Madras H.C : Receipts from sale and purchase of various shares/securities should be treated as business income and not as short-term capital gains

High Court Of Madras

Altius Securities Trading (P.) Ltd. vs. DCIT

Assessment Year : 2005-06

Section : 45, 28(I), 111A, 254

Mrs. Chitra Vankataraman And Ms. K.B.K. Vasuki, JJ.

T.C. (A.) Nos. 202 & 203 Of 2012

July 22, 2013

JUDGMENT

Mrs. Chitra Venkataraman, J. -The above tax case (appeals), filed at the instance of the assessee as against the order of the Income-tax Appellate Tribunal for the assessment year 2005-06, was admitted by this court on the following common substantial question of law :

“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that receipts from sale and purchase of various shares/securities should be treated as business income and not as short-term capital gains?”

2. T. C. (A.) No. 203 of 2012 relates to an individual and T. C. (A.) No. 202 of 2012 relates to a private limited company, in which the assessee in T. C. (A.) No. 203 of 2012 is the managing director. Since the facts are common, it is suffice to refer to the facts as it existed in T. C. (A.) No. 203 of 2012. The assessment year under consideration is 2005-06.

3. It is seen from the facts herein that the assessee is a trader in shares. The assessee was trading in two segments in stock exchange, viz., cash segment and future and options (F & O) segment. Admittedly, the assessee had two different portfolios one as investment and another as stock-in-trade. While profits from trading in cash market up to September 30, 2004, was offered to tax under the head “Business”, similar gains subsequent to that date was offered to tax under the head “Short-term capital gains”. The Assessing Officer viewed that considering the introduction of section 111A of the Income-tax Act brought into the statute with effect from October 1, 2004, offering concessional rates of tax at the rate of 10 per cent. on short-term capital gains arising out of sale of shares and securities through stock exchange on which security transaction tax has been paid, the assessee had accounted all its profits trading in cash segment after October 1, 2004, as short-term capital gains and paid tax at concessional rate of 10 per cent. Thus, the question as to whether the profits made in cash segment after October 1, 2004, was to be assessed under the head “Business” income or under the head “Capital gains” arose for consideration before the Assessing Officer.

4. Referring to the Board’s Circular No. 4 of 2007, dated June 15, 2007 (see [2007] 291 ITR (St.) 384), the Assessing Officer viewed that the manner in which the trades had been executed, the volume of such trades, the frequency on which they had been transacted, the period of holding of such securities indicated that the assessee had executed such trades only with the intention of making profits in the normal course of business. The Assessing Officer pointed out that the assessee had bought and sold shares in as many as 106 companies through stock exchange from October 1, 2004, to March 31, 2005, to an extent of 62,05,150 shares ; the total value of shares purchased was Rs. 88,71,61,051 and had sold the same to the total value of Rs. 79,70,31,405 and there were as many as 500 transactions of purchases and sales during the period. On going through the pattern, the Assessing Officer viewed that on an average, the holding period of these shares ranged from 2 to 45 days and in some cases, the shares were sold immediately. The assessee had also taken funding from M/s. ILFS for trading in securities and had shown the profits made through the funding amounting to Rs. 17,57,808 as capital gains. Taking the view that the transactions made in cash segment from October 1, 2004, to March 31, 2005, were all executed in the normal course of business and not as investments, assessment was sought to be made as business income.

5. This was countered by the assessee that he had held the shares for earning dividend income and capital appreciation and he had also borrowed capital for the purpose of business. The submission of the assessee was, however, negatived by the Assessing Officer holding that the transactions during the period April 1, 2004, to September 30, 2004, were treated by the assessee as stock-in-trade and offered the gain or loss under the head “Business”. However, after October 1, 2004, the assessee had shifted his stand treating the trading of shares and securities as by way of investment. Thus, the Assessing Officer rejected the assessee’s stand to treat the transactions and the profits arising therefrom as stock-in-trade and business income.

6. Aggrieved by this, the assessee went on appeal before the Commissioner of Income-tax (Appeals), who, after going through the facts found, agreed with the assessee. For the completion of narration, it is suffice to point out that the Commissioner of Income-tax (Appeals) found the reasoning of the Assessing Officer as incorrect factually and that contrary to the observation of the Assessing Officer that the shares were held between 2 and 45 days, the assessee had held many shares exceeding 45 days up to 12 months. The Commissioner of Income-tax (Appeals) also pointed out that borrowing of funds was for the purpose of F & O business and not for the purpose of investment. The shares purchased as investment had also been kept in the investment account and not in the stock-in-trade (inventory) account. Thus, on an analysis of facts, the Commissioner of Income-tax (Appeals) agreed with the assessee and allowed the appeal.

7. Aggrieved by this, the Revenue went on appeal before the Income-tax Appellate Tribunal contending that the Commissioner of Income-tax (Appeals) had ignored the findings of the Assessing Officer and that the assessee had sold shares in as many as 106 companies, bought over 62 lakhs shares and sold them before the end of the financial year valuing more than Rs. 77 crores. The Revenue further countered that the Commissioner of Income-tax (Appeals) ignored the fact that except for a very small portion of the shares purchased during the fag end of the financial year, all the shares had been sold before the end of the financial year and that percentage of purchase and sale of shares over the holdings exceeded 98 per cent. for the said period. In the circumstances, the Revenue had prayed for setting aside the order of the Commissioner of Income-tax (Appeals).

8. In considering the rival submissions, in paragraph 5 of the order, the Tribunal held that a perusal of the assessment order, more specifically paragraph 5, clearly brought out the nature of the transactions. It further observed that “These facts as brought out by the Assessing Officer remained undisputed”. Thus, holding, the Tribunal held that the holding period of shares was very short, the consistent practice of the assessee had been to treat the transactions as business and the assessee had changed the consistent stand from business to investment without showing any valid cause. Thus holding, the Tribunal allowed the appeal filed by the Revenue. Hence, the present appeals have been preferred at the instance of the assessee.

9. It is a matter of record that after allowing the Revenue’s appeal, the assessee filed rectification petition before the Tribunal contending that the assessee had not admitted the facts as had been stated by the Assessing Officer to ultimately treat the income as business income. Referring to the findings of the Commissioner of Income-tax (Appeals), the assessee pointed out that such observation by the Tribunal was a mistake apparent on the face of the record requiring rectification. It is also a matter of record that while the Accountant Member agreed with the assessee that the mistake pointed out by the assessee was an error apparent on the face of the record and hence directed the hearing of the appeal in the usual course, the Judicial Member, however, took a different view that under the garb of rectification of mistake, it was not possible for a party to take a further chance to reargue the appeal already decided and rejected the rectification petition. In view of the difference of opinion, the matter was referred to the Third Member, who agreed with the view of the Judicial Member and rejected the rectification petition. Admittedly, as against the order passed in the miscellaneous petition seeking rectification, the assessee did not file any appeal before this court.

10. Leaving that aside, the fact remains that the assessee had challenged the order of the Income-tax Appellate Tribunal passed in the main appeal contending that when the Tribunal had sought to restore the assessment, it committed a serious error in taking the view that the facts as stated in the assessment order remained undisputed.

11. Learned senior counsel appearing for the appellants pointed out that when the assessee had raised specific grounds before the Commissioner of Income-tax (Appeals), who found in favour of the assessee, it is totally incorrect on the part of the Tribunal to hold that the assessee had not disputed the facts as found in the assessment order. Thus, when the Revenue had gone on appeal before the Income-tax Appellate Tribunal, which is a final fact finding authority, it ought to have decided the points raised by the assessee in the appeal filed before the Commissioner of Income-tax (Appeals), which was a subject matter of appeal before the Tribunal at the instance of the Revenue. Thus, when disputed questions of fact were before the Tribunal, in fairness to the claim of the Revenue as well as of the assessee, the Tribunal should have considered the respective cases in a proper perspective to give a finding on facts. Without doing so, on a mistaken impression that the assessee had admitted the facts as projected by the Assessing Officer, the Tribunal allowed the Revenue’s appeal, which makes the finding a perverse one.

12. In this connection, he placed reliance on the decision of the apex court in Udhavdas Kewalram v. CIT [1967] 66 ITR 462 as well as on the unreported judgment of this court dated February 13, 2012, in T. C. (A.) No. 791 of 2004 (CIT v. GEC Alsthom India Ltd. [2014] 361 ITR 304 (Mad)) that when the findings of fact by the Tribunal are unsupported by any material, the order of the Tribunal suffers from a manifest infirmity, requiring interference at the hands of this court.

13. Countering the stand of the assessee, the learned standing counsel appearing for the Revenue, however, submitted that in the face of the order rejecting the rectification petition remaining unchallenged, there is no gain saying on the part of the assessee to contend that the observation of the Tribunal was wrong. In any event, when the Tribunal has given a factual finding as to the nature of transaction, the order does not call for any interference.

14. Heard learned senior counsel appearing for the appellants and the learned standing counsel appearing for the respondent and perused the materials placed before this court.

15. We do not agree with the line of the submission by the learned standing counsel appearing for the Revenue that on the sole ground of the order in the rectification petition not being challenged in the manner known to law, the order of the Tribunal would reach a finality. A reading of the order of the Tribunal clearly shows the perfunctory manner of the disposal of the appeal. This is more so in the context of the findings rendered by the Commissioner of Income-tax (Appeals) allowing the assessee’s appeal on the findings of fact arrived at by the Commissioner of Income-tax (Appeals), which was a subject matter of appeal before the Tribunal at the instance of the Revenue.

16. As rightly pointed out by the learned senior counsel appearing for the assessee that if the Tribunal decides that the findings of the Commissioner of Income-tax (Appeals) was without any material, nothing prevented the Tribunal from going into those facts and the findings to arrive at a finding based on the records. But all that the Tribunal observed was as follows :

“5. We have considered the rival submissions. A perusal of the assessment order, more specifically paragraph 5, clearly brings out the nature of transactions. These facts as brought out by the Assessing Officer remained undisputed.”

17. As far as the observation of the Tribunal is concerned, the only fact admitted by the assessee was that it had two different portfolios, being trading in shares and investments. The dispute raised by the assessee related to the transactions falling under both the heads. When the specific case of the assessee was that the income arising from the sale of shares could not be treated as income from business, in fairness to the claim of the assessee, the Tribunal ought to have considered the same in detail to arrive at a factual finding.

18. As far as the present case is concerned, the Tribunal has not adjudicated on the issue in the light of the materials projected by the assessee in support of his case.

19. In similar situation, in the decision in Udhavdas Kewalram’s case (supra), the apex court pointed out “the Tribunal was undoubtedly competent to disagree with the view of the Appellate Assistant Commissioner. But in proceeding to do so, the Tribunal has to act judicially, i.e., to consider all the evidence in favour of and against the assessee. An order recorded on a review of only a part of the evidence and ignoring the remaining evidence could not be regarded as conclusively determining the questions of fact raised before the Tribunal.”

20. In the unreported decision of this court dated February 13, 2012, in T. C. (A.) No. 791 of 2004 (GEC Alsthom India Ltd.’s case (supra), this court referred to the decision of the apex court in Kranti Associates (P.) Ltd. v. Masood Ahmed Khan [2010] (9) Scale 199) and to the observation in paragraph 51. We need not reproduce the same, except to point out that recording of reasons is meant to serve the wider principles of justice and the quasi-judicial authority must record reasons in support of his conclusions and the decision of the apex court pointing out that insistence on reason is a requirement for both judicial accountability and transparency, it goes without saying that the order passed by the Tribunal on the mistaken impression that the assessee had not raised any dispute on the facts found by the Assessing Officer, calls for interference by this court.

21. Thus, without going into the merits of the contentions made by the assessee, this court has no hesitation to set aside the order of the Tribunal, thereby direct the Tribunal to hear the appeal de novo and pass orders in accordance with law.

22. Since the Tribunal has passed a common order in respect of the same issue in the case of the company, wherein the assessee in T. C. (A.) No. 203 of 2012 is the managing director and the nature of transactions and the applications made being similar, the order passed in T. C. (A.) No. 203 of 2012 would be applicable to T. C. (A.) No. 202 of 2012.

23. In the circumstances, both the tax case (appeals) are allowed and the matters are restored to the files of the Tribunal for fresh consideration. No costs. Consequently, M. P. Nos. 1 and 1 of 2013 are closed.

[Citation : 361 ITR 332]