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2014 (2) TMI 1274

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..... 0 and ITA No.748/Mum/2013 - - - Dated:- 21-2-2014 - SHRI R.C. SHARMA, AM AND SHRI AMIT SHUKLA, JM. Assessee by : Shri S.C. Tiwari and Natasha Mangat. Revenue by : Shri Ravi Prakash ORDER PER R.C. SHARMA (A.M.) : These are the cross appeals filed by the assessee and Revenue against the order of CIT(A) dated 27th November, 2009, for the assessment year 2006-07 in the matter of order passed u/s 143(3) of the Income-tax Act, 1961. 2. Common ground for assessee and Revenue relates to treatment of short term capital gain on sale of shares, whole of which were treated by the Assessing Officer as business income whereas the ld. CIT(A) has partly allowed assessee s claim and partly confirmed the action of the Assessing Officer. Both assessee and Revenue are in appeal before us. 3. Rival contentions have been heard and record perused. Facts in brief are that the assessee is an individual is a partner in M/s. Indoplast, a partnership firm. During the relevant assessment year under consideration, the assessee has shown income from futures and options operations and intra-day share transactions which were declared by him as his business income. The assessee has a .....

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..... wn by the assessee, have proximate and real trappings of business income, due to nature of assessee's activity and his intimate proximity with a variety of stock market operations. Thereafter, applying the various parameters of the CBDT Circular No.4 of 2007, viz. number of scripts dealt with, volume of transactions, frequency of transactions, their systematic and periodic nature, holding period and quantum of purchases and sales. source of acquisition of shares etc., the AO has held that the entire short-term capital gains are, in fact, in the nature of his income from business. In this regard he has, duly rebutted the submissions of the assessee making elaborate discussion, as per paragraphs 3.2 to 3.6 of the assessment order. The contentions of the assessee in this regard submitted before the AO are mainly on the following lines: i) out of total short-term capital gains of approximately ₹ 1.64 crores approximately ₹ 86.80 lakhs pertain to investment made is immediately preceding assessment year. The shares are shown as his investment in balance sheet prepared as on 31.03.2005, and the assessee's status as investor was accepted for the Assessment year 2005 .....

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..... ication of the portfolio of short-term capital gains of the assessee, the AO has further observed that the assessee has entered into numerous, periodic, repetitive, voluminous transactions with great amount of regularity. He has undertaken 45 transactions involving 19 scripts in which holding period is less than 30 days. Number of shares/units of mutual funds purchase and sold are substantially large. The purchase cost incurred is in the vicinity of approximately ₹ 92.36 lakhs and sale proceeds obtained are approximately ₹ 100.88 lakhs. He has further observed that in case of mutual funds units of Phillips Carbon Black Ltd, there are 8 transactions in one month involving approximately 11,313 units the purchase cost of approximately ₹ 9.69. It is further observed that during the year there are about 107 scripts involving 533 transactions which clearly demonstrate the extensive transactions and thereby negating the claim of so-called short term capital gains. It was also observed that for the entire year the number of shares/units dealt in are almost to the tune of 813519, the purchase cost of approx. ₹ 8.18 crores and sale proceeds of approx. ₹ 9.82 cro .....

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..... onnected with all kind of operations in the stock market, vi) the huge aggregate amount of purchases and sales, vii) the huge number of scripts and substantial number of scripts with frequent transactions within 90 days holding period, and viii) the basic motive and intent is one of business/adventure for maximization of profit. In view of the above observation, the Assessing Officer held that the assessee has earned business income out of sale of shares and assessee s claim of short term capital gain was declined. 6. Before the CIT(A), it was argued that the assessee was consistently engaged in the activity of share transaction for last number of years and he has consistently disclosed short term capital gain or long term capital gain in respect of his share transaction in which proper delivery was taken, depending upon the period of holding. It was further submitted that the assessee was consistently having two portfolios of the share transaction one for his investment purposes, which is called Investment Portfolio and another for his trading purposes, which is called Trading Portfolio . As per ld. Authorized Representative, the assessee was maintaining separate le .....

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..... tended to hold those shares for the purpose of his trading portfolio or investment portfolio . It was also argued that similar treatment given in his own case under identical facts and circumstances is already accepted by the AO, in scrutiny assessment u/s 143 (3) of the Act. for the assessment year 2005-06. A copy of the relevant assessment order produced by the assessee is placed on record. According to the AR, merely based on his volume of transactions', its frequency, holding period and repetitive tractions in certain scripts will not make the assessee a trader of these shares. In this regard it was further submitted that the number of transactions are not high as observed by the AO because, the number of transactions of a particular script on given date but carried on different lots are considered as separate transactions by the A.O. instead of treating the same as a single transaction. It was forcefully submitted that due to market constraints it is not feasible to execute the bigger lots of sale and purchase orders in a single lot on a given date, therefore, such transaction are always undertaken through different lots as per the availability of the stock on a given d .....

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..... hat out of these very shares, the A.O. has accepted the investment status for those shares where the gain was long term gain owing to those shares having been held for more than 12 months before their sale. It is respectfully submitted that the character of shares would not undergo change depending upon whether the same are sold within 12 months or beyond. If shares are held on investment account, then merely because the same were sold within 12 months cannot by itself transform them into stock-in-trade. Such an inference would clearly run contrary to the very concept of the short term capital gain, which is enshrined in the Act. 3.3 While rejecting the assessee s contention qua the shares held as on 31/03/2005, the learned, A0 has argued that principles of 'estoppel' or res judicata do not apply to tax proceedings. There can be no quarrel with this basic proposition of law, but at the same time it is well settled that the Rule of consistency cannot he ignored in tax proceedings. This rule is an exception to the above rule, and has been well recognized in various judicial rulings cited below: Radhasoami Satsang vs. CIT /1991/ 193 ITR 321 (SC) Sardar Keh .....

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..... cerned, the profits that arose on their sale ought to have been assessed as capital gains notwithstanding the position that was emerged in the Financial year 2005-06. 3.7 As regards the shares purchased and sold during the Financial year 2005-06, the assessee submits that all those transactions were made in the capacity of investor and not as a trader. Therefore, the resultant profit on sale of those shares ought to be assessed as short term capital gain and not as business income. 3.8 The learned A.O. has given various reasons for holding these transactions as trading transactions, and the assessee submits that if all the facts and circumstances of the case are looked in proper perspective, them it would be clear that there was no trading activity. The question whether a particular activity is in the nature of investment or trading would depend upon a number of factors, and there is no precise universal formula to determine the same. Therefore, it is a mixed question of law and fact to be decided on the factual matrix of each case. Various parameters like volume, frequency, regularity, motive/intention, period of holding, accounting treatment, surrounding circumstances .....

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..... e frequency and the volume of the shares purchased and sold are found to be substantially higher in the relevant assessment year as in comparison to his earlier assessment years It is further observed that all the shares in which STCG is shown are covered u/s. 111A of the Act and accordingly the assessee has taken the delivery after paying necessary security transaction tax. According to the AR, although loan is taken but no interest is paid on borrowed funds utilized for his share trading activity. It was explained that most of the loan is taken from his own associate concerns i.e. M/s Indoplast, a firm in which assessee is partner and Mohan K. Jain, an HUF in which assessee is the Karta. Therefore, according to the AR, assessee's case cannot be compared to a case where a person borrows loan on interest and invests it in shares. It is also observed that the volume of transaction for the relevant assessment year is substantially higher, with frequent, repetitive and consistent transactions undertaken on various scripts purchased and sold, on which STCG is shown by the assessee. 2,3.2 From these specific facts brought on record as discussed above, I find that the case of t .....

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..... re of his business income. Even if the submissions made by the AR as discussed above are taken in to consideration vis-a-vis the case laws cited, I find that a person cannot be held as investor of a particular share or unit of a mutual fund if he/ she consistently keeps on purchasing and selling the same share for realizing profits more than four times in a year in an organized manner, using his borrowed funds. In the case of the assessee as per Annexure-A enclosed to this order, he has dealt in four such shares and in both these shares the repetitive transactions are carried out for more than 4 times during the relevant assessment year. This fact proves his intention of earning profit beyond doubt as held by the Hon'ble Apex Court in the case of Holock and Larsen (supra), even if he has taken delivery in those shares, and therefore, to my considered opinion the assessee is a trader in all those shares in which he has made repetitive purchase and sale for more than four times during the relevant assessment year i.e. precisely more than one transaction in a quarter of the relevant assessment year. It is also noticed that in certain instances the assessee has sold these shares in .....

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..... se facts, the Hon'ble ITAT after taking into consideration various citations, Board's circular and the arguments of the parties concerned has decided the issue in favor of the assessee relying on the order of Hon bleITAT Lucknow in the case of Sarnath Infrastructure Pvt. Ltd. Vs. ACIT (2008) 16 DTR 97(Lucknow), and held that as per the facts of the case, the assessee's claim of STCG and LTCG on share transaction, where the delivery has been taken or given and the security transaction tax has been paid is to be accepted. The Hon'ble ITAT has held that considering the nature of activities, modus operandi of the assessee, past history, manner of keeping records and presentation of shares as investment at the year end is same in all the earlier years as shown in the relevant assessment year, therefore, apparently, there appears no reason as to why the claim of the assessee is rejected by the departmental authorities. The ITAT has further observed that the AO has taken a different view in the relevant assessment year holding that the principle of res-judicata is not applicable to the income-tax proceedings. According to the ITAT, there cannot be any dispute on this aspec .....

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..... so maintaining separate record for both types of transactions. Further, in the present case. it is important to notice that the assessee has entered into two different types of transactions where both activities are entire different in nature i.e. one activity is of investment in nature on the basis of delivery and second activity is purely of jobbing (without delivery), which puts the assessee's case on a more strong footing. Hence, in our view, the ratio of this decision is squarely applies to the facts of the present case. Accordingly, we hold that the delivery based transaction should be treated as of the nature of investment transaction and profit therefrom should be treated as short term capital gain or long term capital gain depending upon the period of holding. 8.4. The Revenue has also held that presentation in the books of account was not conclusive which may be true to some extent, but it is the most crucial source of gathering intention of the assessee as regard to the nature of transaction and in law, it is also so i.e. such presentation reflects, prima facie, a view of the assessee on a particular subject and this principle is effectively applicable in a sit .....

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..... our view, employment of such infrastructure cannot turn an investment activity into a business activity. We may also add that assessee has also raised various other contentions, which, in our opinion, need not be adjudicated at this stage in view of our decision for the above reasons, hence, we refrain ourselves from deliberating on those contentions. 9. To conclude, we hold that, in the facts and circumstances of the present case, the assessee's claim of short term capital and long term capital gain on share transactions where the delivery has been taken or given and securities transactions tax has been paid is liable to be accepted. Accordingly we reverse the orders of Revenue authorities. 2.3.4.Similarly, in the case of Addl. CIT vs. Shri. Sunder Iyer in ITA No. 295(Mum.) of 2001, the Hon ble Jurisdictional ITAT has held under similar facts and circumstances as under:- The assessee might have good knowledge of the share market as a broker but, in our opinion, this does not lead to the conclusion that the assessee would only be purchasing shares as stock-in-trade for the purpose of carrying on business. There is no law which prevents the share broker from .....

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..... S.C in the case of H. Holck Larsen 160 ITR 67 after taking into consideration various English and Indian decisions on the subject has held that for determining whether the person was a dealer or investor in shares, the real question was whether the first step i.e. purchase of shares was taken as in the case of a trading transaction. If that be so, the profit there from would be of the nature of business profit and if not so, the profit there from would not be treated as earned by the trader. Therefore, according to the Hon'ble Supreme Court, the basic intention of the assessee at the time of purchase of the share is the guiding factor for deciding whether the transaction undertaken is in the nature of a trading transaction or an investment transaction. 2.3.8 It is further noted that the scheme of taxation of capital gains related to shares has undergone substantial changes by Finance Act 2004. From the Assessment year 2005-06 (w.e.f. 01.10.2004), security transaction tax (STT) is imposed on sale and purchase of shares and other derivative transactions but at the same time, long term capital gains on sale of shares is exempted from tax u/s. 10(38) of the Income-tax Act, 1 .....

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..... m or shortterm capital gains. It is worthwhile to mention that prior to the amendment in taxation of capital gains and imposition of security transaction tax, the A.O. did not question the taxability of short term capital gains and the issue of business income vs. short term capital gains' was not of much relevance because there was no concessional taxation in case of short term capital gains. The Hon bleJurisdictional ITAT in the case of Sh.Gopal Purohit (supra), has further observed that as per the identical facts reported in the said case it is apparent that the AO has taken a different stand merely because there was a change in the scheme of taxation relating to STCG and LTCG made effective through the finance Act, 2004, the legislature has imposed security transaction tax on the sale and purchase of shares and other derivative transactions and, simultaneously, the legislature exempted LTCG under section 10(38) of the Act from the levy of taxation and on STCG, a concessional rate of tax at the rate of 10% was introduced subject to the condition that the transactions resulting into these type of gain must have suffered the burden of securities transactions tax. This accordi .....

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..... scussed above has held that mere large volume of shares cannot be the sole criteria for deciding if the gains should be assessed as business income or capital gains. The Hon'ble Supreme Court in the case of C.I.T. Vs. H. Holck Larsen (160 ITR 67), as discussed above has held that there is nothing in an investor frequently churning his portfolio to protect his investment and realize appreciation. The Hon bleMumbai Bench of I.T.A.T. in the case of Gopal Purohit Vs . .J.C.I.T (Supra) as discussed above has held that the delivery based transactions should be treated as of the nature of investment and profit there from should be treated as short-term capital gain or long-term capital gains depending upon the period of holding. The deployment of infrastructure or frequent churning of investment cannot turn gains from investment into business income. In the assessee's case, as per the past history, it is evident that the assessee had been engaged in share trading as well as share investment. The profits from trading operation were assessed as business income and the gains from investment were brought to tax as capital gains. 2.3.11. Therefore, in view of the aforesaid discus .....

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..... O, the assessee has undertaken frequent and repeated transactions consistently in certain specific scripts as discussed above. (ix) the assessee has utilized borrowed funds but no interest is paid since mostly the loans are taken from his own group/related concern - for the relevant assessment year. (x) Long term capital gain shown by the assessee is accepted and assessed as such. 2.3.12 With this background and further considering to the facts of the case and the position of law as discussed above, I am of the considered opinion that to a large extent the facts available in the case of the assessee, are identical to the facts reported in the case of Sh. Gopal Purohit (supra) decided by the Hon'ble jurisdictional ITAT. However, due to the unique or distinguishable facts particularly on account or his repetitive transactions of sale and purchase of the same shares as discussed above, which are not in dispute, I find that the rule of consistency as argued by the AR based on the various citations relied on by the AR as mentioned above will not apply in the instant case in hand. The repeated purchase and sale of shares of the same company for more than four times .....

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..... nd the balance capital gains assessed by the A.O. as business income is directed to be assessed as his STCG or LTCG depending upon the period of holding. 2.3.13. Therefore, on account of the above, the claim of the assessee to consider the gains/surplus on purchase and sale of shares held as investment pertaining to his delivery based share transactions, under the head STCG/L TCG and not under the head business income, is partly allowed, as discussed above. Or in other words, the profit/loss incurred by the assessee in respect to his various share transactions undertaken for more than four times during the year as worked out as per Annexure-A, as enclosed to this order is held as his business income. The addition made to the extent of gains or profit realized on account of his repetitive share transactions amounting to ₹ 18,41,027/- is confirmed, and the balance addition made is directed to be deleted. The AO is accordingly, directed to rework out the STCG/business income of the assessee, as discussed above. 2.3.14 During the course of appeal, the AR, as discussed above has raised an alternative ground submitting that in case his main ground of appeal is not fully .....

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..... G claimed is to be allowed if the surplus shown therein is not pertaining to the shares as appearing at Annexure-A to this order. However, if the LTCG disclosed is on the very shares tabulated as per Annexure-A to this order, the entire surplus irrespective of the fact, whether the same is LTCG or STCG, shall be assessed as his business income, and 2.3.15 Therefore, on account of the aforesaid discussion, the action of the AO treating the STCG of the assessee amounting to ₹ 18,41,027/- as his business income is confirmed, and the balance capital gains assessed as business income is directed to be assessed as his STCG instead of business income, for the relevant assessment year. The addition made to this extent on account of business income as against its claim of STCG, is directed to be deleted. At the same time, allowing the alternative ground and the submissions of the assessee, the A.O. is further directed re-workout the business in income and the STCG as discussed in paras 2.3.13 and 2.3.14 above of this order. This ground of appeal, as discussed above is therefore, partly allowed. 8. Against the above order of CIT(A), both the assessee and Revenue are in appea .....

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..... nce was also placed by learned DR on the decision of coordinate bench of ITAT in the case of Jayshree Pradeep Shah, 131 ITD 326. 11. Rival contentions have been heard and record perused. We have also deliberated on the judicial pronouncements referred by the lower authorities in their respective orders as well as decision cited by learned AR and DR during the course of hearing before us in the context of factual matrix of the case. The question as to whether the assessee has earned capital gain or business profits on the shares sold by him depend on the facts and circumstances of each case. Such decision is to be arrived at by taking into account the intention of the assessee while purchasing the shares, as to whether the same was acquired for holding as investment or for doing business therein. The treatment given by the assessee in its books of account is also one of the decisive factors to find out whether the shares were held as investment or stock in trade. If the shares are bought with the intention of earning capital gains thereon and also dividend income by keeping the same as investment, the gain arising there from is required to be treated as capital gains. On the othe .....

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..... me, it is well settled that principle of consistency under the same facts and circumstances is the fundamental of judicial principle, which cannot be brushed aside without proper reasoning. In this regard, reliance can be placed on the decision in case of S.M.K. Shares and Stock Broking Private Limited, I.T.A.No. 799/Mum/09 order dated 24.11.2010. For this proposition, the decision of Hon'ble Supreme Court in the case of Gopal Purohit, 228 CTR 582, is very much relevant and important. From the record, we found that assessee was investing in shares as well as trading in shares. He has maintained two portfolios of share transactions i.e delivery based share transactions and non-delivery based share transactions. The nondelivery based share transactions were in respect of F O and intra-day share transactions, profit of which has been shown under the head income from business. In respect of delivery based share transaction, profit has been shown as STCG or LTCG, depending upon the period of holding. However, profit or loss earned on non delivery based transactions are shown as his business income. The assessee has maintained separate ledger accounts. Transactions were recorded sepa .....

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..... al Purohit (supra), which was affirmed by the Hon blejurisdictional High Court and the SLP filed against the same by the Revenue was also dismissed by the Hon bleSupreme Court, held that the AO was prompted to take a different view on the same sets of facts and types of transactions entered into by the assessee in the relevant assessment year and as found in its earlier assessment year. The CIT(A) also elaborately dealt with the consistency in the treatment of profit arose on similar transaction of sale and purchase of shares. The CIT(A) also considered volume, frequency and continuity of transactions, average holding period in respect of each and every shares entered into by the assessee during the year under consideration. The CIT(A) found that no interest was paid on the amount borrowed from associates. The CIT(A) had also considered different ratios viz. capital gain ratio, quantity ratio, number of transaction ratio, purchase cost ratio, so as to establish that gains on sale of shares is to be assessed as capital gains or business profits. So far as frequency of purchases and sale of shares is concerned, the same is due to the electronic system of stock exchange. A single orde .....

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..... e security transaction tax and exempt the long term capital gain earned from sale of shares and levying 10 % tax on short term capital gain and earned on sale of shares. It is noted that under the old provisions of the Income-tax Act, profits or gains arising to an investor from the transfer of securities were charged to tax either as long term capital gains or short term capital gains depending on the period of holding of the said securities; Short-term capital gains arising from transfer of securities were taxed at the applicable rates (normal rate) and Long-term capital gains were taxed @ 20%, after adjusting for inflation by indexing the cost of acquisition. For listed securities, the taxpayer had an option to pay tax on long-term capital gains @ 10% but without indexation. For Foreign Institutional Investors (FIIs), the long-term capital gains and short-term capital gains were taxed at the rate of 10% (without indexation) and 30% respectively. In case of a trader in securities, however, the gains were taxed as any other normal business income. Thus tax liability on the income from purchase sale of shares as regards to the STCG business income was at par. However, the issue .....

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..... rchased and sold immediately and there were no shares which were acquired prior to 1st April, 2004 and held after 31st January, 2005, the gain arising out of sale of such shares were held to be business income. However, in the instant case before us, the CIT(A) has appreciated not only frequency of transaction but also period of holding and thereafter recorded a finding to the effect that except transaction in case of four companies the profit so arose were liable to tax as capital gains keeping in view the holding period, frequency of transaction etc. Thus, the facts of the case cited by the learned DR are distinguishable from the facts of the instant case. 11.2 We have gone through decision in the case of Jayshree Pradeep Shah (supra) as relied by learned DR and found that on the basis of findings recorded by both the lower authorities to the effect that there were high number of transaction in shares with borrowed funds and the sale of shares was the only activity of the assessee within a very short holding period, it was held that the profit arose on sale of such shares were liable to tax as business income. However, the facts in the instant case before us are distinguishabl .....

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..... d by the Department against the decision of Bombay High Court and the same was dismissed by Hon'ble Apex Court vide order dated 15.11.2010. In the speech by Hon'ble Finance Minister regarding Direct Tax Cases (Union Budget 2004-05), especially clause 111, the intention of Government for introducing the security transaction tax and exempting the long term capital gain from sale of share and levying 10% tax on short term capital gain also supports the case of assessee. The idea behind introduction of security transaction tax is to end the litigation on the issue, whether the profit earned from delivery based sale of shares is capital gains or business profit. 12. Even the Hon'ble Apex Court in the case of K.P. Verghese Vs ITO, 131 ITR 597 (SC) observed as under:- ‟The task of interpretation of a statutory enactment is not mechanical task. It is more than a mere reading of mathematical formulae because few word possesses the precision of mathematical symbols. It is an attempt to discover the intent of the legislature from the language used by it and it must always be remembered that language is at best an imperfect instrument for the expression of human thou .....

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..... narrated in the assessment order as well as at pages 3 and 4 of the appellate order. Broadly, the learned AO was of the view that the intention of the assessee since beginning was sale of shares as trading activities, as evident from audited profit and loss account by not showing the same as short term capital gain and also in Form 3CD the assessee has mentioned the nature of business as trading/dealing in shares/securities and mutual funds. The frequency of transactions was also considered, consequently he treated the amount of ₹ 49,81,915/- as business income from share trading. However, before the learned Commissioner of Income Tax (Appeals) the basis of additions was explained as evident from para 3.1.1 onwards. The crux of claim of the assessee is that in the audited accounts, the sale of shares amounting to ₹ 9.43 crores in which delivery had been taken, STT was paid and the shares were sold after holding for a few days/few weeks. The mutual funds of ₹ 2.91 lacs were sold and were treated as income from short term capital gains. Before the learned Commissioner of Income Tax (Appeals) the assessee also filed a detailed note on the purchase process for deliver .....

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..... ain was held to be business profit. Since in earlier assessment years the claim of the assessee was consistently accepted as short term capital gain, it was held that the rule of consistency as propounded by Hon'ble Bombay High Court in the case of Gopal Purohit (supra), it is fairly applicable and the income has to be treated as short term capital gain. Identically in the case of Nagindas P Seth (ITA No.961/Mum/2010) it was held that despite large number of transactions in shares, the profit can be assessed as capital gains under the facts of the case. The case of the assessee is further fortified by these decisions more specifically when the assessee holds the shares in his books as investor, no interest was paid on the funds. The decision in the case of Janak S Ranawala, 11 SOT 627 (Mum.) further supports the case of the assessee. Likewise, the decision from Hon'ble Madras High Court in CIT vs N.S.S. Investment Pvt Ltd. 227 ITR 149 (Mad), CIT vs Associated Industrial Development Company, 82 ITR 526 (SC) supports the case of the assessee. In the present appeal, we note that the assessee made investment in shares with intention to earn dividend income on appreciation of pr .....

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