Commissioner Of Income Tax-19 v. Shri Chetan K. Desai

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 1947 OF 2013 Commissioner of Income Tax-19 ..Appellant Vs. Shri Chetan K. Desai..Respondent .... Mr. Arvind Pinto a/w N.A. Kazi, Advocates for Appellant.Mr. Nitesh Joshi a/w Atul Jasani and Ashok Bhogani, Advocates I/bAshok Bhogani & Co. for Respondent. .... CORAM : M.S. SANKLECHA & G.S. KULKARNI, JJ.DATED : 20 OCTOBER 2015 P.C.: This appeal filed by the revenue under Section 260A ofthe Income Tax Act, 1961 (the 'Act') challenges the order dated 5December 2012 passed by the Income Tax Appellate Tribunal (the'Tribunal'). The Assessment Year involved is A.Y. 2005-06. 2.Mr. Pinto, the learned Counsel submits that the proposedrevised questions of law for our consideration as under: “1)Whether in law and on the facts of theinstant case, was the Tribunal right in coming to the S.S.DESHPANDE 1 / 9 conclusion that the respondent individual is aninvestor merely on the ground that certain mutualfunds were held for more than 12 months, and thebooks were written in an appropriate manner, ignoringthe fact recorded by the AO that the impugned gainswere declared so in order to avail of a concessionalrate of taxation? 2)Whether in law and on the facts of the case,was the Tribunal right in holding that the mere entryin books of accounts that shares are held asinvestment, make the respondent individual aninvestor, whereas the period of holding of these scrips,the frequency, the volume and value of transactionsare indicative of being trader and not an investor?” 3.The respondent-assessee is an individual who filed returnof income for the subject assessment year declaring a total incomeof Rs.1.49 crores. In the return it had declared short term capitalgains of Rs.84.88 lakhs and long term capital gains of Rs.22.46lakhs aggregating to Rs.1.07 crores. During the course ofassessment proceedings, the Assessing Officer was of the view thatthe gains declared as capital gains was essentially profit on account of trading in shares and consequently taxed the aggregate amountof Rs.1.07 crores declared as Capital Gain as business profits. 4.Being aggrieved, the respondent assessee carried the issuein appeal to the Commissioner of Income Tax (Appeals) (the'CIT(A)'). The CIT(A) on examination of all the facts allowed theappeal of respondent-assessee. In particular so far as long termcapital gain is concerned, the order of the CIT(A) records the factthat this was on account of redemption of mutual funds which wereheld for more than 12 months. It also records the fact that therespondent-assessee had received dividend on these mutual fundsand on redemption there was a gain of Rs.22.46 lakhs. Moreover,the said mutual funds were held as investment and treated the samein the books of accounts. Further, the CIT(A) also records the factthat units of mutual funds cannot be traded and normally one hasto only surrender the same against the redemption value thereof. 5.So far as short term capital gains are concerned, theCIT(A) placed reliance upon the Circular No.1827/1989 dated 31August 1989 as modified by Circular No.4/2007 dated 15 JuneS.S.DESHPANDE3 / 9 5.So far as short term capital gains are concerned, theCIT(A) placed reliance upon the Circular No.1827/1989 dated 31August 1989 as modified by Circular No.4/2007 dated 15 JuneS.S.DESHPANDE3 / 9 2007 issued by the Central Board of Direct Taxes (the 'CBDT'). Onexamination of each of the parameter set out in the aboveinstructions/circular of the CBDT reached the finding of fact takinginto account the time devoted by the appellant to its investmentactivity bearing in mind that he is an active partner of businessalongwith his brother which has a turnover of Rs.19.27 crores.Further the investment activity is an independent activity and hasno relation to the business carried out in partnership of embroidery.On examination of the facts, it was concluded by the CIT(A) thatmotive for the investments by the assessee was for long termappreciation and to earn dividend income. This is also supported bythe fact that the appellant has treated the shares as investment in itsbooks of accounts and not as stock in trade. Further the sale ofshares in a short period of time would not by itself lead to theinference that the respondent-assessee was in business of trading inshares as many times shares are also sold so as to avoid erosion invalue thereof. The CIT(A) also held that no funds were borrowedby the respondent-assessee for its investments in shares. Thustaking an overall view including frequency of transactions and number of stock invested, concluded that the gain earned on shortterm capital gains claimed by the respondent-assessee could not beclassified as income from trading. Thus the appeal of the assesseewas allowed. 6.Being aggrieved, the revenue preferred an appeal to theTribunal. So far as long term capital gain is concerned, the Tribunalon independent examination of the facts concurred with the view ofthe CIT(A). This by recording independently its reasons, which aresimilar to that of CIT(A). Thus the revenue's appeal on aboveground was dismissed. So far as short term capital gain isconcerned, the Tribunal on independent examination of factsreached the same conclusion as the CIT(A) for reasons thoughlargely similar were independently recorded including the fact thatso far as investment in shares are concerned, the assessee tookdelivery of the shares and not entered into intra-day trading. 7.The Tribunal particularly records the fact that it is not thecase of revenue that shares which were reflected in the respondent-assessee's books of account as stock in trade were reclassified asS.S.DESHPANDE5 / 9 5 / 9 investment with intent to avoid and/or reduce tax-ability. This wasin response to the submission by the Departmental Representativethat the impugned gains have been offered as capital gains only toavail of concessional rate of tax applicable to it. It is very pertinentto note that the impugned order of the Tribunal has referred to thefact that for the earlier assessment years, the Assessing Officer hadon the identical facts accepted the respondents claim on account ofcapital gain in respect of investment made in shares. However itrecords that the rule of consistency would not be applied andindependently examined the facts and concluded that therespondent-assessee was engaged in investment and not trading ofshares in the subject assessment year. In these facts, the Tribunaldismissed the revenue's appeal. Regarding Question No.1:- 8.Mr. Pinto state that the grievance of the revenue is thatthe entire activity of declaring the gain made on account of sale ofshares/units of mutual funds was only with the view of avail oflower rate of taxation applicable to profits made on account of Regarding Question No.1:- 8.Mr. Pinto state that the grievance of the revenue is thatthe entire activity of declaring the gain made on account of sale ofshares/units of mutual funds was only with the view of avail oflower rate of taxation applicable to profits made on account of capital gains. We find that this issue has been dealt with by theTribunal by recording the fact that it was not the case of revenuebefore the Tribunal that the respondent-assessee had converted it'sstock in trade into the investment with the intention to avoidand/or reduce the tax. In the absence of any factual basis theallegation that the entire exercise was carried out as investmentonly to avail of the concessional rate of tax as urged by the revenuecannot be accepted. Moreover, on the issue of long term capitalgains with regard to mutual funds, there are concurrent findings offacts by the CIT(A) and the Tribunal in favour of the respondent-assessee. It is not shown to be perverse in any manner.Consequently, Question No.1 as proposed does not give rise to anysubstantial question of law and accordingly not entertained. Regarding Question No.2:- 9.The grievance of the Mr.Pinto is that the impugned ordercompletely overlooked the fact that purchase turn over of Rs.8.07crores and sales turn over of Rs.9.13 crores of the respondent-assessee is indeed very high. The transactions entered into by the 7 / 9 respondent-assessee are 205 during the year. On the above basis itis submitted that looking at the value and frequency of thetransactions would itself be an indication of the fact that therespondent-assessee was engaged in the business of trading inshares. We find that the Assessing Officer in the Assessment Ordergives a table of the transaction entered during the year. From thetable, it is evident that a single purchase/sale transaction which arereceived/delivered in multiple lots i.e. more than one lot are eachconsidered as separate transaction. The Assessing Officer hascomputed each lot as a separate transaction resulting in inflatedfigure of 205 transactions. So far large value of transactions areconcerned, one must not loose sight of the fact that large value hasto be looked at in the context of the wealth of the person concerned.In this case, the respondent-assessee is engaged in a very profitablebusiness of embroidery which has turnover of Rs.19.28 crores andprofit of Rs.9 crores during the subject assessment year. Thus thevalue of the transactions for purposes of deciding the issue is to beconsidered from case to case and there can be no absolute valuebeyond which the transaction would be considered to be trading. Therefore in the facts of the present case, the view taken by theCIT(A) and Tribunal on the aforesaid facts is a plausible view. Thedetermination of whether an assessee is carrying a trading orinvestment activity is to be determined on a cumulative assessmentof various factors, which has in fact been done by the CIT(A) andthe Tribunal. The revenue has not been able to show that thefactual finding recorded by CIT(A) and the Tribunal is in anymanner perverse and/or arbitrary. Accordingly, the proposedQuestion No.2 does not give rise to substantial question of law.Hence Question No.2 is not entertained. 10.In the above view, appeal is dismissed. No order as tocosts. [G.S. KULKARNI, J] [M.S. SANKLECHA, J.]