HIRENDRAKUMAR B RUIA, MUMBAI V. ITO WD 5(2)(1), MUMBAI

ITA 1867/MUM/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 0908 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 4 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-07-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Next Hearing Date: 01-06-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 24-03-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KESHAV SAXENA
• Assessee Lawyers: SANJIV M SHAH
• Keywords: Capital asset; Business income; Business expenditure; Principle of natural justice
• Section: 43(5)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH H MUMBAI BEFORE SHRI R.K. PANDA (AM) AND SMT. ASHA VIJAYARA GHAVAN (JM) ITA NO. 1867/MUM/2009 ASSESSMENT YEAR-2005-06 HIRENDRAKUMAR B. RUIA, INDIA SAFETY VAULTS LTD., WHITEHALL, 143, AUGUST KRANTI MARG, MUMBAI-400 036 PAN - AACPR7419J VS. THE ITO, WARD 5(2)(1), MUMBAI (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI SANJIV M. SHAH RESPONDENT BY: SHRI KESHAV SAXENA O R D E R PER SMT. ASHA VIJAYARAGHAVAN (JM) THIS APPEAL PREFERRED BY THE ASSESSEE IS DIRECTED A GAINST THE ORDER DT. 15.1.2009 PASSED BY THE LD. CIT(A)-V, MUMBAI FO R THE ASSESSMENT YEAR 2005-06. 2. THE ASSESSEE IS AN INDIVIDUAL AND DURING THE YEA R UNDER CONSIDERATION IT HAS SHOWN LOSS OF RS. 2,80,946/- F ROM THE BUSINESS OF TRADING IN SHARES. 3. IN THE ASSESSMENT PROCEEDING ASSESSING OFFICER N OTICED THAT THE ASSESSEE HAS CARRIED OUT ONLY SIX TRANSACTIONS OF P URCHASE AND SALE OF SHARES. THE VOLUME OF TRANSACTION IS VERY LOW. THE ASSESSEE HAS ITSELF SHOWN SOME PART OF THE TRANSACTION UNDER THE HEAD CAPITAL LOSS. ACCORDING TO THE ASSESSING OFFICER, THE ASSESSEE HA S SHOWN BUSINESS LOSS ITA NO. 1867/M/09 2 ONLY TO SET OFF LOSS AGAINST THE INCOME FROM OTHER SOURCES. THE ASSESSING OFFICER TREATED THE TRANSACTIONS OF THE A SSESSEE AS PURCHASE AND SALE OF CAPITAL ASSET AND HELD THAT THE LOSS IN CURRED BY THE ASSESSEE IN THE PURCHASE AND SALE OF SHARES IS THE CAPITAL L OSS AND NOT BUSINESS LOSS. SINCE THE ASSESSEE HAS NOT CARRIED OUT SHAR E BUSINESS, THE ASSESSING OFFICER DISALLOWED BUSINESS EXPENSES OF R S.1,52,675/- INCURRED BY THE ASSESSEE. 4. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE T HE LD. CIT(A) AND SUBMITTED AS FOLLOWS: IN THE ASSESSMENT PROCEEDING THE ASSESSEE SUBMITTE D THAT IT IS MAKING INVESTMENT IN SHARES. HOWEVER, SOMETIME S BECAUSE OF CHANGE IN PERCEPTION ABOUT AN INVESTMENT, DISPOSAL HAPPENS IN SHORT TERM ALSO. THE ASSESSEE SUBMITTED THAT IT HAS TAK EN BORROWED LOAN AND RETAINED EMPLOYEES TO CARRY OUT ITS BUSINESS. THE ASSESSEE SUBMITTED THAT ONLY ON THE BASIS OF LOW VOLUME AND ON THE BASIS OF LESS NUMBER OF TRANSACTIONS, IT CANNOT BE SAID THAT ASSESSEE HAS NOT CARRIED OUT ANY BUSINESS. THE ASSESSEE SUBMITTED THAT IT HAS TREATED THE TRANSACTIONS OF SAID PURCHASE AND SALE OF SHARES AS BUSINESS TRANSACTIONS IN ITS BOOKS OF ACCOUNTS AND THEREFORE THE SAME CANNOT BE TREATED AS TRANSACTION OF PURCHASE A ND SALE OF CAPITAL ASSETS. THE ASSESSEE FURTHER BROUGHT TO M Y NOTICE THAT THE BUSINESS LOSS SUFFERED BY HIM INCLUDES LOSS ON DEAL ING IN FUTURE AND OPTION IS TO BE TREATED AS BUSINESS LOSS. ON THES E FACTS THE ASSESSEE SUBMITTED THAT ASSESSING OFFICER HAS ERRED IN HOLDING THAT ASSESSEE HAS NOT CARRIED OUT ANY BUSINESS. THE AS SESSEE SUBMITTED THAT ALL THESE EXPENSES ARE INCURRED FOR THE PURPOSE OF BUSINESS AND THEREFORE THE ASSESSING OFFICER HAS ER RED IN DISALLOWING THESE EXPENSES. 5. THE LD. CIT(A) CONFIRMED THE ORDER OF THE AO AND HELD THAT PROFIT OF RS. 31,910/- IS TAXABLE UNDER THE HEAD CAPITAL GAI N. WITH RESPECT TO THE BUSINESS EXPENSES CLAIMED BY THE ASSESSEE, THE LD. CIT(A) PARTLY ALLOWED THE EXPENSES. ITA NO. 1867/M/09 3 6. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE U S AND SUBMITTED AS FOLLOWS: A) THE ASSESSING OFFICER OVERLOOKED, FAILED TO APPRECI ATE AND RECKON THAT THE SHORT TERM CAPITAL LOSS RS.5,95,956/- AND LONG TERM LOSS RS.5,90,020/- PRINCIPALLY EMANATED AND ORIGINATED F ROM SALE AND PURCHASE OF MUTUAL FUND UNITS AND NOT SHARES; B) THE APPELLANT HAS BORROWED TO FUND THE PURCHASE OF SHARES AND PAID INTEREST ON IT. THE RATIO OF DECISION IN THE CASE OF [CIT VS. SUTLEJ COTTON MILLS (1975) 100 ITR 706 (SC)]APPLIES ; C) AN ISOLATED AND SINGLE TRANSACTION IS ALSO AN ADVEN TURE IN THE NATURE OF TRADE AND RELIED ON THE DECISION OF [G. VENKATASWAMY NAIDU & CO. VS. CIT (1959) 35 ITR 594, 609, 610 (SC )]; D) THE DOMINANT OR SOLE INTENTION TO RESELL AT A PROFI T IS A APT AND FITTING TRACE TO INFER AND RAISE A STRONG PRESUMPTI ON THAT THE IMPUGNED TRANSACTION IS OF A TRADING ATTRIBUTE AS A DVOCATED IN G. VENKATASWAMY NAIDU & CO. VS. CIT (1959) 35 ITR 594, 610, 622 (SC)]; E) IT IS WELL ESTABLISHED THAT AN ASSESSEE, FOR EXAMPL E, IF HE IS A DEALER IN SHARES MAY HOLD SOME SHARES ON CAPITAL AC COUNT WHEREAS, THE OTHERS HE MAY HOLD IT AS AN INVESTMENT PORTFOLIO [RAMANARAIN & SONS PVT. LTD. VS. CIT (1961) 41 ITR 534DLF HOUSING & CONSTRUCTION PVT. LTD. VS. CIT (1983) 141 ITR 806, F) BY NOW IT IS WELL SETTLED AND ENTRENCHED THAT TH E INTENTION, BOTH INITIAL AND DOMINANT, AT THE TIME OF PURCHASE OF TH E SHARES IN APPOSITE AND GERMANE TO ARRIVE AT A CONCLUSION WHET HER THEY ARE HELD AS A CAPITAL OR TRADING ASSET. THIS PROPOSITI ON HAS BEEN BROUGHT OUT IN THE FOLLOWING DECISIONS. [G. VENKATASWAMY NAIDU & CO. VS. CIT (1959) 35 ITR 594, (SC); KISHAN PRASAD VS. CIT (1955) 27 ITR 49, (SC); AND RAMNARAIN SONS (PR) LTD. VS. C IT (1961) 41 ITR 534, (SC)]. F) THE JURISDICTIONAL MUMBAI TRIBUNAL IN JANAK S RANGW ALLA VS. ACIT (2007) 11 SOT 623 HAS PROPOUNDED THAT GAINS GE NERATED THROUGH A LARGE NUMBER OF FREQUENT SHARE TRANSACTIO NS CANNOT BE IMPRESSED WITH THE CHARACTER OF TRADE MERELY ON THE SUPERSTRUCTURE OF THE HUGE MAGNITUDE OF TRANSACTION S UNDERTAKEN BY THE ASSESSEE IF THE INTENTION IS TO HOLD THE SHA RES AS INVESTMENT AND NOT STOCK IN TRADE. ITA NO. 1867/M/09 4 G) THE APPELLANT HAS MAINTAINED SEPARATE BOOKS OF ACCO UNTS FOR BUSINESS AND INVESTMENT SUGGESTING CARRYING OUT OF TWO DIFFERENT AND SEPARATE ACTIVITIES CIT VS. RAMAAMIRTHAM (2008) 306 ITR 239 (MAD)- NO LAW THAT A SHARE BROKER CANNOT HOLD SHARES ON INVESTMENT ACCOUNT. 7. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE AO HAS ASSUMED THAT THE BASIC NEED IN TREATING THE SAME AS PART OF THE TRANSACTION AS BUSINESS TRANSACTIONS IS TO SET OFF THE LOSS AGAINST INCOME FROM OTHER SOURCES. HE SUBMITTED THAT MOST OF THE S HARE SOLD HAD MADE THE ASSESSEE EARN INCOME AND THE LOSSES WERE SUFFER ED ONLY IN DERIVATIVE TRANSACTIONS. HE SUBSTANTIATED THAT GAIN IN DEALIN G OF SHARES OF RS. 31,910.61 WHEREAS LOSS IN DERIVATIVES WAS 1,60,181. 50 AND THE TOTAL LOSS IN TRADING WAS RS. 1,28,270.89. WITH THE ADDITION OF EXPENSES, THE NET LOSS IN BUSINESS WAS ARRIVED AT RS. 2,80,946/-. TH E ASSESSEE FURTHER SUBMITTED BEFORE US THAT THE EXPENSES INCURRED BY THE ASSESSEE IN CARRYING OUT THE BUSINESS DEALING IN SHARES SHOULD HAVE BEEN FULLY ALLOWED BY THE LD. CIT(A). FURTHER, THE LD. COUNS EL FOR THE ASSESSEE SUBMITTED THAT THE AO DURING THE COURSE OF ASSESSME NT PROCEEDINGS CHANGED THE TREATMENT OF BUSINESS LOSS TO CAPITAL LOSS I.E. CHANGED THE HEAD OF INCOME SUO MOTTO WITHOUT PROVIDING AN OPP ORTUNITY TO THE ASSESSEE TO PRESENT ITS STAND WHICH IS AGAINST THE PRINCIPLE OF NATURAL JUSTICE. 8. THE LD. DEPARTMENTAL REPRESENTATIVE RELIED ON TH E ORDER OF THE LOWER AUTHORITIES. 9. WE FIND THAT THE ASSESSEE IS MAKING INVESTMENTS IN SHARES AND UNITS OF MUTUAL FUNDS AND ALSO DEALS IN DERIVATIVES . THE ASSESSEE HAS BEEN DOING TWO DISTINCT AND SEPARATE ACTIVITIES NAM ELY INVESTMENT AND DEALING SHARES. THE DECISION IN THE CASE OF VENKA TASWAMY NAIDU & CO. ITA NO. 1867/M/09 5 VS CIT 35 ITR 594 THAT THE INTENTION TO RESELL AT A PROFIT IS A APT AND FITTING TRACE TO INFER AND RAISE A STRONG PRESUMPTI ON THAT THE TRANSACTION IS OF A TRADING ATTRIBUTE. FURTHER THE INTENTION A T THE TIME OF PURCHASE OF SHARES IS APPOSITE AND GERMANE TO ARRIVE AT A CONCL USION WHETHER THEY HOLD AS CAPITAL OR TRADING ASSET. 10. THE CASE OF CIT VS HOLCK LARSEN 160 ITR 67 (SC) AND IN THE CASE OF CIT VS RAMAAMIRTHAM 306 ITR 239 THE PROPOSITION THA T THE ASSESSEE CAN MAINTAIN SEPARATE BOOKS OF ACCOUNTS FOR BUSINES S AND INVESTMENT SUGGESTING CARRYING OUT OF TWO DIFFERENT AND SEPARA TE ACTIVITIES HAS BEEN LAID. THE MAIN CONTENTION OF THE AO IN TREATING THE DEALING IN SHARES AS INVESTMENT ACTIVITY IS THAT TOTAL NUMBER OF TRANSA CTION IN PURCHASE AND SALE OF SHARES BY THE DURING THE FINANCIAL YEAR IS SIX. THE VOLUME OF TRANSACTION IN SHARES BY THE ASSESSEE IS VERY LOW. FURTHER THE AO HAS QUOTED THE SUPREME COURT JUDGEMENT IN THE CASE OF C IT VS ASSOCIATED INDUSTRIAL DEVELOPMENT CO. PVT. LTD., AND SUTLEJ CO TTON MILLS VS CIT 116 ITR 01 (SC). 11. WE FIND THAT THE FACTS OF THIS CASE ARE NOT SIM ILAR TO THE CASE OF CIT VS ASSOCIATED INDUSTRIAL DEVELOPMENT CO. PVT. LTD. (SUPRA) SINCE THE PRESENT CASE BEFORE US, THE SHARES WERE PURCHASED F ROM STOCK EXCHANGE THROUGH BROKERS OF LISTED COMPANIES. FURTHER FROM THE BREAK-UP OF PURCHASE AND SALE OF SHARES, IT IS SEEN THAT THE L OSS SUFFERED BY THE ASSESSEE IN FUTURES AND OPTIONS IS RS. 1,60,181.50 . OUT OF THE TOTAL LOSS OF RS. 2,80,946/-, RS. 1,60,181.50 PERTAINS TO LOSS IN FUTURES AND OPTIONS WHICH IS DIRECTLY COVERED BY PROVISO (D) TO SEC. 43(5) AS BUSINESS INCOME/LOSS. 12. THEREFORE IN OUR OPINION THE AO HAS WRONGLY PRE SUMED THE INTENTION OF THE ASSESSEE TO SHOW BUSINESS LOSS FOR CLAIMING SET OFF INCOME FROM OTHER SOURCES EVEN A SINGLE TRANSACTION WOULD AMOUNT TO ITA NO. 1867/M/09 6 BUSINESS. FURTHER THE ASSESSEE CANNOT BE SAID TO C ARRY INVESTMENT ACTIVITIES MERELY BECAUSE THE NUMBER OF TRANSACTION S ARE VERY LOW. THE ASSESSEE HAS BEEN UNFORTUNATE IN INCURRING LOSSES I N HIS BUSINESS ACTIVITY AND THEREFORE THE AO WAS NOT JUSTIFIED IN TREATING BUSINESS PROFIT OF RS. 31,910/- AS SHORT TERM CAPITAL GAIN INSTEAD OF ALLOWING IT AS BUSINESS LOSS. 13. WITH RESPECT TO THE EXPENSES CLAIMED, THE ASSES SEE PRODUCED THE PROFIT AND LOSS ACCOUNT AS AT 31 ST MARCH, 2005 AT PAGE 8 OF THE PAPER BOOK. SINCE THESE EXPENSES HAVE BEEN INCURRED FOR CARRYING OUT DEALING IN SHARES AS A TRADER, THE SAME ARE ALLOWED. WITH RESPECT TO SALARY , CONVEYANCE, INTEREST ON LOAN AND LOAN PROCESSING EX PENSES, THE EXPENSES CLAIMED ARE LEGITIMATE AND NORMAL. HOWEVER, THE LD . CIT(A) HAS OBSERVED THAT THE ASSESSEE HAS NOT FILED ANY EVIDENCE. THER EFORE, WE SET ASIDE THE ISSUE TO THE FILE OF THE AO TO VERIFY THE SAME AND DECIDE THE ISSUE IN ACCORDANCE WITH LAW. 14. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON THIS 30 TH DAY OF JULY, 2010 SD/- SD/- (R.K. PANDA ) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 30 TH JULY, 2010 RJ ITA NO. 1867/M/09 7 COPY TO : 1. THE ASSESSEE 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CONCERNED 5. THE DR H BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, I.T.A.T, MUMBAI ITA NO. 1867/M/09 8 DATE INITIALS 1 DRAFT DICTATED ON: 26.7.2010 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 27. 7 .2010 ______ 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. KEPT FOR PRONOUNCEMENT ON: _________ ______ SR. PS/ PS 7. FILE SENT TO THE BENCH CLERK: _________ ______ SR. PS/PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK: _________ ______ 9. DATE OF DISPATCH OF ORDER: _________ ______