A) confirmed the finding of the Assessing Officer ignoring important relevant factors which goes to the root of the question raised before us and hence, we reproduce the same as under:- (a) The appel .....

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l change. (b) The appellant has maintained separate books of account in respect of business income derived from trading of shares. In F&O share transactions such shares were shown as stock in trade in the books of account and in the Balance Sheet. On the other hand, the investment shares were separately accounted in the books of account as investments and were also reflected in the Balance Sheet as such. (c) In the case of Janak S.Rangawala vs. ACIT, 11 SOT 627 the Hon'ble Tribunal has h .....

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cepted principle that same view should be adopted for subsequent years, unless there is a material change in facts. 6.5 In the books of account the shares have been treated as investment and are reflected in the Balance Sheet as investment and valued at cost. The appellant during the year under consideration has also derived income from F&O share transactions for which separate books of account have been maintained. Income derived from such transactions have been offered to tax under the hea .....

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ffered as either long term capital gain or short term capital gain which was accepted by the Department. Even though the principle of res judicata may not be strictly applicable to Income-tax proceedings but, at the same time, consistency in approach in similar facts and circumstances, is very important for the legal system as held by the Hon'ble Delhi High Court in the case of CIT vs. Dalmia Promoters Developers P. Ltd. 281 ITR 346 (Del). In this case, interest income was assessed as busine .....

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considered and decided consistently in a number of earlier assessment years in a particular manner, then for the sake of consistency, the same view should continue to prevail in subsequent years unless there is some material change in the facts. Same view has been corroborated by the Hon'ble Kerala High Court in the case of CIT vs. N. P. Mathew (Deed.) 280 ITR 44. The relevant part of the ratio is reproduced from the Head note: "Held, dismissing the appeal, that with regard to another .....

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oceedings but consistency in approach is very important for legal system. 6.7 The appellant was a director in Shri Dinesh Remedies Ltd. and Om Shri Gurukrupa Properties and developers Pvt. Ltd. during the year under consideration. In addition he was a karta of Rashmikant C. Patel HUF. He was also a partner in M/s. Uniplast Nicotine Ind. It is evident that when the appellant is associated with multiple entities, it is impossible for him to even spend time in share trading. Moreover, there is no i .....

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ithout trading as the share market runs on speculation. This has not taken place in case of appellant. Thus, assessee has mainly involved in delivery based transactions. 6.9 For determination as to whether any particular income arising on sale of shares is to be treated as business income or capital gain, all the relevant facts and circumstances have to be considered. This question came up before the Hon'ble Gujarat High Court in the case of CIT vs. Rewashanker A. Kothari (2006) 283 ITR 338 .....

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d furnish a valuable guideline ; (b) the second test is why and how and for what purpose the sale was effected subsequently ; (c) the third test is as to how the assessee dealt with the subject matter of transaction during the time the asset was with the assessee, whether it has been treated as stock-in-trade, or been shown in the books of account and balance sheet as an investment. This inquiry, though relevant, is not conclusive ; (d) the fourth test is how the assessee himself has returned th .....

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authorises such an activity ; (f) the most important test is as to the volume, frequency, continuity and regularity of transactions of purchase and sale of the goods concerned. In a case where there is repetition and continuity, coupled with the magnitude of the transaction, bearing reasonable proportion to the strength of holding, an inference can readily be drawn that the activity is in the nature of business." 6.10 The Hon'ble ITAT Mumbai in the case of Janak S. Rangwalla vs. ACIT ( .....

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period. It was also noted that nondelivery based transactions had been treated by the assessee as business activity and delivery based transactions had been treated as an investment activity and. accordingly, the assessee had claimed himself both dealer as well as investor and had offered income for taxation accordingly which had been claimed to have been accepted by the revenue authorities in earlier years and, hence, it became important to analyze the facts of few earlier years. On considerin .....

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profit. (iii) The assessee had shown shares purchased on delivery basis as investment at the end of the year and no stock-in-trade existed on that date and the assessee had earned both long-term and short-term capital gains which meant the assessee had also held shares for the period of more than 12 months. Thus, the nature of activities, modus operandi of the assessee, manner of keeping records and presentation of shares as investment at the year end were same in all the years, and, hence, appa .....

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at facts and circumstances were identical, even though a different stand had been taken by the revenue authorities. In that view of the matter, the action of the revenue authorities in disallowing the claim of the assessee In the relevant year needed verification. In the process to find the answer, it was noted that there was a change in the scheme of taxation relating to short-term capital gains and long-term capital gains. Through the Finance Act, 2004, the Legislature imposed securities trans .....

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e of taxation only must have prompted the revenue authorities to take a different view on the same types of transactions entered into by the assessee in earlier years. There was no dispute that the assessee had claimed exemption under section 10(38) and/or had paid tax under section 111A at concessional rate on the transactions, where securities transaction tax had not been paid. It was also noted that the assessee had paid tax on short-term capital gains at normal rates on share transactions ex .....

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