KORADIA CONSTRUCTION P. LTD, MUMBAI V. DCIT 9(2), MUMBAI

ITA 1074/MUM/2011

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 71269 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 7 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-09-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 05-09-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 07-02-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Opportunity of being heard
• Section: 14A

Judgement Text

` `` ` , IN THE INCOME TAX APPELLATE TRIBUNAL I B ENCH, MUMBAI , ! ! ! ! , '#$ %&'( , #) # * BEFORE SHRI VIJAY PAL RAO, JM AND SHRI N.K. BILLAIYA, AM ./ I.T.A. NO. 1074/MUM/2011 ( ' ' ' ' + + + + / ASSESSMENT YEAR : 2007-08 M/S. KORADIA CONSTRUCTION P. LTD., C-402, GOKUL DIVINE, IRLA, S.V. ROAD, VILE PARLE (W), MUMBAI-400 056 THE DCIT 9(2), MUMBAI , #) ./ - ./PAN/GIR NO. : AAACK9154E ( ,. /APPELLANT ) .. ( /0,. / RESPONDENT ) ,. 1 # / APPELLANT BY : ` SHRI VIMAL PUNAMIYA /0,. 2 1 # /RESPONDENT BY : SHRI O.P. SINGH ' 2 3 ) / DATE OF HEARING :05.09.2013 45+ 2 3 ) / DATE OF PRONOUNCEMENT : #6 / O R D E R PER N.K. BILLAIYA, AM: THIS APPEAL BY THE ASSESSEE IS PREFERRED AGAINST T HE ORDER OF THE LD. CIT(A)-20, MUMBAI DT.24.11.2010 PERTAINING TO A.Y. 2007-08. 2. THE ASSESSEE HAS RAISED 4 SUBSTANTIVE GROUNDS OF APPEAL. GROUND NO. 1 & 2 ARE INTERLINKED AND RELATE TO THE TREATME NT OF CAPITAL GAINS, SHORT TERM AND LONG TERM, AS BUSINESS INCOME. ITA NO.1074/M/2011 2 3. THE ASSESSEE IS A PRIVATE LIMITED COMPANY WHICH WAS INCORPORATED ON 12.12.1995. THE COMPANY IS IN THE BUSINESS OF D EVELOPMENT OF REAL ESTATES AND IN CONSTRUCTION OF INDUSTRIAL GALAS. T HE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION WAS FILED ON 31.10.200 7 DECLARING TOTAL INCOME AT RS. 7,37,80,200/-. THE RETURN WAS SELECT ED FOR SCRUTINY ASSESSMENT AND ACCORDINGLY STATUTORY NOTICES WERE I SSUED AND SERVED UPON THE ASSESSEE. THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS CLAIMED INCOME LONG TERM CAPITAL GAINS TO THE TUNE OF RS. 1,00,445/- AND CLAIMED THE SAME AS EXEMPT U/S. 10(34) OF THE ACT. THE AO SOUGHT CLARIFICATION FROM THE ASSESSEE VIDE ORDER SHEET NO TING DT. 10.8.2009 ASKING THE ASSESSEE TO EXPLAIN AS TO WHY INCOME ARI SING FROM SHORT TERM CAPITAL GAIN AND LONG TERM CAPITAL GAIN FROM SHARES SHOULD NOT BE TREATED AS BUSINESS INCOME. 3.1. THE ASSESSEE FILED A DETAILED REPLY DT. 8.12.2 009 AND EXPLAINED THAT IT WAS ONLY AN INVESTOR AND NOT A TRADER. THE SUBM ISSIONS OF THE ASSESSEE DID NOT FIND ANY FAVOUR FROM THE AO. THE AO WAS OF THE OPINION THAT THE ASSESSEE HAS TRANSACTED MORE THAN 200 TIMES DURING THE YEAR UNDER CONSIDERATION. THE AO FURTHER OBSERVED THAT THE TO TAL VALUE OF SHARE TRANSACTION MADE DURING THE YEAR ARE TO THE TUNE OF RS. 62,96,94,792/-. THE AO FURTHER OBSERVED THAT THE ASSESSEE WAS ALSO HAVING BORROWED FUNDS AT THE BEGINNING OF THE YEAR. THE AO WAS OF THE OPINION THAT CONSIDERING THE VOLUME AND THE FREQUENCY AND THE FA CT THAT THE ASSESSEE HAS BORROWED FUNDS, THE ASSESSEE IS A HABITUAL DEAL ER IN SHARES. THE AO WAS OF THE FIRM BELIEF THAT THE ASSESSEE IS CONTINU OUSLY ENGAGED IN THE ACTIVITY OF BUYING AND SELLING OF THE SHARES THEREF ORE, THE NATURAL CONCLUSION WOULD BE THAT THE SHARES WERE NOT PURCHA SED AS AN INVESTMENTS BUT WITH THE OBJECTIVE OF SELLING THEM SUBSEQUENTLY AT A PROFIT. THE AO ITA NO.1074/M/2011 3 WENT ON TO TREAT THE ENTIRE ACTIVITY OF PURCHASE AN D SALE OF SHARES AS BUSINESS ACTIVITY AND PROFITS THERE FROM WAS ASSESS ED AS BUSINESS INCOME. 4. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. C IT(A) AND REITERATED ITS STAND THAT IT IS ONLY AN INVESTOR AN D NOT A TRADER. THE LD. CIT(A) REJECTED THE SUBMISSIONS MADE BY THE ASSESS EE AND CONFIRMED THE FINDINGS OF THE AO. 5. AGGRIEVED BY THIS FINDING OF THE LD. CIT(A), ASS ESSEE IS BEFORE US. 6. THE LD. COUNSEL FOR THE ASSESSEE ARGUED THAT BOT H THE LOWER AUTHORITIES HAVE TREATED THE CAPITAL GAINS FROM SHA RES AS BUSINESS INCOME ONLY ON THE BASIS OF THE VOLUME OF TRANSACTIONS ENT ERED BY THE ASSESSEE, THE FREQUENCY OF TRANSACTION MADE AND THERE BEING B ORROWED FUNDS. IT IS THE SAY OF THE LD. COUNSEL THAT MERELY ON THE BASIS OF THESE ALLEGATIONS, THE NATURE OF TRANSACTION CANNOT BE CHANGED FROM IN VESTMENT TO BUSINESS ACTIVITY. THE LD. COUNSEL FOR THE ASSESSEE FURTHER ARGUED THAT DURING THE YEAR THE ASSESSEE HAS TRANSACTED ONLY 24 SCRIPS . THE ASSESSEE HAS SHOWN THE INVESTMENT IN THE BALANCE SHEET UNDER THE HEAD INVESTMENT. THE LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED THAT THE ASSESSEE HAS ITSELF BIFURCATED THE INCOME IN ITS PROFIT AND LOSS ACCOUN T UNDER THE HEAD PROFITS FROM FUTURE AND OPTIONS, SPECULATION TRANSACTION AN D INVESTMENT IN SHARES. THE LD. COUNSEL ALSO RELIED UPON THE CIRCU LAR OF THE CBDT NO. 4/2007 DT. 15.6.2007 AND SUBMITTED THAT EVEN THE CB DT HAS RECOGNIZED THAT A TAX PAYER CAN HAVE TWO PORTFOLIOS I.E. AN IN VESTMENT PORTFOLIO AND TRADING PORTFOLIO. 7. PER CONTRA, LD. DEPARTMENTAL REPRESENTATIVE STRO NGLY SUPPORTED THE FINDINGS OF THE LOWER AUTHORITIES. ITA NO.1074/M/2011 4 8. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES. THE DISPUTE I S REGARDING THE NATURE OF INCOME ON SALE AND PURCHASE OF SHARES BY THE ASSESS EE. THE ISSUE, WHETHER THE INCOME FROM SALE AND PURCHASE OF SHARES IN A PARTICULAR CASE SHOULD BE TREATED AS CAPITAL GAIN OR AS BUSINESS IN COME HAS BEEN A DEBATABLE ISSUE AND THERE ARE CONFLICTING DECISION S OF THE TRIBUNAL ON THIS ISSUE. EACH CASE IS, THEREFORE, TO BE BASED ON ITS OWN FACTUAL SITUATION. A PERUSAL OF THE PROFIT AND LOSS ACCOUNT OF THE ASSES SEE SHOWS THAT THE ASSESSEE HAS SEPARATELY SHOWN SHARE TRADING PROFIT, LONG TERM CAPITAL GAINS ON SHARES AND PROFIT FROM BUSINESS. IN THE BALANCE SHEET, THE ASSESSEE HAS SHOWN SHARES UNDER THE HEAD INVESTMENT. THESE IN VESTMENT SHARES HAVE BEEN VALUED AT COST . THE HONBLE SUPREME COURT IN THE CASE OF CIT ASSOCIATED INDUSTRIAL DEVELOPMENT CO PVT. LTD. 82 I TR 586, WHICH DECISION HAS ALSO BEEN CONSIDERED BY THE CBDT IN IT S CIRCULAR NO. 4/2007 DT. 15.6.2007, HAS OBSERVED THAT : WHETHER A PARTICULAR HOLDING OF SHARES IS BY WAY O F 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 E VIDENCE FROM ITS RECORDS AS TO WHETHER IT HAS MAINTAINED ANY DIS TINCTION BETWEEN THOSE SHARES WHICH ARE ITS STOCK-IN-TRADE AND THOSE WHICH ARE HELD BY WAY OF INVESTMENT THE CBDT HAS ALSO MENTIONED IN ITS CIRCULAR THAT I T IS POSSIBLE FOR A TAX PAYER TO HAVE TWO PORTFOLIOS I.E. AN INVESTME NT PORTFOLIO AND TRADING PORTFOLIO. THIS VIEW HAS ALSO BEEN FORTIFIED BY TH E DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS GOPAL PUROHIT 336 ITR 287. 9. THE ASSESSEE HAD OPENING INVESTMENT AT RS. 4,01, 49,296/- AND THE INVESTMENT AS ON 31.3.2007 WAS AT RS. 3,97,99,072/- . THIS CLEARLY SHOWS ITA NO.1074/M/2011 5 THAT THE ASSESSEE HAD BROUGHT FORWARD INVESTMENT IN SHARES. THE BORROWED CAPITAL OF RS. 1,36,23,246/- HAS COME DOWN TO RS. 2,396 /- AT THE CLOSE OF THE CURRENT FINANCIAL YEAR. THE ALLEGATION OF THE REVENUE AUTHORITIES IS THAT THE ASSESSEE HAS INDULGED INTO HIGH FREQUENCY TRANSACTION. THIS IN ITSELF COULD NOT MEAN THAT T RADING ACTIVITIES HAVE BEEN CARRIED OUT. A PRUDENT INVESTOR ALWAYS KEEP A WATCH ON THE VOLATILITY OF THE MARKET AND MAKES SOUND INVESTMENT DECISION IN ACCORDANCE WITH SUCH MARKET FLUCTUATION AND HAS THE LIBERTY TO LIQUIDATE ITS INVESTMENTS IN SHARES AS AND WHEN NECESSARY. T HE LAW ITSELF HAS RECOGNIZED THIS FACT BY TREATING THE SAME AS SHORT TERM CAPITAL GAINS FOR SHARES HELD LESS THAN 12 MONTHS AND LONG TERM CAPIT AL GAINS WHERE THE SHARES ARE HELD FOR MORE THAN 12 MONTHS. HAD THIS BEEN NOT THE CASE, ALL THE GAINS ON SHARES WOULD HAVE BEEN CONSIDERED AS B USINESS INCOME ONLY. THE FACT THAT THE LAW RECOGNIZES SUCH VOLATILITY AN D HAS SPECIFICALLY PROVIDED A SEPARATE HOLDING PERIOD IN RESPECT OF SU CH SHARES MAKES IT VERY CLEAR THAT GAINS ON SUCH SHARES HAVING A HOLDING PE RIOD OF LESS THAN 12 MONTHS AND HELD AS INVESTMENT WOULD BE CONSIDERED A S SHORT TERM CAPITAL GAINS ONLY. THUS THE ASSESSEES CLAIM CANNOT BE NE GATED ON THE BASIS OF FREQUENCY OF TRANSACTION AS HELD IN THE CASE OF GOP AL PUROHIT (SUPRA). 9.1. AS REGARDS THE ALLEGATION THAT THE BORROWED FU NDS HAD BEEN APPLIED FOR INVESTMENT IN SHARES, IT HAS BEEN HELD BY THE T RIBUNAL, DELHI BENCH IN THE CASE OF NARENDRA GEHLAUT VS JCIT 21 TAXMANN .CO M 82 THAT IT CANNOT CONSTITUTE A FACTOR AS IN NONE OF THE C ASE LAWS OR CBDT CIRCULAR IT HAS BEEN HELD THAT BORROWINGS WILL NOT BE ALLOWED IN INVESTMENT TRANSACTIONS. THE INVESTMENT IN CAPITAL ASSETS CAN ALSO BE CARRIED OUT BY WAY OF BORROWED FUNDS, THERE BEING N O BAR NOTIFIED BY THE LAW, JUDICIAL PRONOUNCEMENT OR CBDT CIRCULAR. ITA NO.1074/M/2011 6 9.2. CONSIDERING THE ENTIRE FACTS IN TOTALITY IN TH E LIGHT OF THE JUDICIAL DECISION DISCUSSED HERE IN ABOVE , WE FIND THAT IT HAS NOT BEEN DISPUTED THAT THE ASSESSEE HAS SHOWN SHARES AS INVESTMENT RI GHT FROM THE DATE OF PURCHASE AND THAT WAS SHOWN AS SUCH IN THE BALANCE SHEET OF THE ASSESSEE WHICH WAS FILED BEFORE THE AO. IN OUR HUMBLE OPINI ON, THE SHARES HAVE TO BE TREATED AS AN INVESTMENT AND THEREFORE ANY PROFI T EARNED ON THE SALE THEREOF IS TO BE TREATED AS CAPITAL GAIN. FINDINGS OF THE LD. CIT(A) ARE REVERSED. THE AO IS DIRECTED TO TREAT THE PROFITS ON SALE OF SHARES AS CAPITAL GAIN, SHORT TERM OR LONG TERM AS THE CASE MAY BE. GROUND NO. 1 & 2 ARE ACCORDINGLY ALLOWED. 10. GROUND NO. 3 RELATES TO THE ADDITION OF RS. 2,2 3,900/- U/S. 14A OF THE ACT. 11. THE AO OBSERVED THAT THE ASSESSEE HAS RECEIVED DIVIDEND INCOME OF RS. 4,52,588/- WHICH WAS CLAIMED TO BE EXEMPT FR OM TAX. THE ASSESSEE WAS ASKED TO EXPLAIN WHY PROVISIONS OF SEC. 14A R.W . RULE 8D SHOULD NOT BE INVOKED SINCE DIVIDEND INCOME IS SHOWN AS EXEMPT . THE ASSESSEE STATED THAT NO EXPENDITURE HAS BEEN INCURRED FOR E ARNING THE DIVIDEND INCOME. THE AO DID NOT ACCEPT THIS CONTENTION OF T HE ASSESSEE AND WENT ON THE RELY UPON THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL MUMBAI BENCH IN ITA NO. 8057/M/03 IN THE CASE OF DA GA CAPITAL MANAGEMENT AND COMPUTED THE DISALLOWANCE U/S. 14A R .W. RULE 8D AT RS. 2,23,900/-. 12. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A) AND SUBMITTED THAT APPLICABILITY OF RULE 8D HAS BEEN H ELD TO BE PROSPECTIVE FROM A.Y. 2008-09 BY THE DECISION OF THE HONBLE BO MBAY HIGH COURT IN THE CASE OF GODREJ & BOYCEE MANUFACTURING CO. LTD. 328 ITR 81. THE ITA NO.1074/M/2011 7 LD. CIT(A) WAS CONVINCED THAT RULE 8D IS NOT APPLIC ABLE FOR THE YEAR UNDER CONSIDERATION. HOWEVER, CONFIRMED THE DISALL OWANCE MADE BY THE AO HOLDING THAT THERE IS NO OTHER PARAMETER OR YARD STICK, THEREFORE, METHOD PRESCRIBED UNDER RULE 8D IS CORRECT EVEN THO UGH THE SAME IS NOT APPLICABLE TO THE CURRENT YEAR. 13. AGGRIEVED BY THIS, ASSESSEE IS BEFORE US. AS T HE ISSUE IS WELL SETTLED THAT APPLICABILITY OF RULE 8D IS FROM A.Y. 2008-09, WE THEREFORE DO NOT FIND ANY MERIT IN THE OBSERVATIONS OF THE LD . CIT(A). HOWEVER, IN THE INTEREST OF JUSTICE AND FAIR PLAY, WE RESTORE T HIS ISSUE BACK TO THE FILES OF THE AO. THE AO IS DIRECTED TO RE-COMPUTE THE DI SALLOWANCE, IF ANY, U/S. 14A WITHOUT INVOKING RULE 8D. GROUND NO. 3 IS ALLOWED FOR STATISTICAL PURPOSE. 14. GROUND NO. 4 RAISED BY THE ASSESSEE IS AS UNDER : THE LD. CIT(A) HAS ERRED IN FACT AND IN LAW IN NOT CONSIDERING THE FOLLOWING GROUNDS OF APPEAL SUBMITT ED BY THE ASSESSEE. (A) AN ADDITION OF RS. 7,59,921/- BY LD. AO AS INCOME F ROM FUTURE & OPTIONS WHICH IS FORMING PART OF THE INCOM E RETURNED BY THE ASSESSEE UNDER HEAD PROFIT AND GAI NS FROM BUSINESS OF RS. 13,37,427/-. 15. A PERUSAL OF THE ORDER OF THE LD. CIT(A) SHOWS THAT THE LD. CIT(A) HAS NOT ADJUDICATED THIS GROUND OF APPEAL TAKEN BEF ORE HIM BY THE ASSESSEE. WE, THEREFORE, RESTORE THIS ISSUE BACK T O THE FILES OF THE LD. CIT(A). THE LD. CIT(A) IS DIRECTED TO DECIDE THIS GRIEVANCE OF THE ASSESSEE AS WAS TAKEN BEFORE HIM IN THE FIRST APPEL LATE PROCEEDINGS , AFTER GIVING A REASONABLE OPPORTUNITY OF BEING HEARD TO T HE ASSESSEE. THIS GROUND OF THE ASSESSEE IS ALLOWED FOR STATISTICAL P URPOSE. ITA NO.1074/M/2011 8 16. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH SEPT.2013 . #6 2 5+ )# 7'8 5 2 9 : SD/- SD/- ( VIJAY PAL RAO ) ( N.K. BILLAIYA ) /JUDICIAL MEMBER #) / ACCOUNTANT MEMBER MUMBAI; 7' DATED 27/09/2013 . ' . ./ RJ , SR. PS #6 2 /3; <#+3 #6 2 /3; <#+3 #6 2 /3; <#+3 #6 2 /3; <#+3 / COPY OF THE ORDER FORWARDED TO : 1. ,. / THE APPELLANT 2. /0,. / THE RESPONDENT. 3. = ( ) / THE CIT(A)- 4. = / CIT 5. >9 /3' , , / DR, ITAT, MUMBAI 6. 9? @ / GUARD FILE. #6' #6' #6' #6' / BY ORDER, 03 /3 //TRUE COPY// A AA A / B B B B (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI ITA NO.1074/M/2011 9 DATE INITIALS 1. DRAFT DICTATED ON: 25.09.2013 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 26.09.2013 SR. PS/PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER: JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER: JM/AM 5. APPROVED DRAFT COMES TO THE SR. PS/PS: SR. PS/PS 6. ORDER PRONOUNCED ON: SR. PS/PS 7. FILE SENT TO THE BENCH CLERK: 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK: SR. PS/PS 9. DATE ON WHICH FILE GOES TO AR 10. DATE OF DISPATCH OF ORDER: