TaxTMI 
TaxTMI 
2017 (3) TMI 382
X X X X Extracts X X X X
X X X X Extracts X X X X
.... income is without any justification and the gains be treated as short term and long term capital gains. 2. The Ld. CIT failed to appreciate that in earlier and subsequent assessment years, the gains from shares have been accepted by the department to be arising out of short term and long term capital gains and the A.O for making disallowance u/s. 14A also treated the shares as investments and not stock in trade and hence, the short term and tong term capital gains be accepted as declared by the appellant. 3. The appellant craves leave to add, amend, alter or delete all or any of the aforesaid grounds of appeal". 2. Briefly stated, the facts of the case are that the assessee company which is engaged in the business of rendering innovative services in areas such as housekeeping and maintenance services , Computers and telecommunication services etc., had filed its return of income for A.Y. 2007-08 on 31.03.2008 declaring total income of Rs. 3,68,85,369/-. The case of the assessee was thereafter taken up for scrutiny proceedings under Sec. 143(2) of the 'Act'. That during the course of the assessment proceedings the A.O. observed that the assessee had claimed to have earned ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....not finding favor with the contentions raised by the assessee, therein refuted the same by observing as under:- "(a). Regarding the claim that the transactions resulting in STCG were 'delivery based', this is by no means a conclusive factor to establish that the profit on sale of shares was a capital gain and not business profit. If the transactions are settled without delivery, they may become speculative transactions within the meaning of Sec. 43(5) of the Act. Hence, being delivery-based or being done through demat account does not, ipso facto, render a share transaction on investment account or trading account. (b).Regarding the classification by the assessee in its accounts as 'investments' or stock in trade', this cannot be decisive to determine the nature of the transaction, As highlighted in Circular No. 4 dated 15.6.2007 of the Board it has been held by the Hon'bleSupreme Court in the case of Karamchand Thapar& Bros Pvt. Ltd. (83 ITR 899) that the classification by the assessee of shares as investment or stock in trade is by no means conclusive, Moreover, in the case of State Bank of Hyderabad vs CIT (151 ITR 703) (AP), the income arising from sale of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 8D was mandatory and the mode of computing the amount of disallowance as specified in Rule 8D, which though was made available on the statute from 24.03.2008 was to be applied even to the preceding years, thus computed a disallowance of Rs. 78,848/- under Sec. 14A in the hands of the assessee company. The A.O. thus deliberating on the aforesaid issues assessed the income of the assessee company as per the normal provisions at Rs. 3,77,70,750/- and computed the 'book profits' at Rs. 3,69,78,459/- under Sec. 115JB. 5. The assessee being aggrieved with the order of the A.O. therein carried the matter in appeal before the CIT(A)-5, Mumbai. The assessee in support of his contention that the profit/gain on sale of shares had rightly been reflected under the head 'Capital gain' in the return of income, which however had most arbitrarily been dislodged by the A.O, therein raised the following submissions before the CIT(A):- "a).That even as the Assessing Officer has attempted to sound as if he had adopted a fair approach by recalling that the CBDT Circular on which he has relied requires him to take an overall and holistic view, all that he has really done is to summarily dismiss t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... g) The shares been held by the appellant not as 'invest' but as 'stock-in-trade, the Appellant would have valued the same at lower of cost or market value and not at cost. As per Accounting Standard-13 issued by the Institute of Chartered Accountants of India, New Delhi, on 'Accounting for Investments', a company is required to value its' 'current investments', i.e. investments which have been made with a view to resell at a profit in a short period of time at cost or fair value whichever is lower, whereas 1ong term investments are required to be valued at cost, unless there is a permanent diminution in their value. Similarly, AS-2 on Valuation of Inventories require stock-in-trade to be valued at cost or market price whichever is lower and not at cost. h) Classification of shares/securities by the Appellant as 'investments' has been accepted by the department in the assessment years 2005-06 and 2006-07. The brokerages paid for purchasing the shares were included in the purchases and the brokerages paid on the sales were deducted from the sales. These expenses were not claimed as deductions. The expenditure of Rs. 4,84,048/- by way of Security Transaction Tax incur....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ot be overturned and regarded as to trade in securities". 6. That it was further submitted by the assessee before the CIT(A) that it had in the immediately preceding year, viz. A.Y: 2006-07, shown the income from sale of shares under the head 'Capital gains', which was accepted by the A.O after thorough verification in the assessment framed under Sec. 143(3). It was thus submitted by the assessee that now when the facts and circumstances during the year under consideration remained the same as that of the immediately preceding year, viz. A.Y. 2006-07, therefore the taking of a different view by the A.O as regards the nature of the sale transactions of shares was not warranted in the hands of the assessee company, and as such could not be sustained. It was further averred before the CIT(A) that the A.O. while carrying out disallowance under Sec.14A had himself considered the shares as 'Investments' and not 'stock in trade', and as such the inconsistent approach adopted by the A.O, and holding to the contrary while assessing the sale transactions of shares as 'business transactions' during the year, thus on the said count too could not be sustained and was liable to be vacated. Th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y clearly for deriving regular income from the sales and purchases. Accordingly, I find that the appellants intention was to earn profit in a systematic manner and this being so, the income from the transaction is to be treated as business income. In this respect a recent decision of the Hon. ITAT, Mumbai in the case Wallfort Financial Services Ltd. v/s Addl. CIT Range 4(2) 41 SOT 200 bears special mention. In this case the share broker tried to pass off his trading transactions in shares after 1.10.2004 as investment in light of the possibility of availing lower tax rate. In this backdrop, in this case, after analyzing all facts, the Hon. ITAT has agreed with the assessment made holding the income as business income. In face of those overwhelming features, the appellants arguments are found to be out of place. As I find, the reference to trading activities with F & O and infra-day transactions is misplaced as these are governed by different principles. Further, the appellants argument on the earning of dividend, holding the shares as investment, the shares being delivery based are rendered immaterial in face of the foregoing signature features of the share transactions. The Appell....
X X X X Extracts X X X X
X X X X Extracts X X X X
....egoing pares, I further find that the principles of res-judicata do not apply to income-tax proceedings. In this respect, I particularly observe that the appellant also did not show any STCG/LTCG prior to AY 2005-06, when section 111A came into effect. Further, disallowance u/s 14A are on different principles. In the light of the foregoing, I do not see any merit in these grounds. They are dismissed". The CIT(A) thus on the basis of his aforesaid observations, not being persuaded to subscribe to the contentions of the assessee therein confirmed the action of the A.O. and dismissed the appeal. 8. The assessee being aggrieved with order of the CIT(A) had carried the matter in appeal before us. The Ld. Authorized Representatives (for short 'A.R') for the assessee at the very outset of the hearing of the appeal therein submitted that the authorities below had gravely erred in law and facts of the case in treating the profit/gain arising in the hands of the assessee from the sale of shares which were held as investments, as business profits. The Ld. A.R reiterating the submissions made before the lower authorities, therein tried to drive home and support his contention that the in....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... capital loss' of Rs. 8,35,225/- stood reflected. It was further submitted by the Ld. A.R that now when the assessee company had reflected the aforesaid scrips as 'Investments', and had neither shown nor treated the same as 'Stock in trade', which fact had been accepted by the department in the assessment framed under Sec. 143(3) of the assessee for A.Y. 2006-07, and the carry forward of the 'Short term capital loss' had been specifically allowed, therefore the department thereafter cannot be allowed to turn around and take a contrary view during the year under consideration, and thus in a whimsical and fanciful manner therein categorize the said scrips as 'stock in trade'. It was thus submitted by the Ld. A.R that such inconsistent approach of the department cannot be sustained in the eyes of law and thus was liable to be vacated. The ld. A.R further averred that the material fact that the assessee had purchased the aforesaid scrips from its self owned funds and not any borrowed capital, coupled with the fact that the period of holding of the respective scrips in itself glaringly revealed that the same were in the nature of investments, had been brushed aside by the A.O., who as a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e in a particular assessment year, the same shall remain applicable in subsequent assessment years also and the assessee shall not be allowed to adopt a different/contrary stand in this regard in the subsequent years. (iii) That as regards the other remaining cases, the nature of the transactions (i.e whether the same is in the nature of 'capital gain' or 'business income') shall continue to be decided keeping in view the aforesaid circulars issued by the CBDT, viz. Instruction No. 1827, dated August 31, 1989 and Circular No. 4 of 2007, dated June 15, 2007. That it was further submitted by the Ld. A.R that the aforesaid CBDT circular No. 6/2016, dated 29.02.2016 had been followed by ITAT, Ahmedabad 'D' bench in the case of Smt. Neelam Shukla Vs. ACIT, Circle 6, Surat (ITA No. 2974/Ahd/2008 A.Y. 2005-06 and ITA No. 132/Ahd/2010 A.Y. 2006-07; dated 11.03.2016) and therein placed on record the copy of the aforesaid order. The Ld. A.R further in support of his aforesaid contention relied on the order of a coordinate bench of the Tribunal, viz. ITAT, Mumbai of 'H' bench, in the case of Mr. Hitesh Satish Chandra Doshi, Mumbai Vs. ACIT 21(3), Mumbai ITA No. 6497/Mumbai/2009. That on....
X X X X Extracts X X X X
X X X X Extracts X X X X
....herein reveals that in the case of 'Short term capital gains' the average period of holding of the shares by the assessee ranged between 19 to 242 days. It is not the case of the A.O. that the assessee had purchased and sold the shares on daily basis or without taking/giving delivery. That another important aspect which supports the contention of the assessee on the issue under consideration is that the entire investments had been made by the assessee out of its own funds, and no investment towards purchase of shares had been carried out from any borrowed funds. The assessee had never ever revalued the shares to bring them in line with the 'market value', as would have been so done by an assessee who would have held the shares as 'stock in trade', which is always valued at the lower of the cost or market price. We find that no such exercise of revaluation of the shares so done by the assessee fortifies its contention that the same had been purchased and thereafter held by the assessee purely as an 'Investment'. The conduct of the assessee which goes to support his aforesaid contention can also be gathered from the fact that the 'STT' had been added back in the 'Computation of incom....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tions continued to exist as the tax payers faced real difficulties to prove their intentions at the time of acquiring the said shares/securities, for the reason that no universal principle in absolute terms could be laid down to decide the character of income from sale of shares and securities (i.e whether the same were acquired as 'Investment' or as 'Stock in trade'), thus with the clear intent to reduce the litigation on the said count therein adopted an assessee friendly approach and by resorting to a liberal view, therein came up with a Circular No. 6/2016, dated 29.02.2016 ,relevant extracts of which read as under :- "a).Where the assessee itself, irrespective of the period of holding the listed shares and securities opts to treat them as stock in trade the income arising from transfer of such shares/securities would be treated as its business income. b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if 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. However this stand, once taxed b....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... view that as the aforesaid scrips had not been held by the assessee for a period of more than 12 months immediately preceding date of its transfer, therefore the said fact in itself would take it beyond the sweep of applicability of Para 3(B) of the CBDT Circular No. 6/2016 (supra). We thus, independent of the concession allowed by the aforesaid CBDT Circular No. 6/2016 (supra), which as observed by us at length hereinabove would not be available to the assessee as regards the profit/gain on sale of scrips which were held by the assessee for a period of less than 12 months, are however of the considered view that the conduct of the assessee company, nature of purchase/sale transactions of the shares as can be deciphered from the records, holding period of the shares, volume of transactions, treatment of the scrips by the assessee in its books of account, nature of business of the assessee company, source of purchase of shares and last but not the least, the very fact that the A.O. while framing 'regular assessment' under Sec. 143(3) in the hands of the assessee for the immediately preceding year, viz. A.Y. 2006-07, had accepted that the shares as claimed by the assessee were in th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the case of ACIT 19(3), Mumbai Vs. Shri Sachin R. Tendulkar, Mumbai (ITA no. 3217/Mum/2014) A.Y. 2010-11, dated 25.01.2017, wherein it was observed by the Tribunal, as under:- "12. We have carefully examined all the factual findings recorded by the Ld. CIT(A). It is noted by us that major income of the assessee is income from sports endorsement and other shares. In addition to that assessee had made investment into shares. The entire investment has been made by the assessee out of its own funds. No amount of shares has been invested from any borrowing. Huge amount of dividend income has been earned by the assessee which is roughly 3.25 times of the amount of capital gain. The investment in shares with Portfolio Manager is merely to the extent of 4.8% of the total investments. The assessee has disclosed the amounts invested in the shares in the category of 'investments' right from beginning. The shares have never been revalued to bring them in line with the market value as would have otherwise been done in the case of stock in trade. The stock in trade is always disclosed at cost or market price which is lower. No such exercise has been done by the assessee in the case of shares ....