M/s. Apollo Vikas Steel Pvt.Ltd., Bhavnagar V. The Addl.CIT.,Range-1, Bhavnagar

ITA 10/AHD/2011

• Counselvise Citation: 1020514 RSA 2011
• Duration Of Justice: 3 year(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-01-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 08-01-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 03-01-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P L KUREEL
• Keywords: Capital asset; Business income; Depreciation; Earning of tax free income; Advance ruling; Question of law
• Section: 14A; 12

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD B BENCH BEFORE: SRI D.K TYAGI, JUDICIAL MEMBER AND SHRI T.R. MEENA, ACCOUNTANT MEM BER DCIT, CIRCLE-1, BHAVNAGAR (APPELLANT) VS APPOLLO VIKAS STEEL PVT. LTD, JIVAN MANSION, LATI BAZAR, BHAVNAGAR, PAN: AAFCA9760M (RESPONDENT) APPOLLO VIKAS STEEL PVT. LTD, JIVAN MANSION, LATI BAZAR, BHAVNAGAR, PAN: AAFCA9760M (APPELLANT) VS DCIT, CIRCLE-1, BHAVNAGAR (RESPONDENT) REVENUE BY: SRI P.L. KUREEL, SR.D.R. ASSESSEE BY: SMT URVASHI SHODHAN, A. R. DATE OF HEARING : 08-01-2014 DATE OF PRONOUNCEMENT : 24-01-20 14 / ORDER PER : D.K. TYAGI, JUDICIAL MEMBER:- THESE ARE CROSS APPEALS AGAINST THE ORDER OF LD. C IT(A)-XX, AHMEDABAD DATED 14-10-2010. ITA NO. 3479/AHD/2010 ASSESSMENT YEAR 2007-08 ITA NO. 10/AHD/2011 ASSESSMENT YEAR 2007-08 I.T.A NOS. 3479/AHD/2010 & 10/AHD/2011 A.Y. 2007-08 PAGE NO DCIT VS. APPOLLO VIKAS STEEL PVT. LTD 2 2. GROUND NO. 1 & 4 OF ASSESSEES APPEAL ARE GENERA L DO NOT REQUIRE ADJUDICATION. GROUND NO. 2 OF ASSESSEES APPEAL AN D GROUND NO. 1 OF REVENUES APPEAL RELATE TO RESTRICTING OF DISALLOWA NCE OF INTEREST EXPENSES OF RS. 8,24,392/- U/S. 14A TO RS. 89,550/-. 3. A.O. WHILE MAKING DISALLOWANCE OF EXPENSES TO TH E EXTENT OF RS. 8,24,392/- U/S. 14A OF THE ACT HAS OBSERVED AS UNDE R:- 4.1 ON VERIFICATION OF PROFIT & LOSS A/C., FT IS F OUND THAT THE ASSESSEE COMPANY HAS SHOWN DIVIDEND OF RS.4,90,699/ - WHICH IS EXEMPT U/S. 10(34) OF THE INCOME TAX ACT, 1961. IN THIS CONNECTION, THE ASSESSEE COMPANY WAS ASKED TO SHOW CAUSE AS TO WHY EXPENSES SHOULD NOT BE DISALLOWED IN VIEW OF THE PROVISION OF SECTI ON 14A OF THE INCOME TAX ACT, 1961. IN RESPONSE THE ASSESSEE COMP ANY REPLIED AS UNDER: 'DETAILS AND EXPLANATION REGARDING EXPENSES U/S. 14 .A OF THE IT ACT. [A]DETAILS OF EXEMPT INCOME. DURING THIS ACCOUNTING YEAR WE HAVE EARNED FOLLOWIN G EXEMPT INCOME. (1) DIVIDEND INCOME OF SHARES RS. 1,48,401/ - (2) DIVIDEND INCOME OF MUTUAL FUND RS.3,42,2 98/- . TOTAL RS. 4,90 , 699/- [B] EXPLANATION AND OBJECTION FOR THE PROPOSED- PROPORTIONATE DISALLOWANCES EXPENSES. (1) THAT DIVIDEND INCOME IS EARNED OUT OF THE PAST YEAR IS INVESTMENT AND THEREFORE SUCH INVESTMENT FOR SAID T AX FREE INCOME IS NOT MADE DURING YEAR, UNDER CONSIDERATION. I.T.A NOS. 3479/AHD/2010 & 10/AHD/2011 A.Y. 2007-08 PAGE NO DCIT VS. APPOLLO VIKAS STEEL PVT. LTD 3 (2) THAT AS THE WE HAVE NOT MADE ANY INVESTMEN T IN RELATION TO 'INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOM E' DURING THIS YEAR AND THEREFORE IT CANNOT BE SAID THAT INTEREST PAID ON BORROWED CAPITAL HAVE ANY ELEMENT TO EARN DIVIDEND INCOME. T HUS, NO EXPENDITURE OF DIRECT NATURE IS INCURRED TO EARN EX EMPTED INCOME. (3) THAT THERE IS NO DIRECT NEXUS BETWEEN DIRE CT EXPENSES AND INTEREST PAID HAS DIRECT WAS AS THE FUND BORROWED I S UTILIZED FOR THE SHIP BREAKING BUSINESS AS CAN BE SEEN FROM THE FOLL OWING FACT. (A) INTEREST PAID TO BANK RS.14 , 29 , 062/- WHICH IS IN RESPECT OF BANK FACILITY AVAIL FOR SHIP BREAKING BUSINESS. (B) INTEREST PAID TO OTHERS FOR RS. 22 , 44,113/- AGAINST INCOME FROM UNDER THE HEAD OF INTEREST IS RECEIVED FOR RS.26,18 ,961/-. THUS, THERE IS A NET INTEREST INCOME IS RS.3,73,848/-. (C) THE INTEREST PAYMENT MADE TO OTHERS ARE ON OLD BORROWING EXPECT TWO PARTIES FROM WHICH ADDITIONAL FUND ACQUI RED FOR THE PURPOSE OF SHIP BREAKING BUSINESS ONLY. THUS, THER E IS NO INTEREST PAYMENT WHICH CAN BE CONSIDERED FOR THE DISALLOWANC ES U/S. 14A. (D) THAT OUR COMPANY HAS IT'S OWN CAPITAL AND RESERVED WHICH IS OF THE AGGREGATE AMOUNT OF 5.59 CRORE AS SUCH THE INVE STMENT IN SHARES OF MUTUAL FUND IS FAR BELOW AMOUNT DISALLOWANCES OU T OF INTEREST EXPENSES ON PRESUMPTIVE BASIS. FURTHER, WE SUBMIT T HAT UNLESS PACIFIC EXPENDITURE ARE FOUND TO BE INCURRED FOR EARNING OF DIVIDEND INCOME NO PART THEREOF CAN BE DISALLOWED ON PRESUMPTION TH AT A PART THEREOF HAS BEEN INCURRED FOR EARNING EXEMPTED INCOME. (E) FOR THIS WE RELAY UPON DELHI I.T.A.T. DECI SION IN THE CASE OF CIT VS. EICHER LIMITED 101 TTJ 369 WHEREIN IT IS HE LD THAT THE ' EXPENDITURE WHICH THE A.O. SEEKS TO DISALLOW U/S. 1 4A SHOULD BE ACTUALLY INCURRED, SO IN THE ABSENCE OF ANY MATERIA L TO SHOW ANY NEXUS NOTHING COULD BE DISALLOWED.' RELIANCE IS ALSO PLACED ON THE DECISION OF HON'BLE ITAT, KOLKATA 'D' BENCH, IN THE CASE OF EIH ASSOCIATED HOTELS LTD. VS . DY. CIT 16 DTR (KOL) (TRIB) 181 WHEREIN VIDE PARA 15 IT IS HELD TH AT; I.T.A NOS. 3479/AHD/2010 & 10/AHD/2011 A.Y. 2007-08 PAGE NO DCIT VS. APPOLLO VIKAS STEEL PVT. LTD 4 ' WE HAVE CONSIDERED THE RIVAL CONTENTIONS PUT FORW ARD BOTH BY THE AUTHORIZED REPRESENTATIVE AND DEPARTMENTAL REPRESEN TATIVE. WHILE CONSIDERING THE REVENUE'S CONTENTION THAT THE DISAL LOWANCE HAS BEEN MADE U/S.14A MAINLY ON ASSUMPTIONS THAT ASSESSEE HA D INCURRED HUGE MANAGEMENT EXPENSES AND PAID INTEREST ON BORROWED F UNDS, ON THE OTHER HANDS, WE AGREE WITH THE CONTENTIONS AND THE CASE REFERENCES CITED BY THE AUTHORIZED REPRESENTATIVE THAT THEREFO RE WAS NO EXPENDITURE INCURRED IN CONNECTION WITH THE EARNING OF THE DIVIDEND. CONSIDERING THE RELEVANT FACTS OF THE CASE WE FEE T HAT IN THE INTEREST OF JUSTICE THE ADDITION U/S.14A SHOULD BE RESTRICTED T O 1 PERCENT OF THE DIVIDEND RECEIVED, WHICH HAS BEEN CLAIMED AS TAX-FR EE. IT IS THEREFORE PAID THAT AS NO EXPENSES IS INCURRE D WHICH CAN BE DISALLOWED U/S. L4A OF THIS ACT, NO DISALLOWANCES I S TO BE MADE ON THIS ACCOUNT. HOWEVER, WITHOUT PREJUDICE TO THE ABOVE AND WITHOUT PREJUDICE OF OUR REPLIED STATED ABOVE AND WITH STRONG OBJECTION WE S TATE AND SUBMIT THAT YOUR GOOD SELF DO NOT AGREE WITH OUR ABOVE SUB MISSION AND LIST TO DISALLOWED SOMETHING ON THIS ACCOUNT THAN IN THE PR OVISION OF CAUSED (III) OF THE RULE AT THE OF THE IT ACT, CAN BE APPL IED FOR THE EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT PART OF THE TO TAL INCOME SHALL BE COMPUTED AS UNDER: (I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME:- 0.00 (II) IN A CASE WHERE THE ASSESSEE HAS INCURRED EXPE NDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, AN AMOUNT COMPUTED IN ACCORDANCE WITH THE FOLLOWING FORMULA, NAMELY:-AXB/C A= AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED DURING THE PREVIOUS YEAR; 0.00 B= THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE-SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR; 0.00 C= THE AVERAGE OF TOTAL ASSETS AS APPEARING IN THE BALANCE-SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE 0.00 I.T.A NOS. 3479/AHD/2010 & 10/AHD/2011 A.Y. 2007-08 PAGE NO DCIT VS. APPOLLO VIKAS STEEL PVT. LTD 5 LAST DAY OF THE PREVIOUS YEAR; (III) AN AMOUNT EQUAL TO ONE-HALF PER CENT OF THE AVERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE-SHEET OF THE ASSESSEE, 0.5 % (22967645+ 12852175/2)= 89,550/- 89255/- TOTAL 89255/- THIS IS THE MAXIMUM AMOUNT WHICH CAN BE DISALLOWED. THE REPLY OF THE ASSESSEE COMPANY AND THE CALCULATI ON OF ALLOCATION OF EXPENSES MADE BY THE ASSESSEE COMPANY WERE DULY PER USED. HOWEVER, THE SAME IS NOT TENABLE BECAUSE OF THE FOLLOWING OB SERVATION. THE NEW PROVISION FOR ALLOCATING EXPENSES IN RELATI ON TO EXEMPT INCOME FOR THE PROVISIONS OF SECTION 14A OF THE INC OME TAX ACT, 1961 ARE APPLICABLE WHERE THE ASSESSEE CLAIMS THAT NO EX PENDITURE OR NEGLIGIBLE EXPENDITURE WAS INCURRED FOR EARNING EXE MPT INCOME OR WHERE THE ASSESSING OFFICER IS NOT SATISFIED WITH T HE EXPLANATION OF THE ASSESSEE. IN THE INSTANT CASE, THE EXPLANATION OF THE ASSESSEE COMPANY IS NOT SATISFACTORY AND ACCORDINGLY, THE METHOD OF DETERMINING AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDIBLE IN THE TOTAL INCOME SPECIFIED IN THE RULE *D IS FOLLOWED. THE EXPENDITURE RELATING TO INVESTMENT EARNED FOR E ARNING EXEMPT INCOME IS CALCULATED AS UNDER AS PER RULE 8D; AGGREGATE OF THREE I.E. (I) DIRECT EXPS.- (SHARE EXPENSES) 42282 42282 + (II) AXB/C A= AMT. OF EXPENDITURE BY WAY OF INTER EST IF ANY 3673175 B= AVG. VALUE OF INVESTMENT (22967645=12852175)/2 1 7909910 C= AVG. VALUE OF ASSETS (92594118+9723478)/2 94915 798 AXB/C 693100 693100 +(III) ONE-HALF OF THE AVG. VALUE OF INVESTMENT I.E . 0.5 OF RS. 8950 89550 824932 I.T.A NOS. 3479/AHD/2010 & 10/AHD/2011 A.Y. 2007-08 PAGE NO DCIT VS. APPOLLO VIKAS STEEL PVT. LTD 6 THEREFORE, IN VIEW OF THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULES, 1962, EXPENSES TO THE EXTENT OF RS. 824392/- IS ALLOWED AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE COMPANY. 4. IN APPEAL LD. CIT(A) AFTER TAKING INTO CONSIDER ATION THE SUBMISSION OF THE ASSESSEE WHICH HAS BEEN REPRODUCED BY HIM IN PARA. 4.2 OF HIS ORDER HAS RESTRICTED THIS ADDITION TO RS. 89,550/- INSTEA D OF RS. 8,24,392/- MADE BY AO. 5. AGGRIEVED BY THE RELIEF GIVEN TO THE ASSESSEE, R EVENUE IS IN APPEAL AND AGAINST THE CONFIRMATION OF DISALLOWANCE OF RS. 89, 550/-, THE ASSESSEE HAS FILED THE APPEAL. 6. AFTER HEARING BOTH THE PARTIES AND PERUSING THE RECORD, WE FIND THAT LD. CIT(A) HAS GIVEN RELIEF TO THE ASSESSEE IN VIEW OF THE UNDISPUTED FACT THAT ASSESSEE WAS HAVING INTEREST FREE FUNDS OF RS. 5,59,20,487/- AGAINST THE INVESTMENT OF RS. 1,28,52,175/- IN SHARES AND THERE WAS NO FINDING OF AO THAT INTEREST BEARING FUNDS WERE UTILIZED BY THE AS SESSEE IN MAKING INVESTMENTS IN SHARES RESULTING IN TAX FREE INCOME BY RELYING ON THE DECISION OF JURISDICTIONAL HONBLE HIGH COURT IN THE CASE OF CIT VS. JAYESH BUDHALAL MEHTA IN CIVIL APPEAL NO. 111 OF 2009 WHEREIN IT WA S HELD THAT IF ASSESSEE HAS SUFFICIENT INTEREST FREE FUNDS AND AO HAVING HA VE NOT BROUGHT ANY MATERIAL ON RECORD TO PROVE THAT INTEREST BEARING F UNDS WERE UTILIZED IN MAKING INVESTMENTS IN ASSETS RESULTING IN TAX FREE INCOME THEN NO DISALLOWANCE COULD BE MADE. WE FURTHER FIND THAT D ISALLOWANCE TO THE EXTENT OF RS. 89,550/- HAS BEEN RETAINED BY THE LD. CIT(A) IN VIEW OF THE FACT THAT ASSESSEE HIMSELF HAD ESTIMATED THE ADMINISTRATIVE C OSTS ATTRIBUTABLE TO DIVIDEND INCOME AT RS. 89,550/-. IN VIEW OF THIS, WE ARE NOT INCLINED TO I.T.A NOS. 3479/AHD/2010 & 10/AHD/2011 A.Y. 2007-08 PAGE NO DCIT VS. APPOLLO VIKAS STEEL PVT. LTD 7 INTERFERE WITH THE ORDER PASSED BY LD. CIT(A), THE RELEVANT PORTION OF WHICH READS AS UNDER:- 4.2(I) I HAVE GONE THROUGH THE FACTS OF THE CASE H AS ALSO THE DOCUMENTS SUBMITTED DURING THE APPELLATE PROCEEDING S. IT IS SEEN THAT THE APPELLANT HAD INTEREST FREE FUNDS OF RS. 5,59,2 0,487/- AS AGAINST THE INVESTMENT OF RS. 1,28,52,175/-. IT IS ALSO SE EN THAT THE AO HAS NOT MADE OUT A CASE THAT INTEREST-BEARING FUNDS WERE UT ILIZED TO MAKE THE PURCHASES OF INVESTMENTS WHICH RESULTED IN TAX-FREE INCOMES BY MAKING ENQUIRIES . 4.2(I).IN THE CASE OF CIT.III VS JAYESH BUDHALAL ME HTA IN CIVIL APPEAL NO. 111 OF 2009 THE HONBLE GUJARAT HIGH COURT HAS HELD THAT IF THE APPELLANT HAD SUFFICIENT INTEREST FREE FUNDS AND TH E AO HAD NOT BROUGHT ANY MATERIAL ON RECORD TO PROVE THAT INTERE ST-BEARING FUNDS WERE UTILIZED IN MAKING INVESTMENTS IN ASSETS RESUL TING IN TAX-FREE INCOMES THEN NO DISALLOWANCE COULD BE MADE UNDER SE CTION 36(1)(III) OF THE IT ACT 1961. IN VIEW OF THE ABOVE IT IS CLEAR THAT THE AO WAS NO T JUSTIFIED IN MAKING ANY DISALLOWANCE OUT OF INTEREST UNDER SECTION 14A ESPECIALLY BECAUSE RULE 8D COULD NOT BE APPLIED RETROSPECTIVELY AS HEL D BY THE HONBLE MUMBAI HIGH COURT IN THE CASE OF GODREJ BOYCE VS. C IT WHEREIN IT HAS HELD THAT THOUGH RULE 8D IS NOT RETROSPECTIVE T HE SAME BE APPLIED IN CASE WHERE IT IS NOT POSSIBLE TO COMPUTE THE DIS ALLOWANCE OTHERWISE. 4.2(II) IN SO FAR AS THE COST OF EMPLOYEES AS ALSO OTHER EXPENSES INCLUDING DEPRECIATION ARE CONCERNED, IT IS THE ARG UMENT OF THE APPELLANT THAT THESE EXPENSES ARE MAINLY FOR THE BU SINESS OF THE APPELLANT AND CANNOT BE CORRELATED TO THE INCOME FR OM DIVIDENDS OR TO THE INVESTMENT IN SHARES. IT IS SEEN THAT DURING TH E YEAR THE INVESTMENT OF THE APPELLANT IN SHARES HAVE GONE DOWN FROM RS. 2,29,67,645/- LAST YEAR TO RS. 1,28,52,1757-. THUS IT IS SEEN THAT THE APPELLANT HAS SOLD SHARES WORTH MORE THAN ONE CRORE. THERE IS NO JUSTI FICATION IN THE CONTENTION OF THE ASSESSEE THAT NO EXPENSES WERE IN CURRED FOR HANDLING THESE INVESTMENTS PARTICULARLY WHEN SUCH L ARGE NO. OF SHARES HAVE BEEN SOLD. THIS REQUIRES ADMINISTRATIVE COSTS AS WELL AS OTHER COSTS RELATED TO USE OF ASSETS. THE ACTION OF THE A O THEREFORE IN I.T.A NOS. 3479/AHD/2010 & 10/AHD/2011 A.Y. 2007-08 PAGE NO DCIT VS. APPOLLO VIKAS STEEL PVT. LTD 8 HOLDING THAT EXPENSES IN THE FORM OF ADMINISTRATIVE COSTS WERE ATTRIBUTABLE TO DIVIDEND INCOME IS CORRECT. IT IS ALSO SEEN THAT THE APPELLANT HIMSELF HAS ALSO ESTIMATED THE ADMINISTRA TIVE COSTS AT RS. 89,550/- WHICH IS ALSO THE DISALLOWANCE ON ACCOUNT OF ADMINISTRATIVE COSTS GONE TO BY THE AO. 7. IN THE RESULT, GROUND NO. 2 OF ASSESSEES APPEAL GROUND NO. 1 OF REVENUES APPEAL ARE DISMISSED. 8. GROUND NO. 3 OF ASSESSEES APPEAL AND GROUND NO. 2 OF REVENUES APPEAL RELATE TO ADDITION OF RS. 3,22,144/- TREATIN G SHORT TERM CAPITAL GAIN SHOWN BY THE ASSESSEE OF THIS AMOUNT AS BUSINESS PR OFIT. 9. AO WHILE MAKING THIS ADDITION HAS OBSERVED AS UN DER:- 'ON VERIFICATION OF THE DETAILS OF PURCHASE, AND SA LES OF SHARES FURNISHED BY THE ASSESSES COMPANY, IT WAS FOUND THA T THE ASSESSEE COMPANY HAS SHOWN SHORT TERM CAPITAL GAIN OF RS. 19 ,67,303/-. IN THIS CONNECTION, THE ASSESSEE COMPANY, VIDE ORDER SHEET ENTRY DATED 12.11.2009, WAS ASKED AS TO WHY THE PROFIT/ GAIN FR OM SHARES SHOWN TO BE IN NATURE OF SHORT TERM CAPITAL GAINS SHOULD NOT BE TREATED AS BUSINESS INCOME IN VIEW OF THE CBDT'S CIRCULAR NO. 4/2007 DATED 15- 06-2007. THE ASSESSEE COMPANY VIDE ITS LETTER DATED 26.10.2009 HAS REPLIED AS UNDER: 'REGARDING SHORT TERM CAPITAL GAIN ON SALE OF SHARE S. YOUR HONOUR HAS CALLED FOR DETAILS OF SHORT TERM CA PITAL GAIN EARNED DURING THE YEAR IN WHICH TRANSACTION OF PURC HASES AND SALES HAVE BEEN MADE WITHIN ONE MONTH OF PURCHASE TO TREA T IT TRADING PROFIT INSTEAD OF SHORT TERM CAPITAL GAIN AS PER C.B.D.T. CIRCULAR NO.4/2007 DATED : 15/06/2007. WE ARE ENCLOSING HERE WITH THE DETAIL STATEMENT OF SHORT TERM CAPITAL GAIN EARNED BY US D URING THE FINANCIAL YEAR ALONG WITH HIGHLIGHTED THE DATE OF P URCHASES AND SALES PER ANN.(H) IN THIS STATEMENT, WE HAVE MARKED FROM RED INK AND THESE I.T.A NOS. 3479/AHD/2010 & 10/AHD/2011 A.Y. 2007-08 PAGE NO DCIT VS. APPOLLO VIKAS STEEL PVT. LTD 9 ARE THE TRANSACTION OF WITHIN A MONTH. THE SAME IS WORKED OUT AT THE END OF THE STATEMENT. IN THIS RESPECT WE HAVE TO EXPLAIN THAT WE HAVE NOT DONE TRADING BUSINESS FOR THE SHARES BUT OUR COMPANY IS MAKING I NVESTMENT IN SHARES FOR LONG TERM BENEFIT TO EARN DIVIDEND INCOM E. OUR COMPANY HOLDING VARIOUS COMPANIES SHARES AS CAN BE SEEN FRO M THE SCHEDULE 1.6 OF AUDIT REPORT AND THEREFORE GUIDELINE ISSUED BY THE BOARD IN THEIR CIRCULAR DATED : 15/02/2006 IS NOT APPLICABLE TO OUR CASE BECAUSE OF THE FOLLOWING REASONS. : {1} OUR MAIN BUSINESS IS TO DISMANTLE OLD SHIP. {2} WE VALUE OUR SHARE INVESTMENT AT COST ONLY. {3} MOST OF TRANSACTION OF INVESTMENT IN SHARE WHI CH IS MADE WITHIN A MONTH WERE NOT PURCHASED FROM SECONDARY MA RKET BUT ARE IN POSSESSION THROUGH IPO'S. {4} WE ALSO DONE BUSINESS OF SHARE TRADING BEING F & O AND SPECULATION UNDER THE SEPARATE PORTFOLIO. {5} WE FURTHER SUBMIT AND STATE THAT (1) WE HAVE M AINTAINED DETAIL AND RECORD FOR NAME OF THE COMPANY(2) DATE OF PURCH ASE (3) NO. OF SHARES (4) RATE AND (5) AN AMOUNT OF CONSIDERATION SIMILARLY SAME NARRATION HAVE KEPT IN RESPECT OF SALES AND ALSO MA INTAINED THE RECORDS OF SHOWING THE PERIOD OF HOLDING AND THE RE SULTING PROFIT ON SALE OF THE SHARES AND TERMS OF LONG TERM CAPITAL G AIN AND SHORT TERM CAPITAL GAIN AS THE CASE MAY BE AND PAST ALSO SIMIL AR ISOLATED TRANSACTION RECORD WAS MAINTAINED. {6}. WE SUBMIT THAT OUR PRIMARY INTENTION WAS NOT T O ENTER INTO THE VENTURE OF TRADE BUT ONLY TO GENERATE AN ALTERNATIV E INCOME. THUS THE INTENTION BEHIND SUCH A VENTURE IS TO GET APPRECIAT ION ON THE INVESTMENTS, {7}. THAT THE CIRCULAR NO.4/2007 DATED ; 15/06/2007 ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES, LAYS GUIDELINES TO A SSESSING OFFICERS TO TREAT IT SUCH AN EVENT. THOUGH THERE ARE NO CLEA R CUT DISTINCTIONS EARMARKED THEREIN, HOWEVER, IT IS INSTRUCTED THAT B ROAD PERSPECTIVES I.T.A NOS. 3479/AHD/2010 & 10/AHD/2011 A.Y. 2007-08 PAGE NO DCIT VS. APPOLLO VIKAS STEEL PVT. LTD 10 SHOULD BE BORNE IN MIND WHILE TREATING A VENTURE AS ' TRADE ' OR ' INVESTMENT '. THE AUTHORITY FOR ADVANCED RULING (AA R) (288 ITR 641), REFERRING TO THE DECISIONS OF THE SUPREME COURT IN SEVERAL CASE, HAS CHARTERED OUT THE FOLLOWING PRINCIPLES. (I). THE SUBSTANTIAL NATURE OF TRANSACTIONS, MANNER OF MAINTAINING BOOKS OF ACCOUNTS, THE MAGNITUDE OF PURCHASES AND S ALES AND THE RATIO BETWEEN PURCHASES AND SALES AND THE HOLDING WOULD F URNISH A GOOD GUIDE TO DETERMINE THE NATURE OF TRANSACTIONS. (II). ORDINARILY PURCHASE AND SALE OF SHARES WITH T HE MOTIVE OF EARNING A PROFIT, WOULD RESULT IN THE TRANSACTION B EING IN THE NATURE OF TRADE/ADVENTURE, BUT WHERE THE OBJECTIVE OF THE INV ESTMENT IN SHARES OF A COMPANY IS TO DERIVE INCOME BY WAY OF DIVIDEND ET C., THEN THE PROFITS ACCRUING BY CHANGE IN SUCH INVESTMENT WILL YIELD CA PITAL GAIN AND NOT REVENUE RECEIPT. IN THE FOREGOING SUBMISSION AND FACT STATED IN PARA : 1 TO 5 ABOVE AND INVESTMENTS ARE NOT SHOWN AS STOCK IN TRADE, THE IN VESTMENT MADE FOR NOT EARNING PROFIT BUT ONLY TO GAIN APPRECIATION ON SAID INVESTMENT AND EARNED DIVIDENDS AND THAT THE INVESTMENT WERE M ADE FROM AVAILABLE SURPLUS AND NOT FROM BORROWED FUND ALL TH ESE GO TO PROVE THAT AT WE WERE NOT ENGAGE IN PROFITEERING BY MAKIN G INVESTMENTS IN SHARES AND AS SUCH IT IS NOT A BUSINESS INCOME BUT SHORT TERM CAPITAL GAIN.' THE SUBMISSION OF THE ASSESSEE COMPANY ARE DULY PER USED. HOWEVER, THE CONTENTION OF THE ASSESSEE COMPANY ARE NOT ACCE PTABLE ON THE BASIS OF FOLLOWING OBSERVATIONS IN VIEW OF THE CIRC ULAR NO. 4 DATED 15.06.2007. 'IN THE CASE OF CIT (CENTRAL), CALCUTTA VS ASSOCIAT ED INDUSTRIAL DEVELOOPMENT COMPANY (P) LTD. (82 ITR 586), THE SUP REME COURT OBSERVED THAT: WHETHER A PARTICULAR HOLDING OF SHARES IS BY WAY O F INVESTMENT OR FORMS PART OF STOCK-IN-TRADE IS A MATTER WHICH IS W ITHIN THE KNOWLEDGE OF THE ASSESSEE WHO HOLDS THE SHARES AND IT SHOULD, IN NORMAL CIRCUMSTANCES, BE IN A POSITION TO PRODUCE EVIDENC E FROM ITS RECORDS AS TO WHETHER IT HAS MAINTAINED ANY DISTINCTION BET WEEN THOSE SHARES I.T.A NOS. 3479/AHD/2010 & 10/AHD/2011 A.Y. 2007-08 PAGE NO DCIT VS. APPOLLO VIKAS STEEL PVT. LTD 11 WHICH ARE ITS STOCK-IN-TRADE AND THOSE WHICH ARE HE LD BY WAY OF INVESTMENT'. IN THE CASE OF CIT, BOMBAY VS H. HOLCK LARS EN (160 ITR 67), THE SUPREME COURT OBSERVED THAT: THE HIGH COURT, IN OUR OPINION, MADE A MISTAKE IN OBSERVING WHETHER TRANSACTIONS OF SALE AND PURCHASE OF SHARES WERE TRADING TRANSACTIONS OR WHETHER THESE WERE IN THE N ATURE OF INVESTMENT WAS A QUESTION OF LAW AND FACT. THE PRINCIPLES LAID DOWN BY THE APEX COURT IN THE A BOVE TWO CASES AFFORD ADEQUATE GUIDELINE FOR DISTINCTION BET WEEN SHARES HELD AS INVESTMENT (CAPITAL ASSET) AND SHARES HELD AS STOCK -IN-TRADE (TRADING ASSET). NO EVIDENCE AS TO WHETHER SEPARATE PORTFOLI OS IN RESPECT OF SHARES HELD BY WAY OF STOCK-IN-TRADE AND SHARES HEL D BY WAY OF INVESTMENT IS FURNISHED. THE AUTHORITY FOR ADVANCE RULINGS (AAR) (288 ITR 64 1), REFERRING TO THE DECISIONS OF THE SUPREME COURT IN SEVERAL CASES , HAS CULLED OUT THE FOLLOWING PRINCIPLES: (I). THE SUBSTANTIAL NATURE OF TRANSACTIONS, THE MA NNER OF MAINTAINING BOOKS OF ACCOUNTS, THE MAGNITUDE OF PUR CHASES AND SATES AND THE RATIO BETWEEN PURCHASES AND SALES AND THE HOLDING WOULD FURNISH A GOOD GUIDE TO DETERMINE THE NATURE OF TRANSACTIONS. (II). ORDINARILY THE PURCHASE AND SALE OF SHARES W ITH THE MOTIVE OF EARNING A PROFIT, WOULD RESULT IN THE TRA NSACTION BEING IN THE NATURE OF TRADE / ADVENTURE IN THE NATURE OF TRADE; BUT WHERE THE OBJECT OF THE INVESTMENT IN SHARES OF A C OMPANY IS TO DERIVE INCOME BY WAY OF DIVIDEND ETC. THEN THE PROF ITS ACCRUING BY CHANGE IN SUCH INVESTMENT (BY SAFE OF SHARES) WI LL YIELD CAPITAL GAIN AND NOT REVENUE RECEIPT. THE FIRST PRINCIPLE FURNISHES A GUIDE FOR DETERMINI NG THE NATURE OF TRANSACTIONS BY VERIFYING WHETHER THERE ARE SUBSTAN TIAL TRANSACTIONS, THEIR MAGNITUDE, MAINTENANCE OF BOOKS OF ACCOUNT AN D FINDING THE RATIO BETWEEN PURCHASES AND SALES. I.T.A NOS. 3479/AHD/2010 & 10/AHD/2011 A.Y. 2007-08 PAGE NO DCIT VS. APPOLLO VIKAS STEEL PVT. LTD 12 SECOND PRINCIPLE SUGGESTS THAT ORDINARILY PURCHASES AND SALES OF SHARES WITH THE MOTIVE OF REALIZING PROFIT WOULD LE AD TO INFERENCE OF TRADE / ADVENTURE IN THE NATURE OF TRADE; WHERE THE OBJECT OF THE INVESTMENT IN SHARES OF COMPANIES IS TO DERIVE INCO ME BY WAY OF DIVIDENDS ETC , THE TRANSACTIONS OF PURCHASE AND SA LES OF SHARES WOULD YIELD CAPITAL GAINS AND NOT BUSINESS PROFIT. THE CBDT VIDE CIRCULAR NO. 4/2007 DATED 15-06-2007, HAS ALSO EMPHASIZED THAT IT IS POSSIBLE FOR A TAX PAYER TO H AVE TWO PORTFOLIOS, I.E. AN INVESTMENT PORTFOLIO COMPRISING OF SECURITI ES WHICH ARE TO BE TREATED AS CAPITAL ASSETS AND A TRADING PORTFOLIO COMPRISING OF STOCK- IN-TRADE WHICH ARE TO BE TREATED AS TRADING ASSETS. WHERE AN ASSESSEE HAS TWO PORTFOLIOS, THE ASSESSEE MAY HAVE INCOME UN DER BOTH HEADS I.E. CAPITAL GAIN AS WELL AS BUSINESS INCOME. ON EXAMINATION OF COMPUTATION OF INCOME, IT IS FOUN D THAT THE ASSESSEE COMPANY HAS DECLARED STCG ON SHARES OF RS. 19,67,30 3/-. IN THIS CONNECTION, DETAILS OF PURCHASE AND SATE OF SHARES WERE CALLED FOR. ON EXAMINATION OF DETAILS OF PURCHASE AND SALE OF SHAR ES, IT IS FOUND THAT AGGREGATE GAINS ON SHARES OF FOLLOWING COMPANIES AR E FOUND TO BE IN THE NATURE ADVENTURE IN TRADE. NAME OF THE COMPANY AMOUNT OF PROFIT/GAIN ESS DEE ALLUMINIUM LTD RS. 61,194/- HOTEL LEELA VENTURE LTD. RS. 13,945/- IFCI LTD RS. 58,750/- KEVAL KIRAN CLOTHING LTD RS. 1,88,255/- ------------------- RS. 3,22,144/- ------------------- THE ABOVE REFERRED GAIN/PROFIT OF RS. 3,22,144/- ON SALE OF SHARES IS FOUND TO BE IN THE NATURE OF ADVENTURE IN VIEW OF T HE CIRCULAR NO. 4 DATED 15.06.2007 SINCE SUCH SHARES WERE SAID WITHIN A VERY SHORT PERIOD OF TIME. FURTHER, INTENTION OF THE ASSESSEE COMPANY TO EARN PROFIT THEREFROM BY SELLING THE SAME WITHIN A VERY SHORTER PERIOD OF TIME CLEARLY ESTABLISHES THAT THE ASSESSEE COMPANY HAS NOT HELD THE SAME FROM THE INVESTMENT POINT OF VIEW. FURTHER, MA GNITUDE OF THE TRANSACTIONS OF SHARES, THE RATIO AND FREQUENCY BET WEEN PURCHASES AND SALES AND TRADING PATTERN ALSO ESTABLISHES THAT THE ASSESSEE COMPANY I.T.A NOS. 3479/AHD/2010 & 10/AHD/2011 A.Y. 2007-08 PAGE NO DCIT VS. APPOLLO VIKAS STEEL PVT. LTD 13 IS A REGULAR TRADER AND DEALER IN THE SHARES AND NO T AN INVESTOR. BESIDES THIS, THE ASSESSEE COMPANY HAS NOT MAI NTAINED TWO SEPARATE PORTFOLIOS I.E. INVESTMENT PORTFOLIO COMPR ISING OF SHARES AND SECURITIES WHICH ARE TREATED AS CAPITAL ASSETS AND A TRADING PORTFOLIO COMPRISING OF STOCK-IN-TRADE WHICH ARE TO BE TREATE D AS TRADING ASSETS. CONSIDERING THE ABOVE DISCUSSION, FACTS OF THE CASE AND VARIOUS FACTORS MENTIONED IN THE CIRCULAR NO. 4 DATED 15.06 .2007, THE PROFIT/GAINS ARISING ON DEALING WITH THE SHARES OF THE COMPANIES OF RS. 3,22,144/- CAN NOT BE TREATED AS SHORT TERM CAPITA L GAIN. THEREFORE, PROFIT/GAINS EARNED FROM SALE OF SUCH SHARE IS TREA TED AS BUSINESS INCOME INSTEAD OF SHORT TERM CAPITAL GAIN AS SHOWN BY THE ASSESSEE COMPANY.' 10. LD CIT(A) AFTER TAKING INTO CONSIDERATION THE SUBMISSION OF THE ASSESSEE WHICH HAS BEEN REPRODUCED BY HIM IN PARA 5 .1 OF THE ORDER HAS DIRECTED THE AO TO TREAT THE GAIN ARISING FROM INVE STMENT IN SHARES HELD FOR LESS THAN 30 DAYS AS BUSINESS INCOME AND TO RE-CALC ULATE THE DISALLOWANCE ACCORDINGLY. 11. AGAINST THIS ORDER OF LD. CIT(A) ASSESSEE AS WE LL AS REVENUE BOTH ARE IN APPEAL BEFORE US. AT THE TIME OF HEARING LEARNE D COUNSEL OF THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE LOWER AUTHOR ITIES AND ALSO HIGHLIGHTED CERTAIN PORTION OF THOSE SUBMISSIONS. SHE ALSO PLACED RELIANCE ON SOME CASE LAWS TO MAKE OUT A CASE THAT SHORT TER M GAIN SHOWN BY THE ASSESSEE BE ACCEPTED. HOWEVER, WE FEEL THAT IT WOU LD NOT BE PROPER ON OUR PART TO ACCEPT THESE SUBMISSIONS WITHOUT GETTING TH EM VERIFIED. WE ARE THEREFORE OF THE CONSIDERED OPINION MATTER REQUIRES FRESH ADJUDICATION AT THE END OF AO SO THAT ASSESSEE GETS ONE MORE OPPORTUNIT Y TO SUBSTANTIATE HIS CLAIM THAT THE SHORT TERM GAIN SHOWN IN HIS INCOME TAX RETURN WAS NOT ITS BUSINESS INCOME. THIS GROUND IS ALLOWED FOR STAT ISTICAL PURPOSE. I.T.A NOS. 3479/AHD/2010 & 10/AHD/2011 A.Y. 2007-08 PAGE NO DCIT VS. APPOLLO VIKAS STEEL PVT. LTD 14 12. IN THE RESULT, BOTH THE APPEALS FILED BY THE AS SESSEE AND REVENUE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN OPEN COURT ON THE DATE MENTIONE D HEREINABOVE AT CAPTION PAGE SD/- SD/- (T.R. MEENA) ( D.K. TYAGI) ACCOUNTANT MEMBER J UDICIAL MEMBER AHMEDABAD : DATED 24/01/2014 AK / COPY OF ORDER FORWARDED TO:- 1. ASSESSEE 2. REVENUE 3. CONCERNED CIT 4. CIT (A) 5. DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER/ , / ,