ACIT, New Delhi V. M/s Decent Financial Services Pvt. Ltd., New Delhi

ITA 2442/DEL/2011

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 7698 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-05-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 15-03-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 12-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANIMA BA RANWAL
• Keywords: Capital asset; Business income; Earning of tax free income
• Section: 14A

Judgement Text

1 ITA NO. 2442/DE L/2011 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: B NEW DELHI BEFORE SHRI N. K. SAINI, ACCOUNTANT MEMBER AND SMT SUCHITRA KAMBLE , JUDICIAL MEMBER I.T.A .NO.- 2442/DEL/2011 (ASSESSMENT YEA R-2007-08) ACIT CIRCLE-10(1) NEW DELHI (APPELLANT) VS DECENT FINANCIAL SERVICES PVT. LTD. 84, DARYA GANJ NEW DELHI AAACD2899P (RESPONDENT) APPELLANT BY MS. ANIMA BARANWAL, SR. DR RESPONDENT BY SH. VED JAIN, ADV ORDER PER SUCHITRA KAMBLE, JM THIS APPEAL IS FILED BY THE REVENUE AGAINST THE ORD ER DATED 28/02/2011 PASSED BY CIT(A)-XVII, NEW DELHI. 2. THE GROUNDS OF APPEAL ARE AS UNDER:- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) HAS ERRONEOUSLY HELD THAT INCOME FROM SHORT TERM CA PITAL GAIN AT RS.21,14,240/- AND LONG TERM CAPITAL GAIN AT RS.50, 42,972/- FROM SHARES TO BE TAXED AT SPECIAL TAX RATE U/S 111(A) & 112 OF THE IT DATE OF HEARING 15.03.2016 DATE OF PRONOUNCEMENT 19.05.2016 2 ITA NO. 2442/DE L/2011 ACT, 1961 AND NOT TO BE CONSIDERED AS BUSINESS INCO ME AS ASSESSED BY THE A.O. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LD.CIT(A) HAS ERRONEOUSLY RESTRICTED THE DISALLOWANCE TO 10% OF THE EXEMPTED INCOME AS AGAINST THE DISALLOWANCE OF RS.68,78,340/ - MADE BY THE A.O. 3. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF ACTIVITIES IN SHARES AND SECURITIES DURING THE YEAR UNDER CONSIDERATION, AS WELL AS ALSO EARNED DIVIDEND FROM THESE SHARES AND SECURITIES. OUT OF T OTAL INCOME OF RS.224.55 LAKHS EARNED BY THE ASSESSEE, THE INCOME FROM SHORT TERM CAPITAL GAINS WAS AT RS. 21,14,240/- AND FROM LONG TERM CAPITAL GAIN AT RS.50,42,972/-. THE ASSESSEE ALSO DECLARED DIVIDEND INCOME OF RS.28,42, 318/- AND AFTER DEDUCTING EXPENSES OF RS.90,306/- AN EXEMPTION OF RS.27,52,01 2/- WAS CLAIMED U/S 10(38) OF THE ACT. THE ASSESSEE WAS ASKED TO SHOW CAUSE AS TO WHY THE SHORT TERM AND LONG TERM CAPITAL GAIN DECLARED BY THE ASS ESSEE SHALL NOT BE ASSESSESD AS BUSINESS INCOME. THE ASSESSEE SUBMITT ED ITS REPLY THEREBY STATING THAT THE ASSESSEE IS NOT A SHARE TRADER HAV ING ANY SHARE SHOP, MEMBERSHIP OF STOCK EXCHANGE, REGISTRATION WITH SEB I OR OTHER ASSOCIATION OF SHARE TRADERS ETC. IT WAS FURTHER SUBMITTED THAT I N COMMERCIAL WORLD NOBODY CONSIDERED THE ASSESSEE AS A SHARE TRADER, THEREFOR E, IN NATURAL WAY, ALL ACQUISITION OF SHARES SECURITIES AND UNITS WILL BE CAPITAL ASSETS OF THE ASSESSEE AND THAT THE BENEFIT U/S 10(38) & 111(A) IN CASE OF CAPITAL GAINS OR BENEFIT OF TAX REBATE U/S 88 E SHOULD BE CONSIDERED AS OPTIONS OR PRIVILEGES GRANTED TO THE ASSESSEE BY THE LEGISLATURE. WHERE TRANSACTION S HAVE SUFFERED STT, THE TREATMENT GIVEN BY THE ASSESSEE TO TRANSACTIONS AS SHARE TRADING ACTIVITY OR INVESTMENT ACTIVITY SHOULD BE CONSIDERED AS FINAL. 4. THE ASSESSING OFFICER AFTER TAKING INTO ACCOUNT THE SUBMISSIONS OF THE ASSESSEE OBSERVED THAT ALTHOUGH THE ASSESSEE HAS ME NTIONED PURCHASE OF SHARES AS INVESTMENTS IN ITS BOOKS OF ACCOUNTS BUT LOOKING TO THE NATURE OF TRANSACTIONS OF SHARES, IT WAS FOUND THAT THE ASSES SEE WAS DOING FREQUENT TRANSACTIONS FOR SALE AND PURCHASE OF SHARES WHICH WAS EVIDENT FROM THE 3 ITA NO. 2442/DE L/2011 INVENTORY OF OPENING STOCK/CLOSING STOCKS. THE ASS ESSING OFFICER HAS ALSO TAKEN INTO COGNIZANCE OF CIRCULAR NO. 4/2007 DATED 15/06/2007 ISSUED BY CBDT AND HELD THAT THE ASSESSEE HAS DECLARED SHORT TERM CAPITAL GAIN ON CERTAIN SALE OF SHARES EVEN THOUGH ITS MAIN BUSINES S IS TRADING OF SHARES. THE ASSESSING OFFICER ALSO CONSIDERED THE INSTRUCTIONS DATED 31 ST AUGUST, 1989 ISSUED BY CBDT AND HELD THAT THOUGH THE PORTFOLIO M ANAGER IS AN AGENT OF THE INVESTOR AND THOUGH HE MAY CARRY ON CERTAIN TRANSAC TIONS IN HIS OWN NAME SUCH TRANSACTIONS ARE IN HIS CAPACITY AS AN AGENT O F INVESTOR. THEREFORE, UNDER GENERAL PRINCIPALS SUCH TRANSACTIONS ARE THE TRANSA CTIONS OF THE INVESTOR CARRIED OUT THROUGH AN AGENT, THE INCOME FROM SUCH TRANSACTIONS IS LIABLE TO TAX AS THE INCOME OF THE INVESTOR AND THUS THE ASSE SSING OFFICER HELD THE SHORT TERM CAPITAL GAIN AS WELL AS LONG TERM CAPITAL GAIN EARNED ON ENTIRE SALE AND PURCHASE OF SHARES I.E. RS. 71,57,912/- AS BUSINESS INCOME BY REJECTING THE SPECIAL TAX TREATMENT AS PER SECTION 111(A). THE A SSESSING OFFICER FURTHER DISALLOWED RS.68,78,340/- U/S 14A OF THE ACT BY HOL DING THAT THE INVESTMENT MADE BEING A CONSCIOUS DECISION AND HAVING DEPLOYME NT OF FUNDS CLEARLY BEINGS INTO PICTURE EXPENDITURE BY WAY OF COST OF F UNDS INVESTED. COMPOSITE FUNDS HAVING COST NEEDS TO BE SPREAD SO AS TO A POR TION APPROPRIATE COST OF FUNDS INVESTED IN THE ACTIVITY LENDING TO CARRYING OF EXEMPT INCOME. RULE 8 D IS PROCEDURAL RULE, AND, THEREFORE, WILL HAVE RETROSPE CTIVE OPERATION IN SO FAR AS, ALL PENDING PROCEEDINGS AS ON DATE OF NOTIFICATION ARE CONCERNED. SECTION 2 & 3 OF SECTION 14A AT THE PROCEDURAL PROVISIONS OF THE DETERMINING THE DISALLOWANCE OF THE EXPENDITURE IN RELATION TO INCOME NOT FOUND PART OF TOTAL INCOME. 5. BEING AGGRIEVED THE ASSESSEE CARRIED THE MATTER TO THE CIT(A) WHO HAS HELD THAT LONG TERM CAPITAL GAINS OF RS. 50,42,972/ - WAS ON THE SHARES WHICH HAVE BEEN HELD BY THE ASSESSEE FOR MANY YEARS AND T HERE WAS NO JUSTIFICATION GIVEN BY THE ASSESSING OFFICER FOR TREATING THE SA ME AS BUSINESS INCOME WHEN FOR THE LAST MANY YEARS THE SAME WAS TREATED AS CAP ITAL GAIN. THEREFORE, AS PER CIRCULAR NO. 4/2007 DATED 15/06/2007, THE ASSESSEE S CLAIM WITH REGARD TO LONG TERM CAPITAL GAIN HAS TO BE ACCEPTED AS THE AS SESSEE WAS CLAIMING THE 4 ITA NO. 2442/DE L/2011 SAME AS LONG TERM CAPITAL GAIN CONSISTENTLY, SINCE MANY YEARS WHICH WAS ALLOWED BY THE ASSESSING OFFICER IN PREVIOUS YEARS AND THUS, PARTLY ALLOWED THE SAID GROUND. AS REGARDS TO GROUND NO. 2 RELATED TO DIVIDEND INCOME THE CIT(A) RELIED ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING COMPANY LIMITED 234 CTR 1 AND H ELD THAT IT WAS THE DUTY OF THE A.O TO MAKE THE DISALLOWANCE U/S 14A BY ADOPTING REASONABLE BASIS AND THUS RESTRICTED THE DISALLOWANCE TO 10% OF EXEM PTED INCOME. NOW THE ASSESSEE IS IN APPEAL. 6. THE LD. DR SUBMITTED THAT THE TRANSACTIONS ON IT S VOLUME AND ON THE BASIS OF THE TRADING IN A SINGLE DAY WERE VERY MUCH HIGH AND IS RIGHTLY TREATED AS BUSINESS BY THE ASSESSING OFFICER. IT WAS FURTH ER SUBMITTED THAT NO SEPARATE ACCOUNT WAS MAINTAINED BY THE ASSESSEE AND THE INTENTION OF THE ASSESSEE WAS CLEARLY FOR THE TRADING ACTIVITY AND T HAT THERE WAS NO SHARE PURCHASED FOR LONG TERM CAPITAL GAIN OR TO EARN DIV IDEND. THE LD. DR POINTED OUT THAT FROM THE ASSESSING OFFICERS ORDER IT WAS CLEAR FROM THE ASSESSEES OPENING STOCK AND CLOSING STOCK WAS EVIDENT TO SHOW THAT THE TOTAL NUMBER OF SHARES PURCHASED DURING THE YEAR WAS 514.44 LAKH HA VING TOTAL VALUE OF RS. 2513.54 LAKHS AND NUMBER OF SHARES SOLD DURING THE YEAR WAS 488.46 LAKHS OF RS. 21,185.99 LAKHS. THE USED VOLUME ITSELF INDICAT ED THAT THE ASSESSEE WAS DOING BUSINESS ACTIVITY AND WRONGLY TREATED IT AS I NVESTMENTS AND HAD SHOWN CAPITAL GAIN. THE LD. DR WHILE SUPPORTING THE ORDE R OF ASSESSING OFFICER STATED THAT RULE 8D IS PROCEDURAL RULE AND, THEREFORE, WIL L HAVE RETROSPECTIVE OPERATION. IN SO FAR AS, ALL PENDING PROCEEDINGS A S ON DATE OF NOTIFICATION ARE CONCERNED, THE LD. DR RELIED UPON THE CASE OF CIT V S. M/S DM COMPONENTS LTD. PASSED BY HONBLE DELHI HIGH COURT WHEREIN THE ASSESSEE HAS CLAIMED THE AMOUNTS WERE NOT BUSINESS INCOME BUT TOWARDS CAPITA L GAIN FROM SALE OF INVESTMENT. THE HONBLE JURISDICTIONAL HIGH COURT HELD THAT THE SHORT DURATION HOLDING OF THE SHARES AND THE LACK OF CLAR ITY IN THE ACCOUNTS BOOKS WILL HOLD THE SAID AMOUNT NOT TO BE TESTIFIED AS SHORT T ERM CAPITAL GAIN AND SHALL 5 ITA NO. 2442/DE L/2011 BE TREATED AS BUSINESS INCOME, HENCE APPEAL OF THE REVENUE WAS ALLOWED THEREIN. 7. IN HIS RIVAL SUBMISSIONS, THE LD. AR SUBMITTED T HAT THE ASSESSEE IS HAVING TWO PORTFOLIOS AND ITS NOT A REQUIREMENT UN DER THE LAW TO HAVE TWO SEPARATE BANK ACCOUNTS FOR CONDUCTING A BUSINESS AN D MAKING INVESTMENTS. THE ASSESSING OFFICER ADMITTEDLY STATED THAT THE PR OFIT AND LOSS ACCOUNT CLEARLY SHOWS THAT THE ASSESSEE WAS HAVING SHORT TERM CAPIT AL GAIN AS WELL AS BUSINESS INCOME SO THERE WAS CLEAR BIFURCATION OF B OTH THE INCOMES. IN-FACT, FOR SHORT TERM CAPITAL GAIN THE ASSESSEE HAS NOT UT ILIZED ANY BORROWED FUND. THE LD. AR SUBMITTED THAT THE JUDGMENT WHICH WAS RE LIED BY THE LD. DR WAS IN RESPECT OF TRANSACTIONS DEALING WITH SHARES HELD ON LY FOR THREE TO FOUR DAYS. THUS, THE APPLICABILITY OF THE SAID JUDGMENT WILL N OT SUSTAIN IN ASSESSEES CASE BECAUSE THE ENTIRE TRANSACTION WAS DURING THE YEAR AND THERE WAS NOTHING ON RECORD TO SHOW THAT IT WAS A BUSINESS OF THE ASSESS EE. THE LD. AR ALSO REFERRED TO THE CIT(A)S ORDER AND SUBMITTED THAT THE FACTS WERE APPRECIATED PROPERLY BY THE CIT(A). THE LD. AR OF THE ASSESSEE ALSO RELIED UPON THE CBDT CIRCULAR NO. 6/2016 DATED 29 TH FEBRUARY 2016 WHEREIN THE BOARD HAS INSTRUCTED TO THE AO AS UNDER:- ..A) WHERE THE ASSESSEE ITSELF, IRRESPECTIVE OF TH E PERIOD OF HOLDING THE LISTED SHARES AND SECURITIES, OPTS TO TREAT THEM AS STOCK-IN-TRADE, THE INCOME ARISING FROM TRANSFER OF SUCH SHARES/SECURIT IES WOULD BE TREATED AS ITS BUSINESS INCOME, B) IN RESPECT OF LISTED SHARES AND SECURITIES HELD FOR A PERIOD OF MORE THAN 12 MONTHS IMMEDIATELY PRECEDING THE DATE OF IT S TRANSFER, IF THE ASSESSEE DESIRES TO TREAT THE INCOME ARISING FROM T HE TRANSFER THEREOF AS CAPITAL GAIN, THE SAME SHALL NOT BE PUT TO DISPUTE BY THE ASSESSING OFFICER. HOWEVER, THIS STAND, ONCE TAKEN BY THE ASSESSEE IN A PARTICULAR ASSESSMENT YEAR, SHALL REMAIN APPLICABLE IN SUBSEQU ENT ASSESSMENT 6 ITA NO. 2442/DE L/2011 YEARS ALSO AND THE TAXPAYERS SHALL NOT BE ALLOWED T O ADOPT A DIFFERENT/CONTRARY STAND IN THIS REGARD IN SUBSEQUE NT YEARS; C) IN ALL THE OTHER CASES, THE NATURE OF TRANSACTIO N (I.E. WHETHER THE SAME IS IN THE NATURE OF CAPITAL GAIN OR BUSINESS I NCOME) SHALL CONTINUE TO BE DECIDED KEEPING IN VIEW THE AFORESAID CIRCULARS ISSUES BY THE CBDT. THE ASSESSEE ALSO RELIED UPON THE CASE OF CIT VS. G OPAL PUROHIT (2011) 336 ITR 287 (BOMBAY) WHICH WAS CONFIRMED BY THE HON'BLE SUP REME COURT. IN RESPECT OF GROUND NO. 2, THE LD. AR SUBMITTED THAT RULE 8D WILL NOT BE APPLICABLE FOR THE PRESENT ASSESSMENT YEAR 2007-08 AS HELD IN JURI SDICTIONAL HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD. VS. CIT REPORTED AT 347 ITR 272. 8. WE HAVE PERUSED ALL THE RECORDS AND HEARD BOTH T HE PARTIES. THE LD. DRS CONTENTION THAT THE CIRCULAR DATED FEBRUARY 2016 IS NOT RETROSPECTIVE HAS TO BE LOOKED INTO FROM THE ANGLE OF THE EARLIER CIRCULARS AND THE INTENTION OF THAT CIRCULAR ISSUED BY THE CBDT. THE INTENTION OF THE CIRCULAR IS CLEARLY TO REDUCE THE LITIGATION AND MAINTAIN CONSISTENCY. THE SUBMI SSIONS OF THE LD. DR THAT THE TRANSACTION WAS VERY MUCH VOLUMINOUS AND, THERE FORE, ASSESSING OFFICER BY TAKING INTO THE MODUS OPERANDI OF THE ASSESSEE TREA TED THE SAME AS BUSINESS INCOME BUT THE ASSESSING OFFICER HAS NOT GIVEN THE DAY TO DAY TRANSACTION IN ITS ENTIRE ORDER AND THAT FOR HOW MUCH PERIOD THE ASSES SEE WAS HOLDING THE SHARES AND SELLING THE SAME IS MISSING IN THE ASSESSMENT O RDER. IN-FACT, IN EARLIER ASSESSMENT YEARS, THE REVENUE ALLOWED THE LONG TERM CAPITAL GAIN TO THE ASSESSEE AND THUS THE SAME WAS TREATED AS CAPITAL G AIN DURING THE EARLIER YEARS BY TAKING COGNIZANCE OF CIRCULAR DATED 4/2007 DATED 15/6/2007. THE ASSESSEE HAS ALSO SHOWN SHORT TERM CAPITAL GAIN IN THIS PART ICULAR YEAR. THE CASE LAW WHICH WAS CITED BY THE LD. DR IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE BECAUSE IN THAT CASE THE SHARES WERE HELD FOR ONLY TWO TO THREE DAYS PERIOD BUT THE ASSESSEES SITUATION IN THE PRESENT CASE IS TOT ALLY DIFFERENT. THE CIT (A) HAS TAKEN INTO COGNIZANCE OF THESE FACTORS AND RIGHTLY TREATED THE SAME AS SHORT TERM CAPITAL GAIN AND IN FACT CIT(A) HAS TAXED CERT AIN AMOUNT AFTER EXAMINING 7 ITA NO. 2442/DE L/2011 ALL THE TRANSACTIONS RELATED TO SHARE TRADING. THE ASSESSEES PROFIT AND LOSS ACCOUNT CLEARLY STATES THAT THE ASSESSEE WAS HAVING TWO PORTFOLIOS. THEREFORE, THIS GROUND OF REVENUE IS DISMISSED. 8. AS REGARDS TO GROUND NO. 2, IT IS CLEAR THAT THE ASSESSMENT YEAR INVOLVED IN 2007-08 THEREFORE RULE 8D IS NOT APPLICABLE IN T HIS YEAR AS PER THE RATIO LAID DOWN IN THE JUDGMENT OF HONBLE BOMBAY HIGH COURT I N THE CASE OF GODREJ & BOYCE MANUFACTURING COMPANY (SUPRA). IN OUR OPINION , THE CIT(A) HAS RIGHTLY TAKEN INTO COGNIZANCE THAT THE SAID JUDGMENT ALSO H ELD THAT WHERE INVESTMENT HAS BEEN MADE AND THE INCOME FROM THE SAME WAS EXEM PT FROM TAX THUS, THE A.O IS DUTY BOUND TO MAKE THE DISALLOWANCE U/S 14A BY ADOPTING A REASONABLE BASIS. THE CIT(A) HAS RIGHTLY RESTRICTED THE DISAL LOWANCE TO THE EXTENT OF 10% OF EXEMPTED INCOME. THUS, THIS GROUND OF THE REVENUE IS ALSO DOES NOT SURVIVE. 9. IN RESULT, THE APPEAL OF THE REVENUE IS DISMISSE D. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 19 TH OF MAY, 2016. SD/- SD/- ( N. K. SAINI) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 19/05/2016 *R. NAHEED* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI DATE 1. DRAFT DICTATED ON 15/03/2016 PS 2. DRAFT PLACED BEFORE AUTHOR 16/03/2016 PS 8 ITA NO. 2442/DE L/2011 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER .2016 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS 1 9 . 0 5 .2016 PS/PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK 1 9 . 0 5 .2016 PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER.