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Shri Upendrabhai M Patel 102, Sharda Chambers, New Marine Lines, Mumbai- 400 020 Vs. The ACIT 12(2) Mumbai
May, 17th 2014
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                    MUMBAI BENCHES "F", MUMBAI

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      Before ShriI P Bansal, Judicial Member & Shri N K Billaiya, AM

                   ./ ITA No.1557/Mum/2012
                   [ [ / Assessment Year 2008-09

Shri Upendrabhai M Patel                      The ACIT 12(2)
102, Sharda Chambers,                         Mumbai
New Marine Lines,                       Vs.
Mumbai- 400 020
      ( /Appellant)                                 (×/Respondent)

             Appellants By       : Shri Sunil Talati
             Respondent By       : Shri Ravi Prakash

   /                                         /
Date of Hearing :12.05.2014.              Date of Pronouncement : 16.05.2014

                                  / O R D E R

Per N K Billaiya, AM:

      This appeal by the assessee is directed against the order of the CIT(A)-23,
Mumbai, dated 02.12.2011 pertaining to A.Y. 2008-09. The sole grievance of the
assessee is that the AO erred in treating the income from sale of shares as business
income and the CIT(A) erred in upholding the order of the AO.

2.    The assessee is Chairman of M/s. Dinesh Mills Ltd. and derives salary income.
He also derives share of profit from M/s. Yubi Investment and Patel Investment.
During the course of scrutiny assessment proceedings, the AO noticed that the
assessee has shown Short term capital gains at Rs.19,67,450/-. The AO was of the
                                                               ITA No.1557/Mum/2012

strong belief that the assessee was actually doing business in trading in shares.
The AO accordingly issued notice to the assessee to explain why the profit on sale
of shares shown as Short term capital gains should not be taxed as business income
in view of the Board's Circular No.4/2007. The assessee filed a detailed reply dated
01.12.2010. It was explained that the assessee is drawing salary of Rs.44,85,225
from M/s. Dinesh Mills Ltd. It was explained that the assessee has also invested in
shares, mutual funds from which he earned Short term capital gains of
Rs.19,67,450/-.   The assessee strongly submitted that he is an investor and in
support of his submissions reliance was placed on the decision of Hon'ble Bombay
High Court in the case of Gopal Purohit.

3.    The submissions of the assessee did not find favour from the AO.
Considering the volume and frequency of transactions in shares the assessee has
carried out, the AO was of the opinion that the assessee is in the business of trading
in shares and all profits on such trading activity was treated as business income of
the assessee. The assessee carried the matter before the CIT(A) but without any
success. Aggrieved, the assessee is before us.

4.    The counsel for the assessee strongly submitted that both the lower
authorities have grossly erred in treating the assessee as trader in shares. The
counsel argued that the assessee is a chairman and MD of Dinesh Mills Ltd.,
devoting full time of his services to the company and, therefore, the assessee is left
with no time to do trading in shares. The motive behind the purchase of shares and
Mutual Funds is investment and, therefore, gains arising out of share transactions
deserve to be taxed under the head "Short term capital gains". The DR strongly
supported the orders of the lower authorities.

5.    We have carefully perused the orders of the lower authorities. We find that
during the year under consideration the assessee has done 71 transactions in 37
shares, which means 6 transactions per month. By any stretch of imagination this
cannot be considered as high frequency transactions . We further find that the
assessee has a capital of Rs.9.60 crores.        The assessee does not have any
borrowings.   The assessee has been showing bonds, debentures, fixed deposits,
                                                                ITA No.1557/Mum/2012

mutual funds and shares under the head "investment". In CIT v/s Madan Gopal
Radhey Lal, [1969] 73 ITR 652 (SC), the Hon'ble Supreme Court has dealt with the
issue and discussed the question:­

      "A trader may acquire a commodity in which he is dealing, for, his own
      purposes, and hold it apart from the stock-in-trade of his business.
      There is no presumption that such an acquisition, even if it is an
      accretion to the stock-in-trade of the business, is an acquisition for the
      purpose of his business: in each case the question is one of intention
      to be gathered from the evidence of conduct and dealings by the
      acquirer with the commodity."

       In Associated Industrial Development (supra), the Supreme Court
      observed as follows:­

       " was open to the assessee to contend that even on the
      assumption that it had become a dealer and was no longer an investor
      in shares the particular holdings which had been cleared and the sales
      of which had resulted in the profit in question had always been treated
      by it as an investment. It can hardly be disputed that there was no bar
      to a dealer investing in shares. But then the matter does not rest
      purely on the technical question of onus which undoubtedly is initially
      on the revenue to prove that a particular item of receipt is taxable.
      Whether a particular holding of shares is by way of investment or
      forms part of the stock-in-trade is a matter which is within the
      knowledge of the assessee who holds the shares and it should, in
      normal circumstances, be in a position to produce evidence from its
      records as to whether it has maintained any distinction between those
      shares which are its stock-in-trade and those which are held by way of

6.    The Hon'ble Supreme Court in another case in P.M. Mohammed Meerakhan
(P.M.) v/s CIT, [1969] 073 ITR 735 (SC), reiterated that it was not possible to
evolve any single test or formula which could be applied in determining the
transaction as adventure in nature of trade or not. The distinction between the two
types of transaction is not always easy to make. Whether the transaction is of one
kind or the other depends on the question whether the excess is an enhancement of
                                                                 ITA No.1557/Mum/2012

 the value by realizing the security or a gain in an operation of profit making. The
 assessee might have invested capital in shares with an intention to resale these if in
 future their sale brings in a higher price. Such an investment though motivated by a
 possibility of enhancement value, did not necessarily render the investment a
 transaction in the nature of trade.

 7.     It is also to be noted that the long term capital gain has been accepted by
 the Assessing Officer. If the Assessing Officer is of the firm belief that the assessee
 is engaged in trading activities in the shares, then it does not make any difference
 whether the shares are held for more than 12 months or less than 12 months. In
 the present case, the Assessing Officer has accepted that the assessee as an
 investor insofar as the long term capital gain is concerned. Considering the volume
 and frequency of the transactions, we do not find any reason as to why the profit
 should not be taxed under the head "short term capital gain" as returned by the
 assessee. We, therefore, set aside the findings of the CIT(A) and direct the AO to
 tax the gains arising from the share transactions under the head "Short term capital
 gain" as returned by the assessee. Thus the ground raised by the assessee is

 8.     In the result, the appeal filed by the assessee is allowed.

        Order pronounced in the open court on this 16th day of May, 2014.

                  Sd/-                                         Sd/-
             (I P Bansal)                                  (N K Billaiya)
 Û /JUDICIAL MEMBER                                / ACCOUNTANT MEMBER
  Mumbai;  Dated : 16th May, 2014.


         /Copy of the Order forwarded to :

1.     /The Appellants.
2.    × / The Respondent.
3.     () / The CIT(A), Mumbai.
                                        ITA No.1557/Mum/2012

4.     / CIT
5.    ,   ,  / DR, `F' Bench, ITAT, Mumbai

                                / BY ORDER,

      ×  //True Copy//

                          /  (Dy./Asstt. Registrar)
                           ,  / ITAT, Mumbai
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