Res – judicata – Not apply in tax matter – Each assessment year gives rise to a separate cause of action: Capital Gain or business income – Sale of Shares

The assessee is an individual and filed the return declaring the total income of Rs. 3.16 crore. Assessee is engaged in the business of dealing in derivatives and F&O. The return was revised u/s 139(5) of the Act making downward revisions of his income to Rs. 2,78,55,600/-. In the revised return of income, assessee made a significant revision qua the STCG from Rs. 2,54,92,016/- to Rs 2,17,24,104/-. Thus, as per the revised return of income, STCG was Rs.2,17,24,104/-; income from other sources is Rs.1,70,071/-; business income was Rs. 60,03,269/-. The dividend income declared was Rs. 9,68,732/- and the LTCG was Rs. 8,65,373/-. During the assessment proceedings, AO raised the issue of treating the STCG as business income of the assessee. Assessee submitted the following reply which is as under:

(a) All investments had been made from own funds, and there were borrowed funds

(b) She had earned dividend as well as LTCG, which show the intent

(c) In the AY 2006-07 & 2007-08, the assessee had returned STCG as well as LTCG and classified her share holdings as “investment” and not as “Stock in Trade”. An investment register was maintained on FIFO basis.

(d) The total number of scrips were 31, number of purchase transactions were 70 and sale were transactions 104. Number of days on which transactions took place are less than 150. Therefore, the activity could not be termed as trading.

AO reasoned that the assessee, who wasalready in the business of dealing in shares, derivatives, Futures & Options and dealt with the common scrips qua the capital gains transactions, is only segregated certain shares/ business profits as short term Capital Gains for the benefits of the tax rate. Further, he distinguished the decision relied upon by the assessee. Finally, relying on the decision of the Tribunal in the case of Smt. Harsha N Mehta vs. DCIT in ITA No.1859/Mum/2009, dated 17.7.2010 and also keeping in view the contents of Circular No.4/2007 of the CBDT, dated 15.6.2007, AO treated the impugned STCG of Rs. 2,17,24,104/- as business income of the assessee.

In appeal, the CIT(A) sustained the order of the Assessing Officer to the extent of Rs.21.50 lakh holding that the same was assessable as business income in respect of 11 scrips as the assessee had re-entered the same after selling it. However, the balance amount of Rs.1.96 crore was held to be as short term capital gain.

The Revenue carried the issue in appeal to the Tribunal. The Tribunal on a detailed analysis of the transactions which were carried out by the assessee concluded that for the subject AY , the entire amount of Rs.1.96 crore is also to be brought to tax under the head ‘business income’. Thus, the entire amount of Rs.2.17 crore i.e. Rs.21.50 lakh + Rs.1.96 crore was to be brought to tax as business income. The Tribunal held that the intention of the assessee while doing business in shares was to make quick profit and not hold the shares as investment. It was observed that during the subject AY the assessee had purchased shares valued at Rs.25.37 crore and sold shares valued at Rs.28.92 crore. Thus indicating that what was purchased during the year had been sold in its entirety during the same year. The stock turnover ratio and capital turnover ratio is recorded in the order at 1:16 and 1:10 during the subject AY . On these facts, the Tribunal allowed the Revenue’s appeal treating the entire amount of Rs.2.17 crore as income from trading in shares i.e. business income.

Being aggrieved , the assessee filed a appeal before High Court. The contended that for the earlier and subsequent AY ’s the Revenue has accepted the assessee’s claim of trading in shares as being an action of investment resulting in short term capital gains. Thus, invoking the decision of this Court in CIT vs. Gopal Purohit 336 ITR 287 it was submitted that consistency has to be followed and in this year also the profits made on account of purchase and sale of shares should be taxed under the head ‘short term capital gain’.

The Hon. High Court held that the order of the Tribunal has elaborately dealt with the contention of the assessee that as for the earlier and subsequent AYs profits arising on account of purchase and sale of shares has been classified as short term capital gains, the same should be done in the subject AY . The Tribunal on analysis of the facts noticed that the facts in the subject AY are different from the facts in the earlier and subsequent AY ’s. Particularly the number of transactions in shares were in single or double digits in the years sought to be compared while transactions of purchase and sale of shares is of the magnitude of 346 transactions in the subject AY . Further differences in facts was also brought out in a chart in the impugned order on 13 parameters between the subject AY and the earlier and subsequent AY ’s. In these circumstances the order was upheld . It was further held that the rule of consistency would not apply in the present case as there was a change in facts existing in the subject AY . In fact the decision in the case of Gopal Purohit (supra) relied upon by the assessee itself proceeds on the basis of no change in facts and circumstances in the two years. It is a settled principle of law that res judicata does not apply in tax matters However, as held by the Apex Court in BSNL vs. Union of India 282 ITR 273 the orders passed in the earlier AY s are generally accepted and followed not on the basis of principle of res judicata but on the doctrine of precedence so as to ensure that on identical facts in the absence of change in law the Revenue is bound to follow the view taken earlier.

Thus, the Appeal of assessee was dismissed.