ACIT, Jaipur V. SH. SHYAM SUNDER KAHNDELWAL, Jaipur

ITA 1138/JPR/2011

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7776 (ITAT-JAIPUR)
• Duration Of Justice: 2 year(s) 8 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-09-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 28-05-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 29-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D C SHARMA
• Assessee Lawyers: G G MUNDRA
• Keywords: Business income; Opportunity of being heard; Earning of tax free income; Cost of acquisition
• Section: 14A

Judgement Text

ITA NO. 1138//JP/2011 ACIT VS. SHRI SHYAM SUNDER KHANDELWAL 1 IN THE INCOME TAX APPELLATE TRIBUNAL JAIPUR BENCH, JAIPUR (BEFORE SHRI R.P. TOLANI AND SHRI T.R. ME ENA) ITA NO. 1138/JP/2011 ASSESSMENT YEARS : 2008-09 PAN : ADRPK 5862 C THE ACIT VS. SHRI SHYAM SUNDER KHANDELWAL CIRCLE- 1 P/O M/S. SUMANGAL GEMS JAIPUR 1839, RASTA BARAH GANGOURE JOHRI BAZAR, JAIPUR (APPELLANT) (RESPONDENT) C.O. NO. 16/JP/2012 (ARISING OUT OF ITA NO. 1138/JP/2011) ASSESSMENT YEARS : 2008-09 PAN : ADRPK 5862 C SHRI SHYAM SUNDER KHANDELWAL VS. THE ACIT P/O M/S. SUMANGAL GEMS CIRCLE- 1 1839, RASTA BARAH GANGOURE JAIPUR JOHRI BAZAR, JAIPUR (APPELLANT) (RESPONDENT) DEPARTMENT BY: SHRI D.C. SHARMA ASSESSEE BY : SHRI G.G. MUNDRA DATE OF HEARING: 13-08-2014 DATE OF PRONOUNCEMENT: 05-09-2014 ORDER PER R.P. TOLANI, JM THIS IS AN APPEAL FILED BY THE REVENUE AGAINST TH E ORDER OF THE LD. CIT(A)- 1, JAIPUR DATED 05-10-2011 FOR THE ASSE SSMENT YEAR 2008-09. THE ASSESSEE HAS FILED THE CROSS OBJECTION. ITA NO. 1138//JP/2011 ACIT VS. SHRI SHYAM SUNDER KHANDELWAL 2 2.1 DURING THE COURSE OF HEARING, THE LD. AR HAS WI THDRAWN THE C.O. THUS THE SAME IS DISMISSED. 3.1 THE REVENUE HAS RAISED THE FOLLOWING GROUNDS IN ITS APPEAL. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) IS JUSTIFIED IN:- (I) DELETING THE DISALLOWANCE OF RS. 20,40,619/- MA DE BY THE AO ON ACCOUNT OF TREATING THE INCOME OF STC G FROM TRANSACTIONS THROUGH PMS AS BUSINESS INCOME. (II) DELETING THE DISALLOWANCE OF RS. 44,55,906/-MA DE BY THE AO ON ACCOUNT OF LONG TERM CAPITAL GAIN O F RS. 29,27,833/- FROM TRANSACTIONS THROUGH PMS CLAIMED A S EXEMPT U/S 10(38) AND RS. 15,28,073/- BY SELLING OF SHARES OF M/S. SHARE STREET (P) LTD. WHICH WERE UNLISTED SHARES. (III) DELETING THE DISALLOWANCE OF RS. 30,16,695/- (RS.26,92,378 + RS. 48,401 + RS. 2,75,916) MADE BY THE AO BY APPLYING SECTION 14A READ WITH RULE 8D. 3.2 THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE IS AN INDIVIDUAL WHO DERIVES THE INCOME FROM TRADING OF SHARES & SECURIT IES, FUTURE AND OPTION AND THE ASSESSEE IS ALSO A PARTNER OF THE FIRM M/S. SUM ANGAL GEMS FROM WHERE HE RECEIVES REMUNERATION AND SHARE OF PROFIT. DURING T HE COURSE OF ASSESSMENT PROCEEDINGS, THE AO FOUND THAT THE ASSESSEE WAS DOI NG BUSINESS IN SHARES AS WELL HOLDING SOME OF THE SHARES AS INVESTMENT FOR T RADING IN SHARES, SECURITIES AND FUTURE & OPTION. THE ASSESSEE MAINTA INS THE BOOKS OF ACCOUNT IN THE NAME OF SHYAM SUNDER KHANDELWAL. ALL THE BOO KS OF ACCOUNT OF THE ASSESSEE WERE AUDITED. THE AO HOWEVER, HELD THAT TH E ASSESSEE WAS DEALING ITA NO. 1138//JP/2011 ACIT VS. SHRI SHYAM SUNDER KHANDELWAL 3 IN CONTINUOUS EQUITIES OF SHARES TRADING, FUTURE AN D OPTION ETC. THEREFORE, THE TRANSACTIONS BOTH I.E. BUSINESS TRANSACTION AS WELL AS CLAIM TO BE OUT OF INVESTMENT ACCOUNT WERE CLUBBED TOGETHER AND SUBJEC TED THE TREATMENT UNDER THE HEAD BUSINESS FROM PROFIT AND GAINS. 3.3 BESIDES THE AO WAS OF THE VIEW THAT THE ASSESSE E HAD TAKEN LOANS AND PAID INTEREST AMOUNTING TO RS. 26,92,378/- ON BORRO WED FUNDS WHICH ACCORDING TO HIM WERE UTILIZED BY THE ASSESSEE FOR EARNING EXEMPT DIVIDEND INCOME. THE AO THEREFORE, INVOKED THE PROVISION OF SECTION 14A OF THE ACT READ WITH RULE 8D AND COMPUTED THE DISALLOWANCE U/S 14A OF THE ACT AT RS. 39,16,695/-. 3.4 AGGRIEVED, THE ASSESSEE PREFERRED FIRST APPEAL BEFORE THE LD. CIT(A) WHEREIN THE ASSESSEE RAISED HIS CONTENTIONS AS UNDE R:- 4.2 .(I) THE ASSESSEE IS AN INVESTOR IN MUTUAL FU NDS AND SECURITIES PART OF WHICH ARE MAINTAINED UNDER THE P ORTFOLIO MANAGEMENT SYSTEM THROUGH A PORTFOLIO MANAGER. APAR T FROM THESE INVESTMENTS IN MUTUAL FUNDS AND SECURITIES THE ASSE SSEE ALSO TRADES IN SHARES AND SECURITIES AND FUTURE OPTIONS. (II) THE ASSESSEE MAINTAINS SEPARATE BOOKS OF ACCOU NTS FOR ALL THE ACTIVITIES AND THESE ARE AUDITED U/S 44AB. (III) THE ASSESSEE INVESTED HIS SURPLUS FUNDS FROM FY 2004- 05 IN SHARES AND STOCK FOR CAPITAL APPRECIATION AND TO THIS END HE GAVE THESE FUNDS TO K.B. CAPITAL & MARKET P. LTD ., PORTFOLIO MANAGEMENT SCHEME. THESE INVESTMENTS HAD CONSISTENT LY BEEN CLASSIFIED AS INVESTMENTS BY THE ASSESSEE IN HIS AC COUNTS EVERY YEAR SINCE FY 2004-05. IT WAS SUBMITTED THAT THE GA INS RESULTING FROM SUCH INVESTMENTS WERE CAPITAL GAINS IN ACCORDA NCE WITH ITA NO. 1138//JP/2011 ACIT VS. SHRI SHYAM SUNDER KHANDELWAL 4 SECTIONS 2(29A)/2(42A). THE PERIOD OF HOLDING WOULD DETERMINE WHETHER IT WAS LONG TERM CAPITAL GAIN OR SHORT TERM CAPITAL GAIN. IT WAS MENTIONED THAT IN CASE OF SHORT TERM CAPITAL GAINS IF STT HAD BEEN PAID THEN SHORT TERM CAPITAL GAIN WAS TAXA BLE AT A SPECIFIC RATE U/S 111A OF IT ACT, 1961 AND LONG TER M CAPITAL GAIN WAS EXEMPT U/S 10(38). SINCE THE ASSESSEE FULFILLS ALL THE CONDITIONS AND HAS RIGHTLY SHOWN RS.20,40,619/- AS SHORT TERM CAPITAL GAIN TAXABLE U/S 111A AND LONG TERM CAPITAL GAIN OF RS.29,27,833/- EXEMPT U/S 10(38), THE ADDITION MADE WAS REQUIRED TO BE DELETED. RELIANCE WAS PLACED ON THE JUDICIAL PRONOUNCEMENTS IN THE CASES OF HITESH SATISHCHAND D OSHI VS. JCIT, ITAT MUMBAI BENCH (2011) 140 TTJ 32, CIT VS. GOPAL PUROHIT (2010) 34 DTR (BOM) 52, & SAR INVESTMENT (P ) LTD. VS. DCIT (2010) 40 SOT566(AHD). 43. REGARDING SECOND GROUND OF APPEAL, IT WAS SUB MITTED THAT SHARES HELD BY THE ASSESSEE WERE OF A PVT. LTD . COMPANY M/S SHARE STREET PVT. LTD. AND HAD BEEN SHOWN AS IN VESTMENT IN THE BOOKS OF ACCOUNT OF THE ASSESSEE FROM 5-03-2 005 YEAR AFTER YEAR. SINCE THE ASSESSEE HAS DISTINCTLY TREAT ED THESE SHARES AS INVESTMENTS, THE AO COULD NOT TREAT THEM AS STOC K IN TRADE. 3.5 THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSION S OF THE ASSESSEE DELETED THE ADDITIONS ON ACCOUNT OF BOTH THE GROUN DS OF THE ASSESSEE BY FOLLOWING OBSERVATIONS. 4.4(I) ON PERUSAL OF THE PAPER BOOK FILED BY THE A.R. SHOWING COMPUTATION OF TOTAL INCOME AND THE BALANCE SHEET, IT IS SEEN THAT THE ASSESSEE HAS MAINTAINED VERY DETAILED BALANCE SHEETS WHEREIN THE INVESTMENT IN SCRIPS THROUGH PORTFOLIO MANAGEME NT SCHEME (PMS) HAS BEEN SHOWN AS INVESTMENTS. THE SUMMARY OF THE P MS INVESTMENT THROUGH K.B. CAPITAL & MARKET PVT. LTD. WAS ALSO FU RNISHED FROM 1.11.2004 TO 31.3.2011 WHEREIN THE AMOUNT INVESTED IN SCRIPS HAS CONSISTENTLY BEEN SHOWN AS INVESTMENTS. THE JUDICIA L PRONOUNCEMENTS IN THE CASES OF MAHENDRA S. SHAH VS. ADDL. CIT (2011) 140 TTJ (MUMBAI) 16 AND HITESH SATISH CHANDR A DOSHI VS. JT. CIT (2011) 140 TTJ (MUMBAI) 32 HAVE CONSISTENTLY TA KEN THE VIEW THAT IF THE ASSESSEE HAS SHOWN PURCHASE OF SCRIPS AS INV ESTMENTS IN HIS BALANCE SHEET RATHER THAN STOCK IN TRADE THEN THE D EPARTMENT CANNOT ITA NO. 1138//JP/2011 ACIT VS. SHRI SHYAM SUNDER KHANDELWAL 5 TREAT THE NATURE OF THE TRANSACTIONS DIFFERENTLY FO R TAXABLE PURPOSES. IT IS FOR THE ASSESSEE TO DECIDE WHETHER HE IS HOLDING THE SHARES FOR INVESTMENT PURPOSE OR AS STOCK IN TRADE AND ITS DEC ISION SHOULD BE REFLECTED IN HIS ACCOUNTING METHOD WHICH SHOULD BE SUBJECT TO VERIFICATION. (II) IN THIS PARTICULAR CASE THE ASSESSEE HAS CONSI STENTLY SHOWN PURCHASE OF SHARES THROUGH PMS AS INVESTMENTS IN HIS BALANCE SHEET FROM 2005-06. THE DEPARTMENT CANNOT CHANGE TH E CHARACTER OF THE TRANSACTION FROM THAT OF CAPITAL GAIN TO BUSINE SS. THE SHORT TERM CAPITAL GAIN OF RS.20,40,609/- AND LONG TERM CAPITA L GAIN OF RS.29,27,833/- ARE DIRECTED TO BE TREATED AS CAPITA L GAIN AND NOT INCOME FROM BUSINESS. SIMILARLY, THE CAPITAL GAINS ACCRUING TO HIM OF RS. 15,28,073/- FROM SALE OF SHARES OF M/S SHARES S TREET (P). LTD. IS DIRECTED TO BE TREATED AS LONG TERM CAPITAL GAIN AN D NOT INCOME FROM BUSINESS. THEREFORE, THE FIRST TWO GROUNDS OF APPEA L OF THE ASSESSEE ARE ALLOWED. 3.6 APROPOS THE THIRD ISSUE OF THE ASSESSEE, THE LD . CIT(A) DELETED THE ENTIRE ADDITION MADE BY THE AO U/S 14A OF THE ACT B Y FOLLOWING OBSERVATIONS. 8.2 THE AR OF THE ASSESSEE SUBMITTED THAT INVESTMENTS LISTED ON PAGE 20-21 OF THE ASSESSMENT ORDER ARE OLD INVESTMENTS OUT OF THE CAPITAL OF THE ASSESSEE AND ANY VARIATION THEREIN IS EITHER FROM ASSESSEE'S CAPITAL ACCOUNT O R FROM THE CURRENT INCOME OF THE ASSESSEE AND NO BORROWINGS WE RE MADE FOR THIS INVESTMENT. IT WAS SUBMITTED THAT THE INTEREST OF R S.1,63,409/- WAS PAID BY THE ASSESSEE DURING THE COURSE OF MONEY LEN DING BUSINESS AND INTEREST WAS CLAIMED AS DEDUCTION FROM THE INTEREST INCOME EARNED DURING THE YEAR. THE OTHER EXPENDITURE INCURRED BY THE ASSESSEE WAS CLAIMED AGAINST INCOME FROM SHARE BUSINESS AND INTE REST INCOME BOTH OF WHICH FORM PART OF THE TOTAL TAXABLE INCOME AND THU S NO PART OF INTEREST AND EXPENDITURE IS ATTRIBUTABLE TO EXEMPT INCOME. THE SMALL DIVIDEND INCOME OF RS.189937/- WAS RECEIVED B Y ASSESSEE ON ITS OLD INVESTMENTS IN SHARES MADE FROM HIS OWN CAP ITAL FOR WHICH NO EXPENDITURE HAS BEEN INCURRED WHICH IS EVIDENT FROM THE EXPENDITURE DEBITED IN P&L ACCOUNT AND, THEREFORE, PROVISIONS O F SECTION 14A OR RULE 8D(1) DO NOT APPLY TO THE ASSESSEE. THE DISALL OWANCE OF ITA NO. 1138//JP/2011 ACIT VS. SHRI SHYAM SUNDER KHANDELWAL 6 RS.48,401/- AND RS.2,75,916/- WAS WRONG AND BAD IN LAW AND DESERVES TO BE DELETED. 8.3 I HAVE CAREFULLY PERUSED THE ORDER OF THE AO AN D THE SUBMISSIONS OF THE AR. I FIND THAT IT IS A FACT THA T THE ASSESSEE IS INVESTING IN SHARES BOTH FOR THE PURPOSES OF INVEST MENTS AND ALSO BUSINESS TRANSACTIONS. BOTH ACCOUNTS OF TRANSACTION S ARE BEING REFLECTED IN HIS ACCOUNTS SEPARATELY. THE EXPENSES CLAIMED BY THE ASSESSEE PERTAIN TO THE TRANSACTIONS IN SHARES SHOWN IN HIS P&L ACCOUNT AND INTEREST INCOME EARNED. THEREFORE, THESE CANNOT BE DISALLOWED U/S 14A. IN VIEW OF THE ABOVE , THE DISALLOWANCES OF RS.48,401/- AND RS.2,75,916/- ARE DIRECTED TO BE DELETED 3.7 AGGRIEVED, THE REVENUE IS BEFORE US WHEREIN THE LD. DR VEHEMENTLY ARGUED THAT THE ASSESSEE WAS HEAVILY ENGAGED IN THE BUSINESS OF PURCHASE AND SALE OF SHARES, SECURITIES, FUTURE AND OPTIONS AND OTHER DERIVATIVES. THEREFORE, IT IS A CASE OF CLEAR CUT INTERLACING A ND INTERMINGLING OF THE FUNDS UTILIZED BY THE ASSESSEE FOR THE SHARES TRANSACTION BUSINESS AND WHEREVER IT IS SUITED TO THE CONVENIENCE OF THE ASSESSEE, THE TRAN SACTIONS HAVE BEEN SEGREGATED AS PERTAINING TO INVESTMENT ACCOUNT, THE REBY CLAIMING HUGE BENEFIT ON TAX. THE AO HAS CLEARLY OBSERVED THAT TH ERE WAS HUGE MULTIPLICITY, FREQUENCY AND INTERMIXING OF THE TRANSACTIONS FOR W HICH THE ASSESSEE COULD NOT GIVE SATISFACTORY EXPLANATION. THE RELEVANT EXC ERPTS FROM AOS ORDER IS AS UNDER:- IN CONTINUATION OF THE ONGOING DISCUSSION, IT WOU LD BE RELEVANT TO REFER TO AN IMPORTANT TEST WHICH IS SOM ETIMES APPLIED IN DETERMINING THE CHARACTER OF THE TRANSACTION. WAS T HE PURCHASE MADE WITH THE INTENTION TO RESELL AT A PROFIT? IT IS OFT EN SAID THAT A TRANSACTION OF PURCHASE FOLLOWED BY RESALE IN DISTI NGUISHING BUSINESS TRANSACTION FROM TRANSACTIONS OF INVESTMENT. CASE M AY HOWEVER, ARISE WHERE THE PURCHASE HAS BEEN MADE SOLELY AND EXCLUSI VELY WITH THE INTENTION TO RESELL AT A PROFIT AND THE PURCHASER H AS NO INTENTION OF ITA NO. 1138//JP/2011 ACIT VS. SHRI SHYAM SUNDER KHANDELWAL 7 HOLDING THE PROPERTY FOR HIMSELF OR OTHERWISE ENJOY ING OR USING IT. THE PRESENCE OF SUCH AN INTENTION IS NO DOUBT A RELEVAN T FACTOR AND UNLESS IT IS OFF SET BY THE PRESENCE OF OTHER FACTORS IT W OULD RAISE A STRONG PRESUMPTION THAT THE TRANSACTION IS AN ADVENTURE IN THE NATURE OF TRADE. THE ASSESSEE HAS NOT BEEN ABLE TO GIVE ANY SPECIFIC REASON FOR SUCH A FREQUENCY, MULTIPLICITY AND VOLUM E IN RESPECT OF ALL THE SCRIPS. THE NATURE OF TRANSACTIONS IN ALL OF TH EM IS SUCH THAT IT DOES NOT FIT IN THE CRITERIA OF THE INVESTMENT. THERE CA N BE NO CLAIM OF INVESTMENT WHEN THESE SCRIPS WERE SOLD WITHOUT ANY REASON FOR SALE EXCEPT FOR PROFIT-EARNING. 3.5.5 AS WOULD BE NOTED IN THE SUCCEEDING PARAGRAPH S OF THIS ORDER THE TREATMENT OF SO CALLED LONG TERM CAP ITAL GAIN AS BUSINESS INCOME AND DISCUSSION ABOUT THE REAL NATUR E OF THE TRANSACTIONS IN SHARES AND SECURITIES IS THE KEY IS SUE. IT WOULD INDEED BE VERY PERTINENT TO NOTE HERE AT THE VERY OUTSET T HAT GIVEN THE ENORMOUS VOLUME, PERIODICITY, FREQUENCY AND MULTIPL ICITY OF TRANSACTIONS OF PURCHASE AND SALE OF SHARES, A QUES TION OF MOST SIGNIFICANT IMPORT ARISES IN THIS CASE, WHICH IS TH AT GIVEN THE NATURE OF TRANSACTIONS OF THE TYPE ENTERED INTO BY THE ASSESS EE, CAN IT BE SAID THAT THE SHARES / SECURITIES HAVE BEEN HELD REALLY AS ASSETS OR IS THERE A LARGER SCHEME OF MAXIMIZING PROFITS FROM REPEATED A ND MULTIFARIOUS TRANSACTIONS BY MERELY USING THE CLOAK OF SO-CALLED INVESTMENT ACTIVITY? IT MUST BE NOTED HERE DURING THE COURSE OF THE PROCEEDINGS, A THREAD BARE ANALYSIS OF THE ENTIRE P ORTFOLIO TAKING INTO CONSIDERATION VARIOUS PARAMETERS SUCH A NUMBER OF S CRIPS, VOLUME, FREQUENCY OF TRANSACTIONS AND THEIR SYSTEMATIC AND PERIOD NATURE, ETC. WAS DONE THE AO RELIED ON THE FOLLOWING JUDGEMENTS. (1) CIT VS. MOTILAL HIRABHAI SPG. & SVG. CO. LTD. (1978 ) 113 ITR 173 (GUJ.). (2) RAJA BAHADUR VISHESHWARA SINGH VS. CIT , 41 ITR 685 (SC) (3) BHARAT DEVELOPMENT (P) LTD. VS. CIT (1980( 4 TAXMAN 58 (DEL.) (4) RAJPUTANA TEXTILE (AGENCIES) LTD. VS. CIT (1961) 42 ITR 743 (SC) (5) W.L. KNOPP VS. CIT 16 ITR 398 (MAD.) ITA NO. 1138//JP/2011 ACIT VS. SHRI SHYAM SUNDER KHANDELWAL 8 IT IS FURTHER SUBMITTED THAT IN THE ASSESSEE CASE A SYSTEMATIC, REGULAR AND PERIODIC ACTIVITY WITH NUMEROUS AND CONTINUOUS TRAN SACTIONS WAS STRONGLY INDICATED. RELIANCE WAS PLACED ON THE DECISION OF T HE ITAT, AHEMDABAD BENCH IN THE CASE OF DCIT VS. SMT. DEEPABEN AMITBHA I SHAH (2006, 100 TTJ (AHD.), WHEREIN IT WAS HELD THAT WHETHER OR NOT A PERSON CARRIES ON BUSINESS IN A PARTICULAR COMMODITY CAN BE INFERRED FROM THE VOLUME, FREQUENCY, CONTINUITY AND REGULARITY OF THE TRANSAC TIONS AND THE MOTIVE INVOLVED IN THIS CASE, IT WAS HELD THAT HAVING REGA RD TO THE LARGE VOLUME, FREQUENCY, CONTINUITY AND REGULARITY OF TRANSACTION S OF PURCHASE AND SALE OF SHARES, IT CAN BE INFERRED THAT THESE TRANSACTIONS MUST HAVE BEEN ENTERED INTO BY THE ASSESSEE WITH A PROFIT MOTIVE. IT IS FURTHE R PLEADED THAT THE LD. CIT(A) HAS NOT CARRIED OUT PROPER VERIFICATION AS T O WHETHER SHARES WHICH WERE HELD IN BUSINESS PORTFOLIO OF THE ASSESSEE WER E NOT TRANSFERRED TO INVESTMENT PORTFOLIO BY INTERNAL TRANSACTIONS. HE H AS RELIED ON BALD EXPLANATION THAT SEPARATE BOOKS OF ACCOUNT WERE MAI NTAINED. THEREFORE, THE TRANSACTIONS OUGHT TO HAVE BEEN TREATED ON TWO DIFF ERENT METHODS THE LD. DR FURTHER PLEADED THAT WHAT IS NECESSARY TO SEE WHET HER THERE WAS ANY INTERLACING OR INTERMIXING OF FUNDS AND WHETHER OR NOT THERE WERE ANY INTERNAL OR JOURNAL ENTRIES IN THE BOOKS OF ACCOUNT OF THE ASSESSEE BY WHICH SHARES FROM TRADING PORTFOLIO TO INVESTMENT PORTFOL IO WERE CARRIED OUT. THIS ITA NO. 1138//JP/2011 ACIT VS. SHRI SHYAM SUNDER KHANDELWAL 9 IS VERY EASY IN THE CASE OF THE ASSESSEE AS PROPRIE TOR OF BOTH THE PORTFOLIOS ARE NOT SEPARATE BUT THE ASSESSEE HIMSELF. 3.8 APROPOS GROUND NO. 2, THE LD. DR CONTENDS THAT THE ASSESSEE SOLD 28551 SHARES OF ONE PRIVATE LIMITED COMPANY I.E. M/ S. SHARE STREET (P) LTD. FOR A FACE VALUE OF RS. 10/- EACH SHARE FOR WHICH T HE ASSESSEE REALIZED THE AMOUNT OF RS. 18,55,815/- @ RS. 65/- PER SHARE. THE AO WAS OF THE VIEW THAT THE ASSESSEE IN ORDER TO GENERATE CAPITAL HAS OVERVALUED THE SALE CONSIDERATION AT RS. 65/- PER SHARE FOR WHICH A PRO PER WORKING IS GIVEN AND ACCORDING TO WHICH THE VALUE OF THE SHARE COMES TO RS. 5.50 PER SHARE BY FOLLOWING OBSERVATION. 4.3 THUS, IT BECOMES AMPLY CLEAR THAT THE ASSESSE E HAD OVERVALUED THE SHARES IN ORDER TO PAY TAX AT SUBSID IZED RATES UNDER THE HEAD LONG TERM CAPITAL GAINS AS IS CLEAR FROM THE B/S OF M/S. SHARE STREET (P) LTD. WHICH HAPPENS TO HAVE INCURRED LOSS SINCE YEARS AND WHOSE TOTAL OF C/F LOSS FOR THE YEAR ENDING 31-03-2 010 IS AT RS. 8,89,657/-, AS IS APPARENT FROM ITS PROFIT AND LOSS ACCOUNT. IT APPEARS THAT THE AUDIT REPORT OF THE COMPANY THAT NO DIVIDE ND HAS BEEN DISTRIBUTED BY M/S. SHARES STREET (P) LTD. DURING T HE YEAR UNDER CONSIDERATION. THE ASSESSEE FILED HIS REPLY. THE AO THUS HELD THAT THE SHARES WERE SOLD AT OVERVALUED RATE. HOWEVER, SINCE ALL THE SHARES WERE TREATED UNDER THE HEAD BUSINESS INCOME. NO SEPARATE ADDITION WAS MADE BY THE AO BY FOLLOWING OBSERVATION. 4.5 THE FACT THAT THE SHARES HAVE BEEN OVERVALUED BY THE ASSESSEE IS AMPLY CLEAR AND FULL AMOUNT OF CONS IDERATION ITA NO. 1138//JP/2011 ACIT VS. SHRI SHYAM SUNDER KHANDELWAL 10 CANNOT BE CONSIDERED FOR COMPUTING CAPITAL GAINS. A T MOST THE SALE CONSIDERATION TO THE EXTENT OF INDEXED COST OF ACQUISITION CAN BE CONSIDERED FOR CAPITAL GAIN TAXATION. THIS W OULD RESULT IN CAPITAL GAIN IF NIL. IF THE TRANSACTION IS NOT A CCEPTED AS BUSINESS INCOME, THE BALANCE CONSIDERATION OF RS. 1 528073/- (SALE CONSIDERATION MINUS THE INDEXED COST OF ACQUI SITION) SHOULD BE TREATED ALTERNATIVELY AS INCOME FROM OTH ER SOURCES RATHER THAN THE CAPITAL GAIN. HOWEVER, IT IS DESIRA BLE TO MENTION THAT THE PROPOSED TREATMENT IS NOT BEING GIVEN UNDE R PROVISIONS OF ANY SPECIFIC SECTION OF THE I.T. ACT, 1961 BUT O N THE BASIS OF SETTLED LEGAL POSITION THAT IF ANY INCOME, BECAUSE OF ITS PECULIAR NATURE, CANT BE TAXED UNDER ANY SPECIFIC HEAD OF I NCOME, IT COULD BE TAXED UNDER THE HEAD INCOME FROM OTHER SO URCES. IN ANY CASE SECTION 56(VII)( C ) IS APPLICABLE TO THE PERSONS WHO RECEIVES ANY MOVABLE PROPERTY FOR INADEQUATE CONSID ERATION WHICH IS NOT THE CASE HERE. BUT SINCE THE TRANSACTION HAS ALREADY BEEN CONSIDER ED AS BUSINESS TRANSACTION AND THE INCOME THEREOF RS. 157 0305/ - HAS ALREADY BEEN CONSIDERED AS BUSINESS INCOME, NO SEPA RATE ADDITION IS BEING MADE ON THIS ACCOUNT. 3.9 THE LD. CIT(A) HAS HELD THAT BUSINESS PORTFOLIO AND INVESTMENT PORTFOLIO OF THE SHARES HELD BY THE ASSESSEE ARE SE PARATE AND IT SHOULD BE TREATED UNDER THE HEAD BUSINESS INCOME AND CAPITAL GAINS RESPECTIVELY. THE LD. CIT(A) HAS FAILED TO APPRECIATE THE AOS OBSERV ATION IN RESPECT OF OVER- VALUATION OF THE PRIVATE COMPANY SHARES AND ALLOWED THE RELIEF IN SUMMARY MANNER. IT IS PLEADED THAT IN THE CASE OF SHARES OF M/S. SHARE STREET (P) LTD., THE SHARES ARE UNQUOTED PRIVATE COMPANY SHARES AND NO CREDENTIALS AS WELL AS WORTH OF THE PRIVATE COMPANY ARE AVAILABLE IN PUBL IC DOMAIN. IT WAS EASY FOR THE ASSESSEE TO DOCTOR THE SALE PRICE OF SHARES WIT H THE MANAGEMENT OF SUCH COMPANY MUST BE KNOWN TO THE ASSESSEE. THE LD. CIT( A) IN THIS GROUND HAS ITA NO. 1138//JP/2011 ACIT VS. SHRI SHYAM SUNDER KHANDELWAL 11 ADOPTED THE SUMMARY APPROACH AND MISSED THE CRUCIAL POINTED INVOLVED FOR DETERMINATION OF THE QUESTION. 3.10 APROPOS THIRD GROUND I.E. DISALLOWANCE OF EXPE NDITURE U/S 14A OF THE ACT WHERE THE LD. DR RELIED ON THE ORDER OF THE AO. THE LD. AR RELIED ON THE ORDER OF THE LD. CIT(A) AND PLACED RELIANCE OF THE CASE LAWS AS MENTIONED IN THE WRITTEN SUBMISSION. 3.11 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSE D THE MATERIALS AVAILABLE ON RECORD. IN OUR CONSIDERED VIEW, THE AO AND LD. DR CONTENTIONS APROPOS THE FREQUENCY OF INTERMIXING AND INTERLACIN G OF FUNDS HAVE NOT BEEN OBJECTIVELY ANSWERED BY THE LD. CIT(A) BESIDES THE CRUCIAL FACT WHETHER THERE WAS INTRA-ACCOUNT TRANSFER FROM BUSINESS STOCK TO I NVESTMENT STOCK OF SHARES OR VICE VERSA HAS NOT BEEN SPELT OUT BEFORE US. IT IS ACCEPTABLE THAT THE ASSESSEE CAN MAINTAIN BUSINESS & INVESTMENT PORTFO LIO SEPARATELY WHICH AN IDEAL SITUATION SHOULD BE TAXED UNDER THE HEAD BUSI NESS INCOME AND CAPITAL GAINS RESPECTIVELY. BUT THIS PRESUPPOSES THE NEAT A ND CLEAN STATE OF AFFAIRS IN WHICH THERE IS NEITHER INTERMIXING NOR INTERLACING OF FUNDS AND THERE ARE NO INTERNAL / JOURNAL TRANSFER FROM ONE ACCOUNT TO OTH ER TO KEEP THE CHECK IN CLANDESTINE METHOD. 3.12 SIMILARLY, IN RESPECT OF SHARES OF M/S. SHARE STREET (P) LTD., THERE IS A HUGE GAP BETWEEN THE VALUATION OF PRIVATE COMPANYS EQUITY SHARES ARRIVED AT BY THE AO AND CLAIMED BY THE ASSESSEE AS FACTS E MERGES THAT THE ASSESSEE ITA NO. 1138//JP/2011 ACIT VS. SHRI SHYAM SUNDER KHANDELWAL 12 HAS CLAIMED THESE SHARES IN INVESTMENT ACCOUNT AND THEY ARE AVAILABLE AT REDUCED RATE OF TAXATION. THE LD. COUNSEL FOR THE A SSESSEE DID NOT SPELL OUT ANY MARKET CREDENTIALS OF THE SHARES OF M/S. SHARE STREET (P) LTD. NOR THE PRODUCT RANGE OR WORTH OF THE COMPANY. SIMILARLY, T HERE IS NO FACTUAL ELUCIDATION ABOUT THE TURNOVER AND ASSETS OF THIS COMPANY SO AS TO WORK OUT THE VALUATION OF UNQUOTED EQUITY SHARES AT RS. 65/- PER SHARE. THE LD. CIT(A) WITHOUT ADVERTING TO ANY FACTUAL OBSERVATIONS HAS A LLOWED THE RELIEF BY SUMMARY OBSERVATION WHICH CANNOT BE UPHELD. 3.13 APROPOS GROUND NO. 3, WE ARE OF THE VIEW THAT THE AMOUNT OF RS. 30,16,695/- HAS BEEN DISALLOWED AGAINST THE INTERES T PAID ON LOANS OF RS. 26,92,378/- BY APPLYING THE PROVISION OF RULE 8D WH ICH ON THE FACE OF ITS SEEMS TO BE EXCESSIVE. THE LD. DR CONTENDS THAT IT IS A RESULT OF STATUARY WORKING AS PROVIDED UNDER RULE 8D WHICH IS MECHANIC ALLY AND MANDATORY. HOWEVER, AT THE SAME TIME, THE LD. CIT(A) INSTEAD O F GIVING ANY FACTUAL PROJECTION BY SUMMARY OBSERVATION VIDE PARA 8.3 AB OVE HAS DELETED THE ENTIRE ADDITION. THUS IN THE ENTIRETY OF THE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE OF THE CONSIDERED VIEW THAT THE ISSUE SHOULD BE RESTORED BACK TO THE FILE OF THE LD. CIT(A) TO PASS A SPEAKING ORDER ON THE FACTS AND CIRCUMSTANCES OF THE CASE DULY CONSIDERING THE FACT UAL ISSUES RAISED BY THE AO IN HIS ORDER ABOUT THE INTERMIXING AND INTERLACI NG OF THE FUNDS AND POSSIBILITY OF INTERNAL TRANSACTION FROM BUSINESS A CCOUNT TO INVESTMENT ITA NO. 1138//JP/2011 ACIT VS. SHRI SHYAM SUNDER KHANDELWAL 13 ACCOUNT PORTFOLIOS. SIMILARLY, THE SHARES OF M/S. S HARE STREET (P) LTD. NEEDS TO BE CORRECTLY WORKED OUT AND ALSO THE DISALLOWANC E U/S 14A SHOULD BE CONSIDERED IN VIEW OF VARIOUS HON'BLE HIGH COURT JU DGEMENTS WHICH HAVE BEEN PASSED IN INTERVENING PERIOD. THUS THE LD. CIT (A) WILL DECIDE THE ENTIRE ISSUE AFRESH BY PROVIDING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE IN ACCORDANCE WITH LAW. 4.0 IN THE RESULT, THE APPEAL OF THE REVENUE IS ALL OWED FOR STATISTICAL PURPOSES AND THE C.O. OF THE ASSESSEE IS DISMISSED. . THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 05 - 09-2014 SD/- SD/- (T.R. MEENA) (R.P. TOLANI) ACCOUNTANT MEMBER JUDICIAL MEMBER JAIPUR DATED: 05 TH SEP. 2014 *MISHRA COPY FORWARDED TO:- 1. THE ACIT, CIRCLE- 1, JAIPUR 2. SHRI SHYAM SUNDER KHANDELWAL, JAIPUR 3. THE LD. CIT 4. THE LD. CIT(A), JAIPUR BY ORDER 5..THE LD. DR 6.THE GUARD FILE (IT NO. 1138/JP/2011) AR ITAT, JAIPUR ITA NO. 1138//JP/2011 ACIT VS. SHRI SHYAM SUNDER KHANDELWAL 14 ITA NO. 1138//JP/2011 ACIT VS. SHRI SHYAM SUNDER KHANDELWAL 15 ITA NO. 1138//JP/2011 ACIT VS. SHRI SHYAM SUNDER KHANDELWAL 16