M/s ABR Auto Pvt. Ltd., New Delhi V. ITO, New Delhi

ITA 2375/DEL/2013

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 4229 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 3 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-08-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 22-04-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: O P MEENA
• Assessee Lawyers: AMANJEET SINGH
• Keywords: Business income; Earning of tax free income
• Section: 14A

Judgement Text

ITA NO. 2375/D/13 ABR AUTO P. LTD. PAGE 1 OF 14 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: A NEW DELHI BEFORE SHRI G.D. AGRAWAL, VICE PRESIDENT & SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA NO. 2375/DEL/2013 ( ASSESSMENT YEAR: 2009-10) ABR AUTO PVT. LTD. B-5, CHIRAG ENCLAVE, NEW DELHI. AADCA5137C VS ITO WARD 1(2) NEW DELHI. ASSESSEE BY SH. AMANJEET SINGH, ADV. REVENUE BY SH. O.P. MEENA, DR ORDER PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER : THE PRESENT APPEAL IS PREFERRED BY THE ASSESSEE AG AINST THE ORDER DATED 04/02/2013 PASSED BY THE LD. CIT (APPEALS)-IV, NEW DELHI FOR AY 09-10. IN ITS APPEAL THE ASSESSEE HAS ASSAILED THE ACTION OF THE LD. CIT (APPEALS) IN UPHOLDING THE ADDITION OF RS. 407,158/- U/S 14A OF THE ACT AN D HAD ALSO CHALLENGED THE ACTION OF THE LD. CIT (APPEALS) IN UPHOLDING THE TREATMENT OF CAPITAL GAINS OF RS. 9,139,000/- AS BUSINESS INCOME. DATE OF HEARING 10.05.2016 DATE OF PRONOUNCEMENT 05.08.2016 ITA NO. 2375/D/13 ABR AUTO P. LTD. PAGE 2 OF 14 2. THE BRIEF FACTS OF THE ISSUES BEFORE US ARE THAT THE ASSESSEE COMPANY HAD MADE AN INVESTMENT IN SHARES OF CLOSELY HELD UNQUOT ED COMPANIES. THE TOTAL AMOUNT OF INVESTMENT MADE ON 31/03/08 WAS RS. 80,47 1,569/-, WHEREAS ON 31/03/09 IT WAS RS. 82,391,569/-. IT WAS THE ASSES SEES CONTENTION THAT NO DIVIDEND WAS RECEIVED BY IT DURING THE YEAR UNDER CONSIDERAT ION. HOWEVER, THE AO MADE AN ADDITION OF RS. 407,158/- U/S 14A BEING HALF PERCEN T OF AVERAGE INVESTMENTS. ON APPEAL, THE LD. CIT (APPEALS) UPHELD THIS DISALLOWA NCE. AS FAR AS THE SECOND ISSUE REGARDING TREATMENT OF CAPITAL GAINS AS BUSINESS IN COME IS CONCERNED, THE ASSESSEE COMPANY HAD PURCHASED RIGHTS OF ACQUIRING SPACE IN PARADISE MALL, VIDE AGREEMENT DT. 10/03/05, FOR A SUM OF RS. 49,400,000/-. IT WA S THE ASSESSEES CONTENTION THAT DUE TO SOME PROBLEMS IN THE MANAGEMENT OF THE MALL, THE CONSTRUCTION WAS DELAYED AND THE MATTER ALSO WENT FOR ARBITRATION. SINCE THE MALL WAS UNDER CONSTRUCTION AND NO REGISTERED DEED HAD BEEN EXECUT ED, THE AMOUNT PAID WAS SHOWN UNDER LOANS AND ADVANCES. THE ASSESSEE FINAL LY SOLD THE SAID PROPERTY ON 15/09/08 AND THE AO TREATED THE CONSEQUENTIAL CAPIT AL GAINS AS BUSINESS INCOME OF THE ASSESSEE AND THE LD. CIT (APPEALS) FURTHER CONF IRMED THE SAME. 3. THE LD. AR SUBMITTED THAT THE ASSESSEE COMPANY H AD PURCHASED SHARES OF ONE CLOSELY HELD UNQUOTED GROUP COMPANY MARK AUTO L TD. IT WAS FURTHER SUBMITTED THAT MARK AUTO LTD. WAS PURCHASED BY THE ASSESSEE COMPANY DURING FY 05-06 IN WHICH THE ASSESSEE COMPANY IS HOLDING AROU ND 48% SHARE CAPITAL. IT WAS ITA NO. 2375/D/13 ABR AUTO P. LTD. PAGE 3 OF 14 FURTHER SUBMITTED THAT ANOTHER 48% OF THE SHARES AR E HELD BY MARUTI UDYOG LTD. AND THE PURPOSE OF ACQUIRING THE SHARES OF MARK AUT O LTD. WAS NOT TO EARN DIVIDEND BUT TO SECURE THE RIGHT TO MANAGE THE COMPANY. THE LD. AR FURTHER SUBMITTED THAT NO CONTINUOUS MONITORING WAS REQUIRED FOR THE INVES TMENT MADE IN THE ABOVE SAID COMPANY AND THAT NO EXPENDITURE IN THIS REGARD WAS EVER MADE BY THE ASSESSEE COMPANY. IT WAS FURTHER SUBMITTED THAT NO INTEREST WAS PAID BY THE ASSESSEE FOR ANY LOAN RAISED FOR THE ABOVE SAID INVESTMENT IN SHARES AND THAT THE SHARES WERE PURCHASED PURELY OUT OF NON INTEREST BEARING FUNDS RAISED BY THE ASSESSEE AND THAT THE AO HAD MECHANICALLY APPLIED THE PROVISIONS OF R ULE 8D WITHOUT VERIFYING THE QUANTUM OF EXPENDITURE. THE LD. AR RELIED ON THE D ECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. HOLCIM INDIA P. L TD. IN ITA NOS. 486/2014 & 299/2014 FOR THE PROPOSITION THAT THE DISALLOWANCE U/S 14A WAS NOT TENABLE. 3.1 ON THE ISSUE OF TREATMENT OF CAPITAL GAINS AS B USINESS EXPENDITURE, THE LD. AR SUBMITTED THAT THE ASSESSEE INTENDED TO HOLD THE AB OVE RIGHTS FOR LONG TERM INVESTMENTS WHICH CAN BE ESTABLISHED FROM THE FOLLO WING FACTS: I. THE AGREEMENT FOR PURCHASE AND SALE OF THE SAID SPA CE WERE FOR THE PURPOSE OF COMMERCIAL PROPERTY AND THE ASSESSEE HAD TO SELL THE SAME FOR ITS BONAFIDE NEEDS AND REQUIREMENTS; ITA NO. 2375/D/13 ABR AUTO P. LTD. PAGE 4 OF 14 II. AS PER THE PURCHASE AGREEMENT THE ASSESSEE HAD NO R IGHT TO SUB-DIVIDE THE SAID PROPERTY; III. THE ASSESSEE HELD THE PROPERTY FOR MORE THAN THREE AND A HALF YEARS; IV. NO SUBSEQUENT MODIFICATION WAS CARRIED OUT ON THE P ROPERTY TO MAKE IT MARKETABLE; V. THE ASSESSEE IS HOLDING OTHER PROPERTIES ALSO AND O NE PROPERTY HAS ALSO BEEN GIVEN ON RENT AND THE ASSESSEE IS EARNING RENT ON T HE SAME; VI. THE SALE HAD TO BE EFFECTED ONLY FOR THE PURPOSE OF REALIZING ITS BLOCKED FUNDS; VII. SINCE THE REGISTRY HAD NOT BEEN EXECUTED THE ASSESS EE HAD SHOWN ADVANCES AND THE ASSESSEE HAS BEEN FOLLOWING THIS PRACTICE R EGULARLY. 3.2 THE LD. AR ALSO SUBMITTED COPIES OF ASSESSMENT ORDERS FOR ASSESSMENT YEARS 2011-12, 2012-13 AND 2013-14 AND DREW OUR ATTENTION TO THE FACT THAT IN ALL THE THREE ASSESSMENT YEARS THE AO HAS GIVEN A FINDING T HAT THE ASSESSEE EARNED RENTAL INCOME. THE ASSESSEE ALSO PLACED RELIANCE ON THE D ECISION OF THE ITAT MUMBAI D BENCH IN ITA NO. 6345/MUM/2010 FOR AY 2006-07. 4. THE LD. DR RELIED ON THE ORDER OF THE LD. CIT (A PPEALS) AND SUPPORTED THE ORDER OF THE AO. ITA NO. 2375/D/13 ABR AUTO P. LTD. PAGE 5 OF 14 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT RECORDS. AS FAR AS THE ISSUE OF DISALLOWANCE U/S 14A READ WITH RULE 8D IS CONCERNED IT IS SEEN THAT THE SCHEME OF SECTION 14A HAS WITHIN IT IMPLIC IT NOTION OF APPORTIONMENT IN THE CASES WHERE THE EXPENDITURE IS INCURRED FOR THE COM POSITE/INDIVISIBLE ACTIVITIES IN WHICH TAXABLE AND NON-TAXABLE INCOME IS RECEIVED. B UT WHEN IT IS POSSIBLE TO DETERMINE THE ACTUAL EXPENDITURE IN RELATION TO THE EXEMPT INCOME OR WHEN NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO THE EX EMPT INCOME, THEN PRINCIPLE OF APPORTIONMENT EMBEDDED IN SECTION 14 A HAS NO APPLI CATION. THE OBJECTIVE OF SECTION 14 A IS NOT ALLOWING TO REDUCE TAX PAYABLE ON THE NORMAL EXEMPT INCOME BY DEBITING THE EXPENDITURE INCURRED TO EARN THE EX EMPT INCOME. THUS, THE EXPENSES INCURRED TO EARN EXEMPT INCOME CANNOT BE A LLOWED AND THE EXPENSES SHALL BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATED TO T HE EARNING OF TAXABLE INCOME. IF THERE IS EXPENDITURE DIRECTLY OR INDIRECTLY INCURRE D IN RELATION TO EXEMPT INCOME, THE SAME CANNOT BE CLAIMED AGAINST THE INCOME, WHICH IS TAXABLE AS IT IS HELD BY THE HONBLE SUPREME COURT IN CASE OF COMMISSIONER OF IN COME-TAX V. WALFORT SHARE AND STOCK BROKERS P. LTD. REPORTED IN 326 ITR 1 (SC ) THAT FOR ATTRACTING THE PROVISIONS OF SECTION 14 A, THERE SHOULD BE PROXIMA TE CAUSE FOR DISALLOWANCE WHICH AS RELATIONSHIP WITH THE TAX EXEMPT INCOME. THE EXPENDITURE INCURRED IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME HAS TO BE DISALLOWED. HOWEVER, IT SHOULD BE PROXIMATE RELATIO NSHIP BETWEEN THE EXPENDITURE ITA NO. 2375/D/13 ABR AUTO P. LTD. PAGE 6 OF 14 AND THE INCOME, WHICH DOES NOT FORM PART OF TOTAL I NCOME. ONCE SUCH PROXIMITY RELATIONSHIPS EXIST, THE DISALLOWANCE IS TO BE EFFE CTED. IN CASE THE ASSESSEE HAD CLAIMED THAT NO EXPENDITURE HAS BEEN INCURRED FOR E ARNING THE EXEMPT INCOME, IT IS FOR THE ASSESSING OFFICER TO DETERMINE AS TO WHETHE R THE ASSESSEE HAD INCURRED ANY EXPENDITURE IN RELATION TO INCOME WHICH DID NOT FOR M PART OF TOTAL INCOME AND IF SO, TO QUANTIFY THE EXTENT OF DISALLOWANCE. THUS, IN OR DER TO DISALLOW THE EXPENDITURE UNDER SECTION 14A, THERE MUST BE A LIVE NEXUS BETWE EN THE EXPENDITURE INCURRED AND THE INCOME NOT FORMING PART OF TOTAL INCOME. NO NOTIONAL EXPENDITURE CAN BE APPORTIONED FOR THE PURPOSE OF EARNING EXEMPT INCOM E UNLESS THERE IS AN ACTUAL EXPENDITURE IN RELATION TO EARNING THE INCOME NOT F ORMING PART OF TOTAL INCOME. IF THE EXPENDITURE IS INCURRED WITH A VIEW TO EARN TAX ABLE INCOME AND THERE IS APPARENT DOMINANT AND IMMEDIATE CONNECTION BETWEEN THE EXPENDITURE INCURRED AND TAXABLE INCOME, THEN NO DISALLOWANCE CAN BE MAD E UNDER SECTION 14A MERELY BECAUSE SOME TAX EXEMPT INCOME IS RECEIVED BY THE A SSESSEE. 5.01 IT IS THE ASSESSEES CLAIM THAT THE IMPUGNED D ISALLOWANCE HAS BEEN MADE WITHOUT DUE DELIBERATION. THE ASSESSEE HAS CLAIMED THAT NO EXPENDITURE HAS BEEN INCURRED IN MAKING THE INVESTMENTS WHEREAS THE DEPA RTMENT HAS NOT CONSIDERED THE ASSESSEES ASSERTIONS BEFORE MAKING THE DISALLOWANC E. FURTHER, THE ASSESSING OFFICER HAS PRESUMED THAT THE ASSESSEE MUST HAVE IN CURRED SOME EXPENDITURE BUT THE JUSTIFICATION FOR CALCULATING THE DISALLOWANCE IS MISSING. THE HON'BLE DELHI ITA NO. 2375/D/13 ABR AUTO P. LTD. PAGE 7 OF 14 HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD. VS CIT (I.T.A. 687/2009) HAS OPINED IN PARA 29 OF THE ORDER AS UNDER:- 29. SUB-SECTION (2) OF SECTION 14 A OF THE SAID ACT PROVIDES THE MANNER IN WHICH THE ASSESSING OFFICER IS TO DETERMI NE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. HOWEVER, IF WE EXAMINE TH E PROVISION CAREFULLY, WE WOULD FIND THAT THE ASSESSING OFFICER IS REQUIRED TO DETERMINE THE AMOUNT OF SUCH EXPENDITURE ONLY IF TH E ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSES SEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOE S NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. IN OTHER WO RDS, THE REQUIREMENT OF THE ASSESSING OFFICER EMBARKING UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME WOULD BE TRIGGERED ONLY IF THE ASSESS ING OFFICER RETURNS A FINDING THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITUR E. THEREFORE, THE CONDITION PRECEDENT FOR THE ASSESSING OFFICER ENTER ING UPON A DETERMINATION OF THE AMOUNT OF THE EXPENDITURE INCU RRED IN RELATION TO EXEMPT INCOME IS THAT THE ASSESSING OFF ICER MUST RECORD THAT HE , IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. SUB-SECTIO N (3) IS NOTHING BUT AN OFFSHOOT OF SUB-SECTION (2) OF SECTION 14A. SUB-SECTION (3) APPLIES TO CASES WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. IN OTHER WORDS , SUB-SECTION (2) DEALS WITH CASES WHERE THE ASSESSEE SPECIFIES A POS ITIVE AMOUNT OF EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FO RM PART OF THE TOTAL INCOME UNDER THE SAID ACT AND SUB-SECTION (3) APPLIES TO CASES WHERE THE ASSESSEE ASSERTS THAT NO EXPENDITUR E HAD BEEN INCURRED IN RELATION TO EXEMPT INCOME. IN BOTH CASE S, THE ASSESSING OFFICER, IF SATISFIED WITH THE CORRECTNESS OF THE C LAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE OR NO EXPENDITURE, A S THE CASE MAY BE, CANNOT EMBARK UPON A DETERMINATION OF THE AMOUN T OF EXPENDITURE IN ACCORDANCE WITH ANY PRESCRIBED METHO D, AS MENTIONED IN SUB-SECTION (2) OF SECTION 14A OF THE SAID ACT. IT IS ONLY IF THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF ITA NO. 2375/D/13 ABR AUTO P. LTD. PAGE 8 OF 14 THE CLAIM OF THE ASSESSEE, IN BOTH CASES, THAT THE ASSESSING OFFICER GETS JURISDICTION TO DETERMINE THE AMOUNT OF EXPEND ITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT IN ACCORDANCE WITH THE PR ESCRIBED METHOD. THE PRESCRIBED METHOD BEING THE METHOD STIP ULATED IN RULE 8D OF THE SAID RULES. WHILE REJECTING THE CLAI M OF THE ASSESSEE WITH REGARD TO THE EXPENDITURE OR NO EXPENDITURE, A S THE CASE MAY BE, IN RELATION TO EXEMPT INCOME, THE ASSESSING OFF ICER WOULD HAVE TO INDICATE COGENT REASONS FOR THE SAME. 5.02 SIMILARLY, THE HON'BLE HIGH COURT OF PUNJAB & HARYANA IN THE CASE OF CIT-II VS HERO CYCLES LTD. IN I.T.A. NO. 331 OF 2009 (O&M) HAS HELD IN PARA 4 OF THE JUDGMENT THAT, THE CONTENTION OF THE REVENUE THAT DIRECTLY OR IND IRECTLY SOME EXPENDITURE IS ALWAYS INCURRED WHICH MUST BE DISALL OWED U/S 14A AND THE IMPACT OF EXPENDITURE SO INCURRED CANNOT BE ALLOWED TO BE SET OFF AGAINST THE BUSINESS INCOME WHICH MAY NULLIFY THE MANDATE OF SECTION 14A , CANNOT BE ACCEPTED. DISALLOWANCE U/S 14A REQUIRES FINDING OF INCURRING OF EXPENDITURE. WHERE IT IS FOUND THAT FOR EARNING EXEMPTED INCOME, NO EXPENDIT URE HAS BEEN INCURRED DISALLOWANCE U/S 14A CANNOT STAND. MUMBAI J BENCH OF THE ITAT HAS HELD IN THE CASE O F JUSTICE SAM P. BHARUCHA VS ACIT IN I.T.A. NO. 3889/MUM/2011 THAT NO DISALLOWAN CE U/S 14A OF THE ACT IS CALLED FOR WHEN THE ASSESSEE HAS NOT INCURRED AND C LAIMED ANY EXPENDITURE FOR EARNING THE EXEMPT INCOME. ITA NO. 2375/D/13 ABR AUTO P. LTD. PAGE 9 OF 14 5.03 THEREFORE, ON AN OVERALL CONSIDERATION OF THE FACTS OF THE CASE AND RESPECTFULLY FOLLOWING THE RATIO OF THE JUDGMENTS AS AFOREMENTIO NED, WE HOLD THAT THE DISALLOWANCE U/S 14A WAS MADE WITHOUT DUE DELIBERAT ION AND ANALYSIS BY THE ASSESSING OFFICER AND THE LD. CIT(A) WAS ALSO PATEN TLY WRONG IN CONFIRMING THE DISALLOWANCE WITHOUT TESTING THE SUSTAINABILITY OF THE DISALLOWANCE. HENCE, WE SET ASIDE THE FINDINGS OF THE LD. CIT (A) ON THIS ISSUE AND RESTORE THE MATTER TO THE FILE OF THE AO FOR FRESH ADJUDICATION AFTER DUE VERIFICATIO N OF THE CLAIM OF THE ASSESSEE REGARDING NO EXPENDITURE HAVING BEEN INCURRED. NEED LESS TO SAY, THE AO SHALL AFFORD A PROPER OPPORTUNITY TO THE ASSESSEE TO PRESENT ITS CASE. THIS GROUND OF APPEAL IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 5.4 AS FAR AS THE SECOND ISSUE REGARDING THE TREATM ENT OF LONG TERM CAPITAL GAINS AS BUSINESS INCOME IS CONCERNED THE HONBLE BOMBAY HIGH COURT IN CIT VS. V.A. TRIVEDI 172 ITR 95 (BOM.) HAS HELD THAT ORDINARILY WHERE A PERSON ACQUIRED LAND WITH A VIEW TO SELLING IT LATER AFTER DEVELOPING IT AND ACTUALLY DIVIDED THE LAND INTO PLOTS AND SOLD THE SAME IN PARCELS, THE ACTIVITY CO ULD ONLY BE DESCRIBED AS A BUSINESS ADVENTURE. GENERALLY SPEAKING, THE ORIGIN AL INTENTION OF THE PARTY IN PURCHASING THE PROPERTY, THE MAGNITUDE OF THE TRANS ACTION OF PURCHASE, THE NATURE OF THE PROPERTY, THE LENGTH OF ITS OWNERSHIP AND HO LDING, THE CONDUCT AND SUBSEQUENT DEALINGS OF THE APPELLANT IN RESPECT OF THE PROPERTY, THE MANNER OF ITS DISPOSAL AND THE FREQUENCY AND MULTIPLICITY OF TRAN SACTIONS AFFORDED VALUABLE ITA NO. 2375/D/13 ABR AUTO P. LTD. PAGE 10 OF 14 GUIDES IN DETERMINING WHETHER THE APPELLANT WAS CAR RYING ON A TRADING ACTIVITY AND WHETHER A PARTICULAR TRANSACTION SHOULD BE STAMPED WITH THE CHARACTER OF A TRADING ADVENTURE. 5.4.1. THE HONBLE MADRAS HIGH COURT IN V. RAMANA THAN VS. CIT 51 ITR 640 (MAD.) HAS HELD THAT THE DISTINGUISHING MARK WHICH DIFFERENTIATES A TRA DING ADVENTURE FROM ORDINARY TRANSACTION OF PURCHASE AND SALE ENDING IN A PROFIT IS NOT THE PROFIT MOTIVE OF THE INDIVIDUAL, IS NOT THE SPE CULATIVE INSTINCT OF THE INDIVIDUAL, IS NOT THE RISK THAT HE UNDERTAKES IN THE MATTER, B UT THE COMMERCIAL CHARACTER OF THE VENTURE. THE TEST TO APPLY IS WHETHER THE OPERATIO NS INVOLVED IN IT ARE OF THE SAME KIND AND CARRIED ON IN THE SAME WAY AS THOSE WHICH ARE CHARACTERISTICS OF ORDINARY TRADING IN THE LINE OF BUSINESS IN WHICH THE VENTUR E WAS MADE. 5.4.2. THE COORDINATE BENCH OF LUCKNOW ITAT IN SAA RNATH INFRASTRUCTURE P. LTD. VS. ACIT IN ITA NO. 301/LUCK/2006 HAS CURLED O UT THE PRINCIPLES WHICH CAN BE APPLIED ON THE FACTS OF THE CASE TO FIND OUT WHE THER THE TRANSACTIONS IN QUESTION ARE IN THE NATURE OF TRADE OR ARE MERELY FOR INVEST MENT PURPOSES. THE PRINCIPLES READ AS UNDER: 1. WHAT IS THE INTENTION OF THE APPELLANT AT THE TIME OF PURCHASE OF THE SHARES (OR ANY OTHER ITEM)? THIS CAN BE FOUND OUT FROM TH E TREATMENT IT GIVES TO SUCH PURCHASE IN ITS BOOKS OF ACCOUNT. WHETHER IT IS TREATED AS STOCK-IN- ITA NO. 2375/D/13 ABR AUTO P. LTD. PAGE 11 OF 14 TRADE OR INVESTMENT. WHETHER SHOWN IN OPENING/CLOS ING STOCK OR SHOWN SEPARATELY AS INVESTMENT OR NON-TRADING ASSET. 2. WHETHER APPELLANT HAS BORROWED MONEY TO PURCHASE AN D PAID INTEREST THEREON? NORMALLY, MONEY IS BORROWED TO PURCHASE G OODS FOR THE PURPOSE OF TRADE AND NOT FOR INVESTING IN AN ASSET FOR RETA INING. 3. WHETHER PURCHASE AND SALE IS FOR REALIZING PROFIT O R PURCHASES ARE MADE FOR RETENTION AND APPRECIATION IN ITS VALUE? FORMER WI LL INDICATE INTENTION OF TRADE AND LATTER, AN INVESTMENT. IN THE CASE OF SH ARES WHETHER INTENTION WAS TO ENJOY DIVIDEND AND NOT MERELY EARN PROFIT ON SAL E AND PURCHASE OF SHARES. A COMMERCIAL MOTIVE IS AN ESSENTIAL INGREDIENT OF T RADE. 4. HOW THE VALUE OF THE ITEMS HAS BEEN TAKEN IN THE BA LANCE SHEET? IF THE ITEMS IN QUESTION ARE VALUE AT COST, IT WOULD INDICATE TH AT THEY ARE INVESTMENTS OR WHERE THEY ARE VALUED AT COST OR MARKET VALUE OR NE T REALIZABLE VALUE (WHICHEVER IS LESS), IT WILL INDICATE THAT ITEMS IN QUESTION ARE TREATED AS STOCK IN TRADE. 5. HOW THE COMPANY (APPELLANT) IS AUTHORIZED IN MEMORA NDUM OF ASSOCIATION/ARTICLES OF ASSOCIATION? WHETHER FOR T RADE OR FOR INVESTMENT? IF AUTHORIZED ONLY FOR TRADE, THEN WHETHER THERE ARE S EPARATE RESOLUTIONS OF THE BOARD OF DIRECTORS TO CARRY OUT INVESTMENTS IN THAT COMMODITY? AND VICE VERSA. 6. IT IS FOR THE APPELLANT TO ADDUCE EVIDENCE TO SHOW THAT HIS HOLDING IS FOR INVESTMENT OR FOR TRADING AND WHAT DISTINCTION HE H AS KEPT IN THE RECORDS OR OTHERWISE, BETWEEN TWO TYPES OF HOLDINGS. IF THE A PPELLANT IS ABLE TO DISCHARGE THE PRIMARY ONUS AND COULD PRIMA FACIE SH OW THAT PARTICULAR ITEM IS HELD AS INVESTMENT (OR SAY, STOCK-IN-TRADE) THEN ONUS WOULD SHIFT TO REVENUE TO PROVE THAT APPARENT IS NOT REAL. ITA NO. 2375/D/13 ABR AUTO P. LTD. PAGE 12 OF 14 7. THE MERE FACT OF CREDIT OF SALE PROCEEDS OF SHARES (OR FOR THAT MATTER ANY OTHER ITEM IN QUESTION) IN A PARTICULARS ACCOUNT OR NOT SO MUCH FREQUENCY OF SALE AND PURCHASE WILL ALONE WILL NOT BE SUFFICIENT TO SAY THAT APPELLANT WAS HOLDING THE SHARES (OR THE ITEMS IN QUESTION) FOR I NVESTMENT. 8. ONE HAS TO FIND OUT WHAT ARE THE LEGAL REQUISITES F OR DEALING AS A TRADER IN THE ITEMS IN QUESTION AND WHETHER THE APPELLANT IS COMPLYING WITH THEM. WHETHER IT IS THE ARGUMENT OF THE APPELLANT THAT IT IS VIOLATING THOSE LEGAL REQUIREMENTS, IF IT IS CLAIMED THAT IT IS DEALING A S A TRADER IN THAT ITEM? WHETHER IT HAD SUCH AN INTENTION (TO CARRY ON ILLEG AL BUSINESS IN THAT ITEM) SINCE BEGINNING OR WHEN PURCHASE WERE MADE? 9. IT IS PERMISSIBLE AS PER CBDTS CIRCULAR NO. 4 OF 2 007 OF 15 TH JUNE, 2007 THAT AN APPELLANT CAN HAVE BOTH PORTFOLIOS, ONE FOR TRADING AND OTHER FOR INVESTMENT PROVIDED IT IS MAINTAINING SEPARATE ACCO UNT FOR EACH TYPE, THERE ARE DISTINCTIVE FEATURES FOR BOTH AND THERE IS NO I NTERMINGLING OF HOLDINGS IN THE TWO PORTFOLIOS. 10. NOT ONE OR TWO FACTORS OUT OF ABOVE ALONE WILL BE S UFFICIENT TO COME TO A DEFINITE CONCLUSION BUT THE CUMULATIVE EFFECT OF SE VERAL FACTORS HAS TO BE SEEN. 5.4.3. COMING TO THE FACTS OF THE CASE, THE ASSESS EE HAS NOT SHOWN THE RIGHTS IN THE PROPERTY AS STOCK-IN-TRADE. NO OPENING AND CLOSING STOCK WAS SHOWN BY THE ASSESSEE. SINCE THE REGISTRY OF THE RIGHTS WAS N OT DONE, THE ASSESSEE HAD SHOWN THE SAME UNDER THE HEAD LOANS AND ADVANCES. IT I S UNDISPUTED THAT THE ASSESSEE HAS ENTERED INTO ONLY ONE TRANSACTION OF SALE. THE RIGHTS WERE PURCHASED IN 2005 AND WERE SOLD IN 2008 AFTER RETAINING THE RIGHTS FO R MORE THAN THREE AND A HALF ITA NO. 2375/D/13 ABR AUTO P. LTD. PAGE 13 OF 14 YEARS. IT IS ALSO UNDISPUTED THAT THE ASSESSEE HAS BEEN IN RECEIPT OF RENTAL INCOME FROM OTHER PROPERTIES IN SUBSEQUENT ASSESSMENT YEAR S WHICH HAVE BEEN DULY MENTIONED IN THE RESPECTIVE ASSESSMENT ORDERS. HEN CE, APPLYING THE RATIO AS LAID DOWN BY THE HONBLE BOMBAY HIGH COURT AND THE HONB LE MADRAS HIGH COURT AS WELL AS THE COORDINATE BENCH OF THE LUCKNOW ITAT, W E ARE OF THE CONCERNED OPINION THAT THE SURPLUS RESULTING FROM THE SALE OF RIGHTS IS ASSESSABLE TO TAX ONLY AS CAPITAL GAINS AND NOT AS BUSINESS INCOME BECAUSE TH E DEPARTMENT HAS NOT BEEN ABLE TO DEMONSTRATE THAT PURCHASE AND SALE OF THE RIGHTS WAS AFFECTED IN THE USUAL COURSE OF CARRYING ON THE BUSINESS OF THE ASSESSEE. THE F REQUENCY OF THE PURCHASE AND SALE IS ISOLATED IN THE CASE OF THE ASSESSEE AND, THEREF ORE, THERE IS NO REASON TO ALLEGE THAT THIS WAS ONLY A DEVICE TO PAY LESSER TAXES. IT IS ALSO SEEN FROM THE RECORDS THAT THE ASSESSEE COMPANY IS IN THE PRACTICE OF PASSING SEPA RATE RESOLUTIONS FOR MAKING INVESTMENT IN PROPERTIES/RIGHTS. IN OUR CONSIDERED VIEW, THE ASSESSEE HAS DISCHARGED ITS PRIMARY ONUS BY SHOWING THAT THE SAL E OF RIGHTS WAS NOT IN THE REGULAR COURSE OF BUSINESS OR TRADE BUT RATHER AN I SOLATED TRANSACTION AND NOW THE ONUS WAS ON THE REVENUE TO SHOW THAT THE APPARENT W AS NOT REAL. NO MATERIAL WHATSOEVER HAS BEEN BROUGHT ON RECORD BY THE REVENU E TO SHOW THAT THE TRANSACTION WAS ONLY A SMOKE SCREEN TO CAMOUFLAGE THE TRADING R ECEIPTS. THEREFORE, IN ABSENCE OF ANY MATERIAL TO THE CONTRARY AND ON APPRECIATION OF CUMULATIVE EFFECT OF SEVERAL ITA NO. 2375/D/13 ABR AUTO P. LTD. PAGE 14 OF 14 FACTORS PRESENT WE HOLD THAT THE SURPLUS IS CHARGEA BLE TO CAPITAL GAINS ONLY AND NOT AS BUSINESS INCOME. AS A RESULT, THIS GROUND OF AP PEAL OF THE ASSESSEE IS ALLOWED. 6. IN THE FINAL RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 05/08/2016 SD/- SD/- (G.D. AGRAWAL) (SUDHANSHU SRIVASTAVA ) VICE PRESIDENT JUDICIAL MEMBER DATED: 05.08.2016 *KAVITA ARORA COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI