DCIT, New Delhi V. M/s. DLF Home Developers Ltd., New Delhi

ITA 129/DEL/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 86704 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-01-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 11-11-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 07-01-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PARWINDER KAUR
• Keywords: Capital asset; Business income; Transactions in derivatives; Earning of tax free income; Question of law; Wholly owned subsidiary
• Section: 143(3); 14A; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH B : NEW DELHI BEFORE SHRI J. SUDHAKAR REDDY , ACCOUNTANT MEMBER AND SHRI GEORGE GEORGE K, JUDICIAL MEMBER ITA NO. 129 /DE/2013 AY: 2007 - 08 DCIT, CIRCLE 10(1) VS. DLF HOME DEVELOPERS LTD. NEW DELHI 9 TH FLOOR, DLF CENTRE, SANSAD MARG NEW DELHI A N D ITA NO. 147/DE/2013 AY: 2007 - 08 M/S DLF HOMES DEVELOPERS LTD. VS. ACIT, CIRCLE 10(1) NEW DELHI NEW DELHI PAN: AACCD 0037 H (APPELLANT) (RESPONDENT) DEPARTMENT BY : S MT. PARWINDER KAUR, SR.D.R. ASSESSEE BY : SH. R.S.SINGHVI, ADV. SH. SATYAJEET GOEL, ADV. ORDER PER J. SUDHAKAR REDDY , ACCOUNTANT MEMBER : THESE ARE CROSS APPEALS DIRECTED AGAINST THE ORDER OF LD.CIT(A) - XIII, NEW DELHI DT. 26.10.2012 PERTAINING TO THE AY 2007 - 08. 2 . FACTS OF THE CASE : - THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF REAL ESTATE. IT IS THE WHOLLY OWNED SUBSIDIARY OF DLF UNIVERSAL LTD. IT FILED ITS E - RETURN OF INCOME ON 29.10.2007. THE ASSESSING OFFICER IN HIS ORDER PASSED U/S 143(3) ON 24.12.2009 DETERMINED THE TOTAL LOSS AT RS.11,87,12,025/ - INTER ALIA, DISALLOWING EXPENDITURE CLAIMED OF RS.4,69,20,004/ - RELATING TO EARNING OF EXEMPT INCOME AND ALSO TREATING THE SHORT TERM AND LONG TERM CAPITAL GAINS EARNED FROM THE SALE OF SHARES AS B USINESS INCOME. AGGRIEVED THE ASSESSEE CARRIED THE MATTER IN APPEAL. AS REGARDS THE DISALLOWANCE OF EXPENDITURE INCURRED UNDER RULE 14 A , THE FIRST APPELLATE AUTHORITY UPHELD THE ORDER OF THE AO. ITA NO. 129/DEL/2013 AND ITA 147/DEL/2013 AY: 2007 - 08 M/S DLF HOMES DEVELOPERS LTD., NEW DELHI 2 3 . AGGRIEVED THE ASSESSEE IS BEFORE US ON THE FOLLOWING G ROUNDS. 1. THAT THE IMPUGNED ORDER DATED 26.10.2012 PASSED BY THE LD.CIT(A) - XIII, NEW DELHI IS BAD IN LAW AND WRONG ON FACTS. 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD.CIT(A) - XIII, NEW DELHI HAS ERRED IN LAW IN CONFIRMING THE DISALLOWANC E U/S 14A OF THE ACT R.W.RULE 8D OF ITAT RULES, 1962 AMOUNTING TO RS.4,68,99,665/ - BY UPHOLDING THAT THE INVESTMENT IN SHARES AND SECURITIES HAVE BEEN MADE OUT OF BORROWED FUNDS, THEREFORE, THE PROVISIONS OF S.14A ARE APPLICABLE. 3. THAT THE APPELLANT CRAV ES LEAVE TO ADD, ALTER, AMEND, SUBSTITUTE, WITHDRAW AND/OR VARY ANY GROUNDS OF APPEAL AT OR BEFORE THE TIME OF HEARING. 4. ON THE ISSUE OF TREATING INCOME EARNED FROM PURCHASE AND SALE OF SHARES AS INCOME FROM CAPITAL GAINS AND NOT INCOME FROM BUSINESS BY THE LD.CIT(A) , THE REVENUE HAS FILED THIS APPEAL BEFORE US. 5. WE HAVE HEARD SMT.PARWINDER KAUR, THE LD.SR.D.R. ON BEHALF OF THE REVENUE AND SHRI RS SINGHVI, THE LD.COUNSEL FOR THE ASSESSEE. 6 . ON A CAREFUL CONSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND ON A PERUSAL OF THE PAPERS ON RECORD, AS WELL AS THE ORDERS OF THE AUTHORITIES BELOW AND CASE LAWS CITED, WE HOLD AS FOLLOWS. 7. THE ASSESSEE IN THIS CASE HAS SHOWN TAX FREE DIVIDEND INCOME OF RS.28,832/ - AS EARNED DURING THE P.Y. AS AGAINST THIS INCOME , THE ASSESSING OFFICER DISALLOWED EXPENDITURE OF RS.4,69,20,004/ - . 7.1. THE ASSESSEE HAD RAISED A NUMBER OF CONTENTIONS ON THIS DISALLOWANCE . W ITHOUT PREJUDICE TO ALL THOSE SUBMISSIONS, HE RELIED ON THE DECISION OF THE DELHI B ENCH OF THE TRIBUNAL IN THE CASE OF SAHARA INDIA FINANCIAL CORP LTD. VS. DCIT (2014) REPORTED IN 105 D TR 1 (DELHI ITAT) AND SUBMITTED THAT THE DISALLOWANCE CAN BE TO THE MAXIMUM OF THE EXEMPT INCOME. 7.2. THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF SAHARA INDIA FIN CORP LTD. (SUPRA) HAD HELD AS FOLLOWS. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IT HAS NOT BEEN DISPUTED THAT THE ADMINISTRATION, EXPENSES AND BOOKS OF ACCOUNTS OF INVESTMENT DIVISION ARE SEPARA TELY CARRIED OUT AND MAINTAINED ITA NO. 129/DEL/2013 AND ITA 147/DEL/2013 AY: 2007 - 08 M/S DLF HOMES DEVELOPERS LTD., NEW DELHI 3 BY THE ASSESSEE. NO INFIRMITY HAS BEEN FOUND BY THE DEPARTMENT IN THIS BEHALF. ONE OF THE MAIN ISSUE IS ON WHOM LIES THE ONUS TO ESTABLISH NEXUS OF AVAILABLE FUNDS WITH FREE AND TAXABLE INCOME. SIMILARLY COURTS HAVE HELD THA T A FINDING IN OBJECTIVE TERMS ABOUT ASSESSEE WORKING BEING UNSATISFACTORY IS TO BE RECORDED BY AO IN THE ORDER. CHANDIGARH BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. PUNJAB STATE CO - OP. & MARKETING FEDERATION LTD. (ITA NO. 548/CHD/2011) HAS HELD THAT I N ANY CASE THE DISALLOWANCE U/S 14A CANNOT EXCEED TAX FREE INCOME OF THE ASSESSEE. IF MECHANICAL METHOD OF RULE 80 IS APPLIED, IT LEADS TO MANIFESTLY ABSURD RESULTS IN AS MUCH AS FOR TAX FREE INCOME OF RS.68,37,583/ - DISALLOWANCE OFRS.2,16,51,917 (ENHANCED BY CIT(A) AT RS. 2,19,47,772) IS MADE U/S 14A WHICH IS WAY TOO MUCH THAN THE EXEMPT INCOME. AS THE INTERPRETATION OF PROVISIONS OF SEC. L4A R/W RULE 80 IS LEADING TO UNANTICIPATED ABSURDITIES WHICH CANNOT BE THE INTENTION OF LEGISLATURE. UNDER THESE CIRC UMSTANCES HELP OF EXTERNAL AIDS OF CONSTRUCTION FOR INTERPRETATION OF STATUTE IS CALLED FOR. LOOKING AT THE VARYING INTERPRETATION OFFERED BY VARIOUS COURTS AND BENCHES OF TRIBUNAL IN RELATION TO SEC. 14A, IT IS QUITE ARDUOUS TO PRECISELY DECIDE THE ISSUE. IN GIVEN FACTS AND CIRCUMSTANCES WITHOUT GOING INTO ALL THE ISSUES, IN OUR VIEW IT IS APPROPRIATE TO TAKE GUIDANCE FROM CHANDIGARH BENCH JUDGMENT IN THE CASE OF PUNJAB STATE COOPT MFT. FED.(SUPRA) HOLDING THAT THE DISALLOWANCE OF EXPENDITURE IN ANY CASE CANNOT EXCEED THE INCOME EARNED. IN OUR VIEW THIS JUDGMENT TAKES A HOLISTIC VIEW THAT DISALLOWANCE IN TERMS OF SEC. 14A CAN BE MAXIMUM TO THE EXTENT OF EXEMPT INCOME, THERE IS NO DISPUTE THAT IN THIS CASE WHICH IS AT RS. 68,37,583/ - . THIS JUDGMENT IMP LIES THAT REASONABLE EXPENDITURE LESS THAN THE EXEMPT INCOME CAN BE DISALLOWED. IN OUR CONSIDERED OPINION, IN THE INTEREST OF JUSTICE, IT WILL BE REASONABLE TO ESTIMATE AND DISALLOW, 50% OF EXEMPT INCOME (RS.68,37,583/ - ) AS RELATABLE TO EXEMPT INCOME U/S 14A R/W RULE' 80. WE DO NOT GO INTO VARIOUS PLEA TAKEN BY BOTH SIDES OFFERING DIVERSE VIEWS BASED ON JUDICIAL CITATIONS. THIS GROUND OF THE ASSESSEE IS PARTLY ALLOWED. 7.3. THE JURISDICTIONAL HIGH COURT IN THE CASE OF M/S HOLCIM INDIA P.LTD. IN ITA NO. 486/2014 AND ITA NO.299/2014 VIDE JUDGEMENT DATED 05 TH SEPTEMBER,2014, HELD THAT SEC.14A CANNOT BE INVOKED WHEN THERE IS NO INCOME EARNED BY THE ASSESSEE WHICH IS NOT PART OF TOTAL INCOME. THE HON BLE JURISDICTIONAL COURT AT PARA NOS. 14, 15 AND 16 HELD A S FOLLOWS. 14. ON THE ISSUE WHETHER THE RESPONDENT - ASSESSEE COULD HAVE EARNED DIVIDEND INCOME AND EVEN IF NO DIVIDEND INCOME WAS EARNED, YET SECTION 14A CAN BE INVOKED AND DISALLOWANCE OF EXPENDITURE CAN BE MADE, THERE ARE THREE DECISIONS OF THE DIFF ERENT HIGH COURTS DIRECTLY ON THE ISSUE AND AGAINST THE APPELLANT - REVENUE. NO CONTRARY DECISION OF A HIGH COURT HAS BEEN SHOWN TO US. THE PUNJAB AND HARYANA HIGH COURT IN COMMISSIONER OF INCOME TAX , FARIDABAD VS. M/S LAKHANI MARKETING INCL,, ITA NO. 970/2 008, DECIDED ON ITA NO. 129/DEL/2013 AND ITA 147/DEL/2013 AY: 2007 - 08 M/S DLF HOMES DEVELOPERS LTD., NEW DELHI 4 2.4.2014, MADE REFERENCE TO TWO EARLIER DECISIONS OF THE SAME COURT IN CIT VS. HERO CYCLES LTD. (2010) 232 ITR 518 AND CIT VS. WINSOME TEXTILE INDUSTRIES LTD.(2009) 319 ITR 204 TO HOLD THAT SECTION 14A CANNOT BE INVOKED WHEN NO EXEMPT INCOM E WAS EARNED. THE SECOND DECISION IS OF THE GUJARAT HIGH COURT IN CIT - I VS. CORRTECH ENERGY (P.) LTD. [2014] 223 TAXMANN 130 (GUJ.). THE THIRD DECISION IS OF THE ALLAHABAD HIGH COURT IN INCOME TAX APPEAL NO. 88 OF 2014, COMMISSIONER OF INCOME TAX (II) KAN PUR, VS. M/S. SHIVAM MOTORS (P) LTD. DECIDED ON 05.05.2014. IN THE SAID DECISION IT HAS BEEN HELD: AS REGARDS THE SECOND QUESTION, SECTION 14A OF THE ACT PROVIDES THAT FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THE CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. HENCE, WHAT SECTION 14A PROVIDES IS THAT IF THERE IS ANY INCOME WHICH DOES NOT FORM PART OF THE INCOME UNDER TH E ACT, THE EXPENDITURE WHICH IS INCURRED FOR EARNING THE INCOME IS NOT AN ALLOWABLE DEDUCTION. FOR THE YEAR IN QUESTION, THE FINDING OF FACT IS THAT THE ASSESSEE HAD NOT EARNED ANY TAX FREE INCOME. HENCE, IN THE ABSENCE OF ANY TAX FREE INCOME, THE CORRESP ONDING EXPENDITURE COULD NOT BE WORKED OUT FOR DISALLOWANCE. THE VIEW OF THE CIT(A), WHICH HAS BEEN AFFIRMED BY THE TRIBUNAL, HENCE DOES NOT GIVE RISE TO ANY SUBSTANTIAL QUESTION OF LAW. HENCE, THE DELETION OF THE DISALLOWANCE OF RS.2,03,752 / - - MADE BY TH E ASSESSING OFFICER WAS IN ORDER . '. 15. INCOME EXEMPT UNDER SECTION 10 IN A PARTICULAR ASSESSMENT YEAR, MAY NOT HAVE BEEN EXEMPT EARLIER AND CAN BECOME TAXABLE IN FUTURE YEARS. FURTHER, WHETHER INCOME EARNED IN A SUBSEQUENT YEAR WOULD OR WOULD NOT BE TA XABLE, MAY DEPEND UPON THE NATURE OF TRANSACTION ENTERED INTO IN THE SUBSEQUENT ASSESSMENT YEAR. FOR EXAMPLE, LONG TERM CAPITAL GAIN ON SALE OF SHARES IS PRESENTLY NOT TAXABLE WHERE SECURITY TRANSACTION TAX HAS BEEN PAID, BUT A PRIVATE SALE OF SHARES IN AN OFF MARKET TRANSACTION ATTRACTS CAPITAL GAINS TAX. IT IS AN UNDISPUTED PO SITION THAT RESPONDENT ASSESSEE, IS AN INVESTMENT COMPANY AND HAD INVESTED BY PURCHASING A SUBSTANTIAL NUMBER OF SHARES AND THEREBY SECURING RIGHT TO MANAGEMENT. POSSIBILITY OF SALE OF SHARES BY PRIVATE PLACEMENT ETC. CANNOT BE RULED OUT AND IS NOT AN IMPROBABILITY. DIVIDEND MAYOR MAY NOT BE DECLARED. DIVIDEND IS DECLARED BY THE COMPANY AND STRICTLY IN LEGAL SENSE, A SHAREHOLDER HAS NO CONTROL AND CANNOT INSIST ON PAYMENT OF DIVIDEND. WHEN DECLARED, IT IS SUBJECTED TO DIVIDEND DISTRIBUTION TAX. 7.4 . RESPECTFULLY FOLLOWING THE DECISIONS OF THE ITAT IN THE CASE OF SAHARA INDIA FIN CORP LTD. (SUPRA), WE RESTRICT THE DISALLOWANCE U/S 14A TO ITA NO. 129/DEL/2013 AND ITA 147/DEL/2013 AY: 2007 - 08 M/S DLF HOMES DEVELOPERS LTD., NEW DELHI 5 RS.2,81,832/ - , WITHOUT GOING INTO MERITS OF THE OTHER CONTENTIONS RAISED BY THE ASSESSEE. 8. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALLOWED IN PA RT. 9. ITA 129/DEL/2012 IS REVENUE S APPEAL WHICH IS ON THE FOLLOWING GROUNDS. 1. WHETHER THE LD.CIT(A) UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW WAS JUSTIFIED IN DELETING THE ADDITION OF RS.22,45,489/ - TREATING THE SAME AS INCOME FROM CAPITAL GAINS AS AGAINST THE BUSINESS INCOME ASSESSED BY THE AO. 2. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND, SUBSTITUTE, WITHDRAW AND/OR VARY ANY GROUNDS OF APPEAL AT OR BEFORE THE TIME OF HEARING. 10. AFTER HEARING RIVAL CONTENTIONS WE FIND THAT THE FIRST APPELLATE AUTHORITY HAS BROUGHT OUT THE FACTUAL POSITION AT PARA 6.2 OF HIS ORDER WHEREIN HE HELD AS UNDER. ( I ) THE ASSESSEE IS ENGAGED IN REAL ESTATE BUSINESS AND IT ALSO MAKES OCCASIONAL INVESTMENTS IN SHARES AND SECURITIES. ( II ) DURING THE YEAR TH E ASSESSEE HAD MADE INVESTMENTS IN SHARES AND MUTUAL FUNDS AND ALSO IN VARIOUS SUBSIDIARY COMPANIES. ( III ) MOST OF THE TRANSACTIONS ARE OF HOLDING OF SHARES AND SECURITIES AND INVESTMENTS MADE IN MUTUAL FUNDS IN THE P.Y. S UCH BROUGHT FORWARD BALANCES WERE RS. 50.50 CRORES . ( IV ) IN THE BALANCE SHEET THE ASSESSEE IS MAINTAINING SEPARATE ACCOUNTS FOR INVESTMENTS. ( V ) IN THE EARLIER YEARS , IN SCRUTINY ASSESSMENTS , THE ASSESSEE HAS TREATED THE INCOME FROM PURCHASE AND SALE OF SHARES , AS SHORT TERM CAPITAL GAINS IN ITS RET URN OF INCOME AND THE DEPARTMENT HAS ACCEPTED THE SAME. ( VI ) ALL THE SALES AND PURCHASES ARE DELIVERY BASED. ITA NO. 129/DEL/2013 AND ITA 147/DEL/2013 AY: 2007 - 08 M/S DLF HOMES DEVELOPERS LTD., NEW DELHI 6 ( VII ) THE HOLDING PERIOD OF THE SHARES ON WHICH THE LONG TERM CAPITAL GAIN HAS BEEN DECLARED , IS MORE THAN 12 MONTHS AND WHERE THERE ARE SHORT TERM CAPITAL GAINS IT VARIES FROM 4 TO 6 MONTHS. ( VIII ) JUST BECAUSE THE ASSESSEE HAD OFFLOADED SOME SHARES, AFTER HOLDING THE SAME FOR A SHORT PERIOD, THE SAME CANNOT BE TREATED AS BUSINESS TRANSACTION. ( IX ) THE ASSESSEE HAS INVESTED IN 21 LISTED COMPANIES AND IN 11 COMPANIES T HE SHARES ARE NOT TRADABLE. ( X ) THE ASSESSEE HAD MADE INVESTMENTS IN SUBSIDIARY COMPANIES OF THE GROUP. ( XI ) INVESTMENTS IN MUTUAL FUNDS WAS RS.50.50 CRORES. ( XII ) THE QUANTUM OF SALE AND PURCHASE OF SHARES IS VERY NOMINAL AND WAS LIMITED TO FEW COMPANIES. ( XIII ) THE FACTS AND CIRCUMSTANCES OF THE CASE CLEARLY SUGGEST THAT THE ASSESSEE HAS PURCHASE D SHARES ONLY FOR INVESTMENT PURPOSES AND NOT FOR TRADING PURPOSES. ( XIV ) THE ASSESSEE HAS NOT ENTERED INTO ANY TRANSACTION OF F&O OR DAY TRADING DURING THE ENTIRE YEAR. 10.1 . THE ABOVE FACT UAL FINDINGS COULD NOT BE CONTROVERTED BY THE LD.D.R. BEFORE US. 11. WE NOW DISCUSS THE CASE LAWS ON THE SUBJECT. IN THE CASE OF G.VENKATESWAMI NAIDU AND CO. VS. CIT : 35 ITR 594 (SC), THE SUPREME COURT HELD AS UNDER: IF A PERSON INVESTS MONEY IN LAND INTENDING TO HOLD IT, ENJOYS ITS INCOME FOR SOME TIME, AND THEN SELLS IT AT A PROFIT, IT WOULD BE A CLEAR CASE OF CAPITAL ACCRETION AND NOT PROFIT DERIVED FROM AN ADVENTURE IN THE NATURE OF TRADE. IN DECIDING THE CHARACTER OF SUCH TRANSACTIONS SEVERAL FACTORS ARE RELEVANT. WHETHER THE PURCHASER WAS A TRADER AND THE PURCHASE OF THE COMMODITY AND ITS RESALE WERE ALLIED TO - HIS USUAL TRADE OR BUSINESS OR INCIDENTAL TO IT? .... WHAT IS THE NATURE AND QUANTITY OF THE COMMODITY P URCHASED AND RESOLD? ... . DID THE PURCHASER BY ANY ACT SUBSEQUENT TO THE PURCHASE IMPROVE THE QUALITY OF COMMODITY PURCHASED AND THEREBY MAKE IT MORE READILY RESALEABLE? ... WHERE THEY (ACTS OF PURCHASE OR SALE) SIMILAR OPERATIONS USUALLY ASSOCIATED WITH TRADE OR BUSINESS? . . . ARE THE TRANSACTIONS OF PURCHASE AND SALE REPEATED' IN REGARD TO THE PURCHASE OF THE COMMODITY AND ITS SUBSEQUENT POSSESSION BY THE PURCHASERS, DOES NOT ELEMENT OF PRIDE OF POSSESSION COME ITA NO. 129/DEL/2013 AND ITA 147/DEL/2013 AY: 2007 - 08 M/S DLF HOMES DEVELOPERS LTD., NEW DELHI 7 INTO THE PICTURE. A PERSON MAY PURCHASE A PIECE OF ART, HOLD IT FOR SOME TIME AND IF A PROFITABLE OFFER IS RECEIVED SELL IT. DURING THE TIME THAT THE PURCHASER HAD ITS POSSESSION HE MAY BE ABLE TO CLAIM PRIDE OF POSSESSION AND AESTHETIC SATISFACTION; AND IF SUCH A CLAIM IS UPHELD THAT WOULD BE A F ACTOR AGAINST THE TRANSACTION BEING IN THE NATURE OF TRADE ..... THE PRESENCE OF ALL THESE RELEVANT FACTORS MAY HELP THE COURT TO DRAW AN INFERENCE THAT A TRANSACTION IS IN THE NATURE OF TRADE; BUT IT IS NOT A MATTER OF MERELY COUNTING THE NUMBER OF FACTS AND CIRCUMSTANCES PRO AND CON; WHAT IS IMPORTANT TO CONSIDER IS THEIR DISTINCTIVE CHARACTER. IN EACH CASE, IT IS THE TOTAL EFFECT OF ALL RELEVANT FACTORS AND CIRCUMSTANCES THAT DETERMINES THE CHARACTER OF THE TRANSACTION. . .. . .. WHERE THE PURCHASE HAS BEEN MADE SOLELY AND EXCLUSIVELY WITH THE INTENTION TO RESELL AT A PROFIT AND THE PURCHASER HAS NO INTENTION OF HOLDING THE PROPERTY FOR HIMSELF OR OTHERWISE ENJOYING OR USING IT .... THE PRESENCE OF SUCH AN INTENTION IS NO DOUBT, A RELEVANT FACTOR AND UN LESS IT IS OFFSET BY THE PRESENCE OF OTHER FACTORS, IT WOULD RAISE A STRONG PRESUMPTION THAT THE TRANSACTION IS AN ADVENTURE IN THE NATURE OF TRADE. EVEN SO, THE PRESUMPTION IS NOT CONCLUSIVE; AND IT IS CONCEIVABLE THAT, ON CONSIDERING ALL THE FACTS AND CI RCUMSTANCES IN THE CASE, THE COURT MAY, DESPITE THE SAID - INITIAL INTENTION, BE INCLINED TO HOLD THAT THE TRANSACTION WAS NOT AN ADVENTURE IN THE NATURE OF TRADE'.' (EMPHASIS SUPPLIED) THE APEX COURT IN THE CASE OF SUTLEJ COTTON MILLS SUPPLY AGENCY LTD: 100 ITR 706 (SC) OBSERVED AS FOLLOWS: ..... WHERE THE PURCHASE OF ANY ARTICLE OR OF ANY CAPITAL INVESTMENT, FOR IN STANCE, SHARES, IS MADE WITHOUT THE INTENTION TO RESELL AT A PROFIT, A RESALE UNDER CHANGED CIRCUMSTANCES WOULD ONLY BE A REALISATION OF C APITAL AND WOULD NOT STAMP THE TRANSACTION WITH A BUSINESS CHARACTER. WHERE A PURCHASE IS MADE WITH THE INTENTION OF RESALE, IT DEPENDS UPON THE CONDUCT OF THE ASSESSEE AND THE CIRCUMSTANCES OF THE CASE WHETHER THE VENTURE IS ON CAPITAL ACCOUNT OR IN THE N ATURE OF TRADE. A TRANSACTION I S NOT NECESSARILY IN THE NATURE OF TRADE BECAUSE THE PURCHASE WAS MADE WITH THE INTENTION OF RESALE. A CAPITAL INVESTMENT AND RESALE DO NOT LOSE THEIR CAPITAL NATURE MEREL Y BECAUSE THE RESALE WAS FORESEEN AND CONTEMPLATED WH EN THE INVESTMENT WAS MADE AND THE POSSIBILITY OF ENHANCED VALUES MOTIVATED THE INVESTMENT. IN COMMISSIONER OF INLAND REVENUE V. FRASER: [1942] 24 TC 498,502 LORD NORMAND SAID: 'THE INDIVIDUAL WHO ENTERS INTO A PURCHASE OF AN ARTI CLE OR COMMODITY MAY HAVE IN VIEW THE RESALE OF IT AT A PROFIT, AND YET IT MAY BE THAT THAT IS NOT THE ONLY PURPOSE FOR WHICH HE PURCHASED THE ARTICLE OR THE COMMODITY, NOR THE ONLY PURPOSE TO WHICH HE MIGHT TURN IT IF FAVOURABLE OPPORTUNITY FOR SALE DOES NOT OCCUR ... AN AMATEUR MAY PURCHASE A PICTURE WITH A VIEW TO ITS RESALE AT A PROFIT, AND YET HE MAY RECOGNISE AT THE TIME OR AFTERWARDS THAT THE POSSESSION OF THE PICTURE WILL GIVE HIM AESTHETIC ENJOYMENT IF HE IS UNABLE ULTIMATELY, OR AT HIS CHOSEN TIME , TO REALISE IT AT A PROFIT. ... ' AN ACCRETION TO CAPITAL DOES NOT BECOME INCOME MERELY BECAUSE THE ORIGINAL CAPITAL WAS INVESTED IN THE HOPE AND EXPECTATION THAT IT WOULD RI SE IN VALUE; IF ITA NO. 129/DEL/2013 AND ITA 147/DEL/2013 AY: 2007 - 08 M/S DLF HOMES DEVELOPERS LTD., NEW DELHI 8 IT DOES SO RISE, ITS REALIZATION DOES NOT MAKE IT INCOME. LORD DUNEDIN SAID IN L EEMING V. JONES AT PAGE 360: 'THE FACT THAT A MAN DOES NOT MEAN TO HOLD AN INVESTMENT MAY BE AN ITEM OF EVIDENCE TENDING TO SHOW WHETHER HE IS CARRYING ON A TRADE OR CONCERN IN THE NATURE OF TRADE IN RESPECT OF HIS INVESTMENTS BUT PER SE IT LEADS TO NO CONCLUSION WHATEVER.' IN THE CASE OF RAJA BAHADUR KAMAKHYA NARAIN SINGH VS. CIT: 77 ITR 253 (SC) THE SUPREME COURT OBSERVED AS UNDER: 'SINCE THE EXPRESSION 'ADVENTURE IN THE NATURE OF TRADE' IMPLIE S THE EXISTENCE OF CERTAIN ELEMENTS I N THE TRA NSACTIONS WHICH IN LAW WOULD INVEST THEM WITH THE CHARACTER OF TRADE OR BUSINESS AND THE QUESTION ON THAT ACCOUNT BECOMES A MIXED QUESTION OF LAW AND FACT, THE COURT CAN REVIEW THE TRIBUNAL'S FINDING IF IT HAS MISDIRECTED ITSELF IN LAW. IT IS FAIRLY CLEAR THAT WHERE A PERSON IN SELLING HIS INVESTMENT REALISES AN ENHANCED PRICE, THE EXCESS OVER HIS PURCHASE PRICE IS NOT PROFIT ASSESSABLE TO TAX. BUT IT WOULD BE SO, IF WHAT IS DONE IS NOT A MERE REALISATION OF THE INVESTMENT BUT AN ACT DONE FOR MAKING PROFITS. 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 WAS AN ENHANCEMENT OF THE VALUE BY REALISING A SECURITY OR GAIN IN AN OPERATION OF PROFIT - MAKING. IF THE TRANSACTION IS IN THE ORDINARY LINE OF THE ASSESSEE'S BUSINESS, THERE WOULD HARDLY BE ANY DIFFICULTY IN CONCLUDING THAT IT WAS A TRADING TRANSACTION, BUT WHERE IT IS NOT, THE FACTS MUST BE PROPERLY ASSSESSED TO DISCOVER WHETHER IT WAS IN THE NATURE OF TRADE. THE SURPLUS REALISED ON THE SALE OF SHARES, FOR INSTANCE, WOULD BE CAPITAL IF THE ASSESSEE IS AN ORDINARY INVESTOR R EALISING HIS HOLDING; BUT IT WOULD BE REVENUE IF HE DEALS WITH THEM AS AN ADVENTURE IN THE NATURE OF TRADE. THE FACT THAT THE ORIGINAL PURCHASE WAS MADE WITH THE INTENTION OF RESELL IF AN ENHANCED PRICE COULD BE OBTAINED IS BY ITSELF NOT ENOUGH BUT IN CONJ UNCTION WITH THE CONDUCT OF THE ASSESSEE AND OTHER CIRCUMSTANCES IT MAY POINT TO THE TRADING CHARACTER OF THE TRANSACTION. FOR INSTANCE, AN ASSESSEE MAY INVEST HIS CAPITAL IN SHARES WITH THE INTENTION TO RESELL THEM IF IN FUTURE THEIR SALE MAY BRING IN A H IGHER PRICE. SUCH AN INVESTMENT, THOUGH MOTIVATED BY A POSSIBILITY OF ENHANCED VALUE, DOES NOT RENDER THE INVESTMENT A TRANSACTION IN THE NATURE OF TRADE. THE TEST OFTEN APPLIED IS, HAS THE ASSESSEE MADE HIS SHARES AND SECURITIES THE STOCK - IN - TRADE OF A BUSINESS ..... ' IN THE CASE OF KARAM CHAND THAPAR & BROS. (P) LTD. REPORTED IN 82 ITR 899 THE HON BLE SUPREME COURT HELD AS FOLLOWS. ..................... THE TRIBUNAL ALSO RELIED ON THE CIRCUMSTANCE THAT THE ASSESSEE WAS SHOWING T HESE SHARES AS INVESTMENT SHARES IN ITS BOOKS AS WELL AS IN THE BALANCE SHEET. IT IS TRUE THAT CIRCUMSTANCE BY ITSELF IS NOT A CONCLUSIVE CIRCUMSTANCE. IT CANNOT BE DENIED THAT THAT IS A RELEVANT CIRCUMSTANCE ON WHICH THE TRIBUNAL COULD HAVE RELIED FOR D RAWING THE INFERENCE IT DID. THE ITA NO. 129/DEL/2013 AND ITA 147/DEL/2013 AY: 2007 - 08 M/S DLF HOMES DEVELOPERS LTD., NEW DELHI 9 EXPLANATION THAT IT HAD TO DO SO BECAUSE OF THE PROVISIONS OF THE COMPANY LAW IS UNFOUNDED. THE LUCKNOW BENCH OF THE ITAT IN THE CASE OF SARNATH INFRASTRUCTURE P.LTD. VS. ACIT, 313 ITR (AT) 13 (LU CKNOW) HELD AS FOLLOWS. 13. AFTER CONSIDERING THE ABOVE RULINGS, WE CULL OUT THE FOLLOWING PRINCIPLE WHICH CAN BE APPLIED ON THE FACTS OF A CASE TO FIND OUT WHETHER TRANSACTIONS IN QUESTION ARE IN THE NATURE OF TRADE OR ARE MERELY FOR INVESTMENT PURPOSES: ( I ) WHAT IS THE INTENTION OF THE ASSESSEE AT THE TIME OF PURCHASE OF SHARES (OR ANY OTHER ITEM). THIS CAN BE FOUND OUT FROM THE TREATMENT IT GIVES TO SUCH PURCHASE IN ITS BOOKS OF ACCOUNT. WHETHER, IT IS TREATED AS STOCK - IN - TRADE OR INVESTMENT. WHETHER SHO WN IN OPENING/CLOSING STOCK OR SHOWN SEPARATELY AS INVESTMENT OR NON - TRADING ASSET. ( II ) WHETHER THE ASSESSEE HAS BORROWED MONEY TO PURCHASE AND PAY INTEREST THEREON? NORMALLY, MONEY IS BORROWED TO PURCHASE GOODS FOR THE PURPOSE OF TRADE AND NOT FOR INVESTING IN AN ASSET FOR RETAINING. ( III ) WHAT IS THE FREQUENCY OF SUCH PURCHASES AND DISPOSAL IN THAT PARTICULAR ITEM? IF PURCHASE AND SALE ARE FREQUENT, OR THERE ARE SUBSTANTIAL TRANSACTIONS IN THAT ITEM, IT WOULD INDICATE TRADE. HABITUAL DEALING IN THAT PARTICULAR I TEM IS INDICATIVE OF INTENTION OF TRADE. SIMILARLY, RATIO BETWEEN THE PURCHASES AND SALES AND THE HOLDINGS MAY SHOW WHETHER THE ASSESSEE IS TRADING OR INVESTING (HIGH TRANSACTIONS AND LOW HOLDINGS INDICATE TRADE WHEREAS LOW TRANSACTIONS AND HIGH HOLDINGS INDICATE INVESTMENT). ( IV ) WHETHER PURCHASE AND SALE IS FOR REALISING PROFIT OR PURCHASES ARE MADE FOR RETENTION AND APPRECIATION IN ITS VALUE? FORMER WILL INDICATE INTENTION OF TRADE AND LATTER, AN INVESTMENT. IN THE CASE OF SHARES WHETHER INTENTION WAS TO ENJOY DIVIDEND AND NOT MERELY EARN PROFIT ON SALE AND PURCHASE OF SHARES. A COMMERCIAL MOTIVE IS AN ESSENTIAL INGREDIENT OF TRADE. ( V ) HOW THE VALUE OF THE ITEMS HAS BEEN TAKEN IN THE BALANCE SHEET? IF THE ITEMS IN QUESTION ARE VALUED AT COST, IT WOULD INDIC ATE THAT THEY ARE INVESTMENTS OR WHERE THEY ARE VALUED AT COST OR MARKET VALUE OR NET REALISABLE VALUE (WHICHEVER IS LESS), IT WILL INDICATE THAT ITEMS IN QUESTION ARE TREATED AS STOCK IN TRADE. ( VI ) HOW THE COMPANY IS AUTHORISED IN MOA/AOA? WHETHER FOR TRADE OR FOR INVESTMENT? IF AUTHORISED ONLY FOR TRADE, THEN WHETHER THERE ARE SEPARATE RESOLUTIONS OF THE BOARD OF DIRECTORS TO CARRY OUT INVESTMENTS IN THAT COMMODITY AND VICE VERSA. ( VII ) IT IS FOR THE ASSESSEE TO ADDUCE EVIDENCE TO SHOW THAT HIS HOLDING IS FOR INV ESTMENT OR FOR TRADING AND WHAT DISTINCTION HE HAS KEPT IN THE ITA NO. 129/DEL/2013 AND ITA 147/DEL/2013 AY: 2007 - 08 M/S DLF HOMES DEVELOPERS LTD., NEW DELHI 10 RECORDS OR OTHERWISE, BETWEEN TWO TYPES OF HOLDINGS. IF THE ASSESSEE IS ABLE TO DISCHARGE THE PRIMARY ONUS AND COULD PRIMA FACIE SHOW THAT PARTICULAR ITEM IS HELD AS INVESTMENT (OR SAY, STOCK IN TRADE) THEN ONUS WOULD SHIFT TO THE REVENUE TO PROVE THAT APPARENT IS NOT REAL. ( VIII ) THE MERE FACT OF CREDIT OF SALE PROCEEDS OF SHARES(OR FOR THAT MATTER ANY OTHER ITEM IN QUESTION) IN A PARTICULAR ACCOUNT OR NOT SO MUCH FREQUENCY OF SALE AND PURCHASE WILL ALONE WILL NOT BE SUFFICIENT TO SAY THAT THE ASSESSEE WAS HOLDING THE SHARES (OR THE ITEMS IN QUESTION) FOR INVESTMENT. ( IX ) ONE HAS TO FIND OUT WHAT ARE THE LEGAL REQUISITES FOR DEALING AS A TRADER IN THE ITEMS IN QUESTION AND WHETHER THE ASSESSEE IS COMPLYIN G WITH THEM. WHETHER IT IS THE ARGUMENT OF THE ASSESSEE THAT IT IS VIOLATING THESE LEGAL REQUIREMENTS, IF IT IS CLAIMED THAT IT IS DEALING AS A TRADER IN THAT ITEM? WHETHER IT HAD SUCH AN INTENTION TO CARRY ON ILLEGAL BUSINESS IN THAT ITEM SINCE BEGINNING OR WHEN PURCHASES WERE MADE? ( X ) IT IS PERMISSIBLE AS PER CBDT CIRCULAR NO.4 OF 2007 OF JUNE 15, 2007 THAT AN ASSESSEE CAN HAVE BOTH PORTFOLIOS, ONE FOR TRADING AND OTHER FOR INVESTMENT PROVIDED IT IS MAINTAINING SEPARATE ACCOUNT FOR EACH TYPE, THERE ARE DIST INCTIVE FEATURES FOR BOTH AND THERE IS NO INTERMINGLING OF HOLDINGS IN THE TWO PORTFOLIOS. ( XI ) NOR ONE OR TWO FACTORS OUT OF THE ABOVE ALONE WILL BE SUFFICIENT TO COME TO A DEFINITE CONCLUSION BUT THE CUMULATIVE EFFECT OF SEVERAL FACTORS HAS TO BE SEEN. THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. ROHIT ANAND, ITA NO. 1135/2010 DT. 16.8.2010 UPHELD THE FINDING OF THE TRIBUNAL IN THE FOLLOWING WORDS. 3. HOWEVER, UPON A PERUSAL OF THE IMPUGNED ORDER, WE ARE OF THE OPINION THAT NO SUBSTANTIAL QUESTION OF LAW ARISES IN THE PRESENT PROCEEDINGS INASMUCH AS BOTH THE COMMISSIONER OF INCOME TAX (APPEALS) AND THE TRIBUNAL HAVE GIVEN COGENT REASONS IN ARRIVING AT THE CONCLUSION THAT THE RESPONDENT - ASSESSEE WAS NOT - A - TRADER IN STOCK BUT ONLY A INVESTO R AND FURTHER HIS INCOME ON SALE OF SHARES WAS NOT BUSINESS INCOME. IN FACT, THE TRIBUNAL IN ITS IMPUGNED ORDER HAS OBSERVED AS UNDER. - '9. WE HAVE CAREFULLY CONSIDERED THE RELEVANT FACTS AND THE FINDINGS OF BOTH THE AUTHORITIES BELOW. THE ASSESSEE IN H IS INDIVIDUAL CARRIES ON BUSINESS OF JEWELLERY. APART FROM SAID BUSINESS, THE ASSESSEE INVESTED IN SHARES AND TREATS SHARES AS INVESTMENT IN HIS BOOKS OF ACCOUNT. THIS ITSELF MANIFEST THE ITA NO. 129/DEL/2013 AND ITA 147/DEL/2013 AY: 2007 - 08 M/S DLF HOMES DEVELOPERS LTD., NEW DELHI 11 INTENTION OF THE ASSESSEE AS TO WHETHER HE PROPOSED INTO DEALING IN SHARES OR EARN DIVIDEND AND PROFIT OUT OF SUCH INVESTMENT. THE ASSESSING OFFICER WAS GUIDED MORE BECAUSE OF THE TOTAL AMOUNT INVOLVED RATHER THAN THE ACTUAL INTENTION AND THE WAY OF CARRYING ON SHARE TRANSACTION. THERE IS NO DOUBT THAT EVEN A SINGLE TRAN SACTION CAN BE IN THE NATURE OF TRADE BUT THE ASSESSEE HAS DEMONSTRATED THAT HIS. INTENTION WAS NEVER TO TRADE IN SHARES. THE INTENTION IS MANIFESTED BY TREATMENT GIVEN TO SUCH INVESTMENT THAT THE INVESTMENT IS OUT OF OWN FUND AND NOT BORROWED THAT THE IN VESTMENT IS NOT ROTATED FREQUENTLY, THAT THE TOTAL NUMBER OF TRANSACTIONS ARE VERY FEW, THAT ALL THE SHARES PURCHASED ARE NOT SOLD AND RATHER HELD FOR QUITE NUMBER OF DAYS. IT IS TO BE NOTED THE INCOME TAX ACT ITSELF HAS PROVIDED THAT WHEN THE SHARES AR E HELD FOR A PERIOD OF ONE YEAR OR MORE WILL BE TREATED AS LONG TERM CAPITAL ASSET CONTRARY TO OTHER ASSETS WHERE THE HOLDING PERIOD TO TREAT SUCH ASSET A LONG TERM IS MORE THAN 36 MONTHS. THUS EVEN AFTER HOLDING THE SHARES FOR MORE THAN 12 MONTHS AND SHOW ING SUCH INTENTION FROM THE CONDUCT, THE ASSESSING OFFICER CANNOT REPLACE HIS OPINION FOR THAT OF THE ASSESSEE IN HOLDING THAT THE SHARES ARE HELD AS STOCK IN TRADE AND PROFIT FROM WHICH IS TO BE ASSESSED AS BUSINESS INCOME. IN ALL SUCH CASES THE INTENTIO N IS MANIFESTED BY THE ASSESSEE HIMSELF BY HIS CONDUCT AND OTHER RELEVANT FACTORS AS CONSIDERED BY THE LEARNED CJT(A). IT IS ALSO SEEN THAT THE SHARES WERE TREATED AS INVESTMENT IN EARLIER YEAR AND WHICH FACT HAS BEEN ACCEPTED BY THE ASSESSING OFFICER. THE ASSESSEE HAS ALSO EARNED HUGE DIVIDEND INCOME FROM SUCH SHARES. THE ASSESSING OFFICER MERELY BECAUSE OF THE TOTAL VOLUME OF TRANSACTION IS SUBSTANTIAL, IS GUIDED TO HOLD THE INCOME AS BUSINESS INCOME. HOWEVER, HE FAILED TO. RECOGNIZE THAT THE VOLUME OF TR ANSACTION INCLUDES THE APPRECIATION IN SHARES ALSO AND SUCH APPRECIATION 'HAS BEEN OFFERED FOR TAX. IF VOLUME OF TRANSACTION IS THE CRITERIA, WHAT IS TO BE EXAMINED IS HOW FREQUENTLY THE TRANSACTION IS DONE, WHETHER THE TRANSACTION IS SETTLED IN THE COURSE OF THE DAY OF TRADING ITSELF OR IN THE SETTLEMENT PERIOD ITSELF SO AS TO AVOID PAYMENT OF FULL PURCHASE PRICE. HERE. THE ASSESSEE HAS BEEN HOLDING THE SHARES BY TAKING DELIVERY AND MAKING FULL PAYMENT FOR SUCH INVESTMENT. IN SUCH CIRCUMSTANCES, THE TRANS ACTIONS ARE TO BE TREATED AS GIVING RISE TO THE CAPITAL GAIN AND CANNOT BE BRANDED AS TRADING OF MAKING INVESTMENT SO AS TO DETERMINE WHETHER THE TRANSACTION WAS FOR DEALING IN SHARES OR MAKING INVESTMENT FOR EARNING DIVIDEND AND APPRECIATION FROM SUCH IN VESTMENT. THE TOTAL NUMBER OF SHARES DEALT IN RESPECT OF LONG TERM PORTFOLIO IS ONLY 5. THIS CANNOT BE CONSIDERED AS VOLUME TRANSACTION. THEREFORE, THIS TRANSACTION IN SHARES CANNOT BE SAID TO BE WITH INTENTION TO DEAL IN SUCH SHARES. RATHER THE TRANSACTIO N WERE WITH INTENTION OF EARNING APPRECIATION FROM SUCH SHARES. THEREFORE, THE SAME ARE ASSESSABLE AS CAPITAL GAIN AND NOT AS PROFITS AND GAINS OF BUSINESS. WE, THEREFORE, UPHOLD THE ORDERS OF THE LEARNED CIT(A) . ITA NO. 129/DEL/2013 AND ITA 147/DEL/2013 AY: 2007 - 08 M/S DLF HOMES DEVELOPERS LTD., NEW DELHI 12 4. IN OUR OPINION, THE FACTUAL FINDINGS OF THE FINAL FACT FINDING AUTHORITY ARE NEITHER PERVERSE NOR CONTRARY TO RECORD. ACCORDINGLY, WE FIND THAT NO SUBSTANTIAL QUESTION OF LAW ARISES IN THE PRESENT APPEAL. 12. APPLYING THE PROPOSITIONS LAID DOWN IN THESE CASE LAWS TO THE FACTS OF THE CASE W E UPHOLD THE FINDING OF THE FIRST APPELLATE AUTHORITY THAT THE INCOME RECEIVED FROM THE SALE AND PURCHASE OF SHARES IS TO BE TAXED UNDER THE HEAD INCOME FROM CAPITAL GAINS . HENCE WE DISMISS THIS APPEAL OF THE REVENUE. 13. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALLOWED AND THE APPEAL OF THE REVENUE IS DISMISSED. DECISION PRONOUNCED IN THE OPEN COURT ON 28 TH JANUARY, 2015 . SD/ - SD/ - ( GEORGE GEORGE K ) ( J.SUDHAKAR REDDY ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 28 TH JANUARY, 2015 MANGA COPY FORWARDED TO: - 1. APPELLANT : 2. RESPONDENT : 3. CIT 4. CIT(A) 5. DR, ITAT BY ORDER ASSISTANT REGISTRAR