Allahabad High Court

M/S Kiran Somani vs Asstt. Commissioner Of Income Tax on 14 August, 2015

Bench: Sudhir Agarwal, Shashi Kant




HIGH COURT OF JUDICATURE AT ALLAHABAD
 
 

AFR
 
Reserved on 24.02.2015
 
Delivered on 14.08.2015
 
Court No. - 34
 
Case :- INCOME TAX APPEAL No. - 80 of 2004
 
Appellant :- M/S Kiran Somani
 
Respondent :- Asstt. Commissioner Of Income Tax
 
Counsel for Appellant :- S.D. Singh,Krishna Dev Vyas
 
Counsel for Respondent :- C.S.C.,R.K.Upadhyay
 

 
Hon'ble Sudhir Agarwal, J.

Hon'ble Shashi Kant,J.

1. Heard Sri S.D. Singh, learned Senior Advocate, assisted by Sri Krishna Dev Vyas, Advocate, for appellant and Sri R.K. Upadhyay, Advocate, for respondent.

2. This appeal under Section 260A of income Tax Act, 1961 (hereinafter referred to as "Act, 1961") has arisen from assessment proceedings for the assessment year 1992-93 wherein the Revenue has considered the transaction of shares by appellant as "adventure in the nature of trade" instead of "income from capital gain" and have taxed appellant accordingly.

3. This Court, when admitted appeal, formulated following two substantial questions of law to adjudicate this appeal:

"1. Whether the appellant has derived "capital gain" on sale of shares and not "business income" as determined by the Tribunal?

2. Whether, the Tribunal has committed itself to perversity while concluding that the income of the appellant is "business income"?"

4. For the Assessment Year 1992-93, appellant-Assessee submitted return declaring income of Rs. 2,86,798/-. The Assessee disclosed profit on share transaction and claimed deduction under Section 48(2) of Act, 1961. In the relevant year, the sale of shares was Rs. 4,22,485/-, dividend Rs. 800/- and interest Rs. 994/-. Consequently net profit was shown as 4,23,614/-. Claiming deduction of Rs. 1,26,212/- under Section 48 (2) of Act, 1961 and some minor deductions under Section 80L, Rs. 3633/-, and under Section 80CCB, i.e., Rs. 10,000/- etc., the appellant disclosed income of Rs. 286798/-.

5. The Assessing Authority did not agree with deduction claimed under Section 48(2). The Assessee was required to justify the same. The Assessing Authority took the view that shares have to be treated as ''stock in trade' under Section 2 (14) of Act, 1961. Rejecting claim of Assessee that income from share is an "income from capital gain" and does not amount to business in "stock in trade", it declined deduction under Section 48 (2) and computed chargeable income as Rs. 4,09,980/- vide assessment order dated 31.3.1993.

6. The Assessee preferred appeal being Appeal No. 245 of 1993-94/Gzb. before Commissioner of Income Tax (Appeals), Ghaziabad (hereinafter referred to as "CIT(A)") who also agreed with the view taken by Assessing Authority and dismissed the appeal. Thereafter, Assessee preferred further appeal before Income Tax Appellate Tribunal, New Delhi (hereinafter referred to as "ITAT") where also he has failed. The appeal was dismissed vide order dated April, 2004. Hence this appeal.

7. Counsel for appellant contended that Assessee has actually invested in shares but the investment having gone some times for change of shares of one company to another and that is how there were certain transactions of sale and purchase but this fact by itself would not justify an inference that Assessee was doing business in sale and purchase of shares and earned income therefrom. It is submitted that investment in share and movement of stock by changing from one company to another is a part of prudent investment and unless volume and period of transactions are such which may justify a short term regular transaction feature, mere fact that more than one such transactions have taken place, the same will not partake nature of business, hence the view taken by Revenue is clearly illegal.

8. In the order of Tribunal, total number of transactions in sale and purchase of share commencing from financial year 1990-91 till 1998-99 have been shown as under:

Financial Year

Assessment Year

Number of Transactions made

Purchase

Sale

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-2000

9. The only question which has to be seen here is whether the appellant was engaged in the business of sale and purchase of shares or it was a kind of investment with change of Companies and shares as a prudent investor.

10. It was a case where the Assessee did not admit that he was doing business in the sale and purchase of shares in a regular way. The Revenue, however, has treated shares as stock in trade. From the number of transactions made from time to time, Assessee has tried to show that shares were in the shape of capital assets.

11. In G. Venkataswami Naidu & Co. vs The CommSsioner Of Income-Tax (1959) 35 ITR 594, Supreme Court said that it is impossible to evolve any formula which can be applied in determining character of isolated transactions which come before the courts in tax proceedings. It would not be expedient to make any attempt to evolve a rule or formula in this regard. Generally, it would not be difficult to decide whether a given transaction is an adventure in the nature of trade or not but there are cases where line of distinct is thin. Several factors are to be taken into account to come to a definite conclusion for determining character of transaction such as; (1) nature of commodity purchased and resold; and, (2) in what quantity was it purchased and resold ? If the commodity purchased is generally subject-matter of trade, and if it is purchased in very large quantities, it would tend to eliminate the possibility of investment for personal use, possession or enjoyment.

12. The Court referred to decision in Cayzer, Irvine and Co. Ltd. Vs. Commissioner of Inland Revenue (1942) 24 Tax Cases 491, where the land was purchased and subsequently developed with the object of making it more readily salable and sold at a profit, the intention of Assessee was treated to be not to hold the land as an investment but as a trading asset. It was held that the intention was to hold the land not as "investment", but as "trading asset", and in order to develop it and to market it. It was also held that transaction was an adventure in the nature of trade though the property purchased and sold was land.

13. Again in Mohammed Meerakhan (P.M.) Vs. Commissioner of Income-tax, (1969) 73 ITR 735, the Court held that it is not possible to evolve any single legal test or formula which can be applied in determining whether a transaction is an adventure in the nature of trade or not. The answer to the question must necessarily depend in each case on the total impression and effect of all the relevant factors and circumstances proved therein, which may determine the character of the transaction.

14. Both these cases, however, pertain to land and, therefore, may not be of much help in the case in hand.

15. In Janki Ram Bahadur Ram Vs. CIT (1965) 57 ITR 21 (SC), the Court held, question whether profit in a transaction has arisen out of an adventure in the nature of trade is a mixed question of law and fact. At the relevant point of time, if a transaction is related to the business which is normally carried on by Assessee, though not directly part of it, an intention to launch upon an adventure in the nature of trade may readily be inferred. A similar inference would arise where a commodity is purchased and sub-divided, altered, treated or repaired and sold, or is converted into a different commodity and then sold. Magnitude of transaction of purchase, the nature of the commodity, subsequent dealings and the manner of disposal may be such that the transaction may be stamped with the character of a trading venture.

16. A somewhat similar issue came up in Commissioner of Income-Tax, Bombay Vs. H. Holck Larsen (1986) 160 ITR 67 (SC). The Court considered the question "whether in respect to certain transactions between the years 1957 to 1959 the Assessee was a Dealer or an investor and whether income arising from sale and purchase by Assessee is to be taxed on revenue account or capital account?" Department took the view that it should be a revenue account while Assessee claimed it capital account. The Court said, in the case of sale of shares, the object or purpose of sale of shares in order to determine whether one was a dealer in shares or an investor in shares should be viewed or may be looked at from the angle of Lord Reid in J.P. Harisson (Watford), Ltd. v. Griffiths (H.M. Inspector of Taxes) (1962) 40 Tax cases 281 (HL) at 295 where he observed:

"The question has been asked in a number of cases: "If this was not trading, what was it?" With all deference to those who have used that argument, I do not think that it is very useful in most cases. Human affairs - and business affairs - are of infinite variety. They do not fit neatly into categories or classes. Innominate contracts and transactions are of frequent occurrence, and I would not expect to find appropriate names to denote new kinds of operations devised for the sole purpose of gaining tax advantages. In the present case the question is not what the transaction of buying and selling the shares lacks to be trading, but whether the later stages of the whole operation show that the first step - the purchase of the shares - was not taken as, or in the course of, a trading transaction."

17. The above observations show that the real question was not, whether the transactions of buying and selling the shares lack the element of trading but whether the later stages of whole operation show that the first step - the purchase of the shares - was not taken as, or in the course of, a trading transaction. The Court referred to its earlier decision in Rannarain Sons Pvt. Ltd. Vs. Commissioner of Income Tax, Bombay (1961) 41 ITR 534 (SC) and said that in considering whether the transaction was or was not an adventure in the nature of trade, the problem must be approached in the light of intention of Assessee having regard to legal requirements which were associated with the concept of trade or business. A mere profit motive in entering into transaction was not decisive, for an accretion to capital did not become taxable income merely because an asset was acquired in the expectation that it might be sold at a profit. It also relied on Janki Ram Bahadur Ram Vs. CIT (supra), where it was held that if a transaction was related to the business which is normally carried on by the Assessee, though not directly part of it, an intention to launch upon an adventure in the nature of trade might readily be inferred. It also referred to the principles laid down in Raja Bahadur Kamakhya Narain Singh Vs. Commissioner of Income Tax (1970) 77 ITR 253 (SC) and said:

" ... the question of adventure in the nature of trade was again considered by this Court and it was reiterated that since the expression "adventure in the nature of trade" implied the existence of certain element in the transactions which in law would invest these with the character of trade or business and the question on that account became a mixed question of law and fact, the court could review the Tribunal's findings if it had misdirected itself in law. It was fairly clear that where a person in selling his investment realised an enhanced price, the excess over his purchase price was not profit assessable to tax as income, but it would be so, if what was done was not a mere realisation of the investment but an act done for making profit. The distinction between the two types of transactions 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 the value by realising a security or a gain in an operation of profit-making. The assessee might invest his capital in shares with the intention to resell these if in future their sale bring in a higher price. Such an investment, though motivated by a possibility of enhanced value, did not necessarily render the investment a transaction in the nature of trade."

18. Having said so, the Court said that totality of all the facts have to be borne in mind and the correct legal principle have to be applied. This question is clearly a mixed question of law and fact, therefore, reasons assigned by Tribunal have to be looked into.

19. The Tribunal has recorded a finding that in the present case, Assessee's main source of income is from share transaction. His income from interest is only Rs. 4158/-. Further during the year of assessment in question, Assessee has sold shares of various Companies, i.e. Flex Industries Limited, Rathi Ispat Limited, Maharashtra Fabrics Limited, U.P. Petro Ltd. and has also purchased shares of various Companies of substantial amount. The sale and purchase of shares on the part of Assessee is continuous, periodical and with an intention to earn profit. Profit earned from share transactions have been invested in loan given to Smt. Pushpa Somani, M/s Somani and Co. M/s Jay Dee Investment. There are some further reasons and as a whole, we find ourselves in agreement with the conclusion drawn by Tribunal that the transactions of shares are "adventure in the nature of trade" and shares sold during the assessment year in question are liable to be considered as "stock entry".

20. In other words, looking to the nature of commodity, i.e., shares and also continuity of transactions in several years, in our view, the Revenue was justified in treating the income as "business income" and not "capital gain". The question no. 1, therefore, is answered against Assessee and question no. 2 is answered in favour of Revenue.

21. In the result, we uphold the judgment of Tribunal challenged in this appeal and dismiss the appeal without there being any order as to costs.

Dt. 14.08.2015