Investment made in share cannot be treated as trading activity without fulfilling the condition for trading

IN THE INCOME TAX APPELLATE TRIBUNAL

MUMBAI BENCH “G”, MUMBAI

BEFORE SHRI B. RAMAKOTAIAH, A.M. AND SHRI V. DURGA RAO, J.M.

ITA Nos. 6252 & 6464/Mum/2009

Assessment Years: 2005-06 & 2006-07

Gulabray Dhanji Trust, Prop. Bhuta Enterprises

A-364, Antop Hill Waterhousing Co.

Barkat Ali Road, Wadala,

Mumbai – 400 037

(PAN – AAATG0209K)

(Appellant)

Vs.

Jt. Commissioner of Income-tax-17(2),

Piramal Chambers, Mumbai.

(Respondent)

Assessee by: Mr. Pradip Kapasi

Revenue by: Mr. Rajendra Yadav

Date of Hearing: 09/02/2012

Date of Pronouncement: 24/02/2012

ORDER

PER V. DURGA RAO, J.M.:

Both these appeals pertaining to the assessee are directed against the orders of CIT(A)-29, Mumbai, for the assessment years 2005-06 & 2006-07. Since identical issue is involved in both these appeals, a common order is passed for the sake of convenience.

2. A common ground raised in both the appeals is against the action of the CIT(A) in confirming the action of the AO in treating the short term capital gains of Rs. 1,46,458/- as business income.

3. To dispose of the appeals, we refer to the facts of the case in AY 2005-06. The facts in brief are that the assessee is an AOP, engaged in the business of trading in dyes and chemicals and derive income therefrom filed return of income declaring an income of Rs. 9,39,492/-. During the course of assessment proceedings, the AO noticed that the assessee had claimed long term and short term capital gains on shares and mutual funds as this is in contrast to the assessee’s own policy of treating the transactions in shares and mutual funds up till 2004-05 as a trading activity. On being asked by the AO to explain as to why the transactions in shares and mutual funds as capital gains be treated as trading activity and taxed accordingly, the assessee submitted that investments made in shares and mutual funds as an investment and not stock-in-trade. He further explained that the above investments made by the assessee were from its own funds and the intention of the assessee is only investment and not trading. The said explanation of the assessee was not found favour with the AO for the reason that during the course of assessment proceedings for the AY 2004-05, the assessee had claimed its share transactions as trading activity. The AO, therefore, denied the short term capital gains claim of the assessee. On appeal, the CIT(A) upheld the action of the AO on the grounds that a) the appellant has been treating the dealings in shares and mutual funds as business activities in earlier year, b) during the year the very same transactions are shown as investment from 01/10/2004 for no apparent reason, c) there is no withdrawal from the capital account as observed by the AO and business funds have been used for these transactions and d) the number of transactions are many. With the above observation, the CIT(A) confirmed the addition made by the AO. Aggrieved, the assessee carried the matter in appeal before the Tribunal.

4. Before us, the learned counsel for the assessee submitted that the assessee has not treated buying and selling of the shares as trading activity and, in fact, in its books of account, it was treated as an investment. It is submitted that the finding given by both the authorities below are contrary to the assessee’s treatment and the assessee has never shown buying and selling of the shares as a trading activity.

5. On the other hand, the learned DR supported the orders of the authorities below. However, both the parties agreed that the matte may be restored to the file of the AO for fresh adjudication.

6. We have heard both the parties, perused the record and gone through the orders of the authorities below. The assessee has shown long term capital gains and short term capital gains on buying and selling of shares and mutual funds, but, the revenue treated the same as business income based on the claim of the assessee in AY 2004-05 as trading activity of the said transactions. The only dispute between the assessee and revenue is that whether the assessee’s claim of treating the income arising out of selling and buying of shares out of the capital gains is correct or treating the said income is a trading activity as held by the revenue based on the decision in AY 2004-05 is correct. The AO and CIT(A) have observed that the assessee himself accepted that in the AY 2004-05 is a trader on the basis of the earlier year assessee is treated as trader. The learned counsel for the assessee has submitted that the assessee has never accepted as trader in earlier year and also in the year under consideration. He submitted that the issue may go back to the AO to decide afresh. On the other hand, the learned DR has no objection to remit the issue back to the file of the AO. In view of the submissions of the both the parties, we set aside the order of the CIT(A) and restore the issue to the file of the AO to adjudicate the issue afresh in accordance with law after providing reasonable opportunity of hearing to the assessee.

7. Since the issue in AY 2006-07 is identical to that of AY 2005- 06, following said conclusions, we restore the issue to the file of the AO for fresh adjudication in this year also.

8. In the result, both the appeals of the assessee are treated as allowed for statistical purposes.

Pronounced in the open court on this 24th day of February, 2012.

                                                  Sd/-                                     Sd/-

                                 (B. RAMAKOTAIAH)           (V. DURGA RAO)

                             ACCOUNTANT MEMBER    JUDICIAL MEMBER

Mumbai, Dated: 24th February, 2012

kv

Copy to:

1) The Appellant.

2) The Respondent.

3) The CIT (A) concerned.

4) The CIT concerned.

5) The Departmental Representative, “G” Bench, I.T.A.T.,

Mumbai.

//true copy//

                                                                                                                              By Order

                                                                                                                              Asst. Registrar,

I.T.A.T., Mumbai.