Dynamic Consultants Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 2694/DEL/2009

• Counselvise Citation: 269420114 RSA 2009
• Duration Of Justice: 2 year(s) 3 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 01-09-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 02-06-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL [ DELHI BENCH B DELHI ] BEFORE SHRI R. P. TOLANI, JM AND SHRI K. D. RANJ AN, AM I. T. APPEAL NO. 2694 (DEL) OF 2009. ASSESSMENT YEAR : 2006-07. M/S. DYNAMIC CONSULTANTS PVT. LTD., ASSTT. CO MMISSIONER OF INCOME-TAX, C2/4, SAFDARJUNG DEVELOPMENT AREA, VS . C I R C L E : 10 (1), N E W D E L H I 110 016. N E W D E L H I. P A N / G I R NO. AAA CD 0042 L. A N D I. T. APPEAL NO. 3317 (DEL) OF 2009. ASSESSMENT YEAR : 2006-07. ASSTT. COMMISSIONER OF INCOME-TAX, M/S. DYNAMIC CONSULTANTS PVT. LTD., C I R C L E : 10 (1), VS. C2/4, SAFDARJUNG DEVELOPMENT AREA, N E W D E L H I. N E W D E L H I 110 016. PAN / GIR N O. AAA CD 0042 L. ( APPELLANTS ) ( RESPONDENTS ) ASSESSEE BY : SHRI K. SAMPATH, ADV.; DEPARTMENT BY : SHRI ROHIT GARG, SR. D. R. O R D E R. PER K. D. RANJAN, AM : THESE CROSS APPEALS BY THE ASSESSEE AND THE REVENUE FOR ASSESSMENT YEAR 2006-07 ARISE OUT OF ORDER OF THE LD. CIT (APPEALS)XIII, NEW DEL HI. THESE WERE HEARD TOGETHER AND ARE BEING DISPOSED OF, FOR THE SAKE OF CONVENIENCE, BY THIS C ONSOLIDATED ORDER. 2 I. T. APPEAL NO. 2694 (DEL) OF 2009 A N D I. T. A. NO. 3317 (DEL) OF 2009. 2. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE REA D AS FOLLOWS :- 1. THE ASSESSMENT MADE BY THE COMMISSIONER O F INCOME-TAX (APPEALS) IS BAD IN LAW AND ON THE FACTS OF THE CASE; 2. THAT HAVING REGARD TO THE MATERIAL ON R ECORD AND DETAILED SUBMISSION MADE, THE LD. CIT (APPEALS) HAS ERRED IN LAW AND ON FACTS IN TREATING THE SHORT- TERM CAPITAL GAINS ON SHARES HELD BY THE ASSESSEE F OR LESS THAN 6 MONTHS AS BUSINESS INCOME AND THEREBY TREATING THE SHORT-TERM CAPITAL GAINS OF RS.14,32,653/-, AS NORMAL BUSINESS INCOME OUT OF TH E TOTAL SHORT-TERM CAPITAL GAINS OF RS.24,77,878/-; IT IS PRAYED THAT THE SHORT-TERM CAPITAL GAINS OF RS.14,32,653/- ON SHARES HELD FOR LESS THAN 6 MONTHS MAY BE TREATED A S CAPITAL GAINS AND APPEAL BE ALLOWED. 3. THE GROUNDS OF APPEAL RAISED BY THE REVENUE READ AS FOLLOWS :- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT (APPEALS) ERRED IN DIRECTING THE ASSESSING OFFICER TO TREAT THE INCOME OF RS.27,38,938/- EARNED ON TRADING OF LONG TERM SHARE HOLDING AS INCOME UNDER THE HEAD CAPITAL GAIN INSTEAD OF BUSINESS INCOME , AS TREATED BY THE ASSESSING OFFICER; 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT (APPEALS) ERRED IN DIRECTING THE ASSESSING OFFICER TO TREAT THE INCOME OF RS.11,55,927/- EARNED ON TRADING OF SHARES HELD FOR MORE THAN SIX MONTHS, AS INCOME UNDER THE HEAD CAPITAL GAIN INSTEAD OF BU SINESS INCOME, AS TREATED BY THE ASSESSING OFFICER. 4. THE FACTS OF THE CASE STATED IN BRIEF ARE THAT T HE ASSESSEE IS A PVT. LTD. COMPANY AND DURING THE RELEVANT PERIOD DERIVED INCOME FROM CONS ULTANCY, INVESTMENT AND FINANCE. DURING THE ASSESSMENT YEAR 2006-07 THE ASSESSEE HAD SHOWN LONG TERM CAPITAL GAINS OF RS.27,38,938/- AND SHORT TERM CAPITAL GAIN OF RS.25,88,578/-. THE ASS ESSEE CLAIMED LONG TERM CAPITAL GAINS OF RS.27,38,938/- AS EXEMPT UNDER SECTION 10(38) OF TH E ACT. THE ASSESSEE PAID TAX ON SHORT TERM CAPITAL GAINS UNDER SECTION 111-A OF THE ACT. DURI NG THE COURSE OF ASSESSMENT PROCEEDINGS THE AO FOUND THAT THE HOLDING PERIOD OF THESE SHARES WA S FROM FOUR MONTHS TO TWO YEARS AND THERE WERE NUMEROUS TRANSACTIONS FOR SALE/PURCHASE OF SHA RES. THE AO, THEREFORE, REQUIRED THE 3 I. T. APPEAL NO. 2694 (DEL) OF 2009 A N D I. T. A. NO. 3317 (DEL) OF 2009. ASSESSEE TO EXPLAIN AS TO WHY INCOME FROM LONG TERM CAPITAL GAINS AND SHORT TERM CAPITAL GAINS SHOULD NOT BE ASSESSED AS BUSINESS INCOME. IN RESP ONSE TO THIS QUERY, IT WAS SUBMITTED BY THE ASSESSEE THAT COMPANY HAD BEEN INVESTING ITS SURPLU S FUNDS IN SHARES FOR THE LAST TWENTY YEARS, WHICH WAS EVIDENT FROM THE OLD BALANCE SHEETS OF TH E ASSESSEE. THE COMPANY HAD PURCHASED SHARES ONLY AS INVESTMENT AND HAD NOT DONE ANY BUSI NESS IN THE SHARES. ALL THE SHARES WERE DEPOSITED IN DE-MAT ACCOUNT OF THE ASSESSEE COMPANY . THE COMPANY HAD MADE INVESTMENT FOR THE LONG TERM, BUT AS STOCK MARKET HAD BEEN VERY VO LATILE, WHICH MADE IT DIFFICULT TO GUESS THE HOLDING TERM FOR MAJORITY OF SHARES. THUS INVESTME NTS MADE, EVEN AFTER DUE RESEARCH, FOR LONG TERM, HAD TO BE SOLD WITH THE HASTE AFTER HOLDING F OR SHORT PERIOD BECAUSE OF RAPIDLY CHANGING MARKETING CONDITIONS, GOVT. POLICIES AND ECONOMY, F OR THE FEAR OF MAKING LOSS. IT WAS ALSO SUBMITTED THAT THE ASSESSEE HAD SOLD SHARES OF FOUR COMPANIES ON WHICH LONG TERM CAPITAL GAIN WAS CLAIMED AND MOST OF THE SHARES WERE FOR MORE TH AN TWO YEARS. THE COMPANY HAD SOLD SHARES OF 12 COMPANIES ON WHICH SHORT TERM CAPITAL GAINS W ERE CLAIMED OUT OF WHICH SHARES OF 5 COMPANIES WERE PURCHASED DURING THE LAST FINANCIAL YEAR 2004-05 AND THE AVERAGE PERIOD OF HOLDING THE SHARES WAS FOUR MONTHS. THE SHORT TERM TRANSACTIONS MAINLY REPRESENT EITHER A WRONG DECISION BY BUYING UNDESIRABLE OR MISTAKE THROUGH W RONG INFORMATION. THIS CONTENTION OF THE ASSESSEE WAS REJECTED BY THE AO RELYING ON CBDT CIR CULAR AND DECISIONS. THE ASSESSING OFFICER ALSO OBSERVED THAT ASSESSEE WAS MAKING PROVISIONS I N HIS BOOKS OF ACCOUNTS FOR DIMINUTION IN THE VALUE OF INVESTMENT I.E. THEY WERE HOLDING THE SHAR ES ALLEGED AS INVESTMENT AT MARKET VALUE AND FOR MAKING GOOD ANY FUTURE LOSS THEY WERE MAKING PR OVISIONS IN THE BOOKS OF ACCOUNTS / BALANCE SHEET. THIS INDICATED THAT THE ASSESSEE WAS NOT DO ING INVESTMENT, BUT ENGAGED IN THE BUSINESS OF SHARES SALE PURCHASE. THE AO TREATED THE SHORT T ERM CAPITAL GAINS AND LONG TERM CAPITAL GAINS EARNED BY THE ASSESSEE AS BUSINESS INCOME. THE AO DISALLOWED THE CLAIM OF EXEMPTION UNDER SECTION 10(38) OF THE ACT FOR LONG TERM CAPITAL GAI NS EARNED BY THE ASSESSEE. 5. BEFORE THE LD. CIT (APPEALS) SIMILAR ARGUMENTS W ERE MADE. REGARDING MAKING OF THE PROVISION ON ACCOUNT OF DIMINUTION IN THE VALUE OF INVESTMENTS, IT WAS SUBMITTED BY THE ASSESSEE THAT ALL THE COMPANIES WERE REQUIRED TO PREPARE THE IR FINAL ACCOUNTS AS PER MANDATORY ACCOUNTING STANDARD -13. AS PER AS-13 THE ASSESSEE HAD TO MAKE PROVISION TOWARDS DIMINUTION IN THE VALUE 4 I. T. APPEAL NO. 2694 (DEL) OF 2009 A N D I. T. A. NO. 3317 (DEL) OF 2009. OF INVESTMENTS. HOWEVER, THERE WAS NO EFFECT ON TH E TAXING INCOME OF THE COMPANY. THE AO HAD FAILED TO APPLY HIS MIND AND HAD COMMENTED THAT THEY WERE HOLDING SHARES ALLEGED AS INVESTMENT AT MARKET VALUE WHEREAS THE COMPANY HAD SHOWN ITS INVESTMENT AT BOOK VALUE ONLY. AS REGARDS THE PERIOD OF HOLDING THE LD. AR OF THE ASSESSEE SUBMITTED THAT THE SHARES WERE HELD FROM PERIOD OF FOUR MONTHS TO TWO YEARS. THEREFORE , THE SHARES WERE HELD AS INVESTMENT WHICH HAS BEEN SHOWN AS SUCH IN THE ACCOUNTS. THE SHARES WERE TRANSFERRED TO DE-MAT ACCOUNT. THE LD. CIT (APPEALS) ON CONSIDERATION OF SUBMISSIONS MADE BY THE ASSESSEE OBSERVED THAT LONG TERM CAPITAL GAINS AND SHORT TERM CAPITAL GAINS CLAIMED BY THE ASSESSEE NEEDED TO BE EXAMINED SEPARATELY TO ARRIVE AT THE CONCLUSION WHETHER THE TRANSACTIONS WERE IN THE NATURE OF CAPITAL GAINS OR BUSINESS INCOME. FIRSTLY, WITH REGARD TO LONG T ERM CAPITAL GAIN, THE ASSESSEE HAD SUBMITTED THAT SHARES WERE HELD FOR LONGER PERIOD OF TIME WIT H THE INTENTION OF EARNING OF DIVIDEND INCOME. THE SAME HAD BEEN SHOWN AS INVESTMENT AND WERE ONLY FOUR SCRIP, WHICH WERE SOLD ON WHICH LONG TERM CAPITAL GAIN HAD BEEN CLAIMED. THE SOURC E OF INVESTMENT IN THESE SHARES HAD BEEN STATED TO BE THE SURPLUS FUNDS OF THE ASSESSEE. EV EN THOUGH THE AMOUNT INVOLVED WAS LARGE, IT COULD NOT BE DENIED THAT THE ASSESSEE HAD MADE LONG TERM INVESTMENTS AND EARNED DIVIDEND FROM THESE INVESTMENTS. THE LD. CIT (A) ALLOWED THE CLA IM OF THE ASSESSEE IN RESPECT OF SHARES OF FOUR COMPANIES. AS REGARDS THE SHORT TERM CAPITAL GAINS OF RS.24,77,878/-, THE LD. CIT (A) NOTED THAT THERE WERE 19 TRANSACTIONS RELATING TO SALE OF SHAR ES DURING THE YEAR. IN THESE CASES THE FREQUENCY OF TRANSACTIONS WAS MINIMUM AND THE INVESTMENT WAS MADE OUT OF SURPLUS FUNDS OF THE ASSESSEE. HOWEVER, ON EXAMINATION OF SOME OF THE TRANSACTIONS IT WAS SEEN THAT THE ASSESSEE HAD PURCHASED AND SOLD THE SHARES IN BRIEF INTERVAL OF TIME INDIC ATING THAT PART OF THE SHARES TRANSACTIONS RELATING TO THE SAME WERE ALSO DONE WITH THE INTENTION OF EA RNING PROFIT THROUGH TRADING OF SHARES. THE LD. CIT (A) IDENTIFIED SUCH SHARES WHERE THE SHARES WER E SOLD WITHIN A SHORT PERIOD OF ONE TO TWO MONTHS. HE ALSO NOTED THAT THERE WERE SOME SHARES WHICH WERE HELD FOR MORE THAN SIX MONTHS ALSO. THE LD. CIT (A), THEREFORE, HAD OBSERVED THA T IN THE CASES WHERE SHARES PURCHASED AND SOLD WITHIN ONE TO TWO MONTHS, THE TRANSACTIONS WERE TO BE TREATED AS TRADING IN SHARES. HOWEVER, IN CASES WHERE SHARES WERE HELD AT LEAST FOR A PERIOD OF SIX MONTHS SUCH SHARES SHOULD BE CONSIDERED AS INVESTMENTS. HOWEVER, WHERE THE HOLDING PERIOD W AS LESS THAN SIX MONTHS, THE TRANSACTION OF SALE/PURCHASE SHOULD BE TREATED AS TRADING ACTIVITY . THE LD. CIT (A), THEREFORE, DIRECTED THE AO TO 5 I. T. APPEAL NO. 2694 (DEL) OF 2009 A N D I. T. A. NO. 3317 (DEL) OF 2009. DETERMINE THE SHORT TERM CAPITAL GAIN IN RESPECT OF SHARES HELD FOR A PERIOD OF MORE THAN SIX MONTHS. THE OTHER SHARES WERE TREATED AS BUSINESS TRANSACTIONS. 6. AGGRIEVED BY THE ORDER OF THE LD. CIT (A) THE AS SESSEE IS IN APPEAL AGAINST TREATING THE SHARES HELD LESS THAN SIX MONTHS AS TRADING STOCK A ND SHORT TERM CAPITAL GAIN ARISING THEREON AS BUSINESS INCOME. THE REVENUE IS IN APPEAL AGAINST TREATING THE SHARES FOR A PERIOD OF TWO YEARS AS LONG TERM CAPITAL GAIN AND SHARES MORE THAN SIX MONTHS AS SHORT TERM CAPITAL GAINS. 7. BEFORE US THE LD. AR OF THE ASSESSEE SUBMITTED T HAT THE ASSESSEE HAD BEEN INVESTING IN SHARES ITS SURPLUS FUNDS FOR LAST 20 YEARS. THE AS SESSEE HAS CLASSIFIED THE SHARES AS INVESTMENTS IN ITS BOOKS OF ACCOUNTS. THE ASSESSEE HAS HELD THE S HARES FOR THE PERIOD ONE MONTH TO TWO YEARS. THE DELIVERIES OF THE SHARES PURCHASED FROM ITS OW N SOURCES, WERE RECEIVED AND CREDITED TO DE- MAT ACCOUNT OF THE ASSESSEE. IT WAS ALSO CONTENDED THAT MANY TIMES THE ASSESSEE HAD TO SELL SHARES BECAUSE OF MARKET CONDITIONS. THE MARKET HA D BEEN VOLATILE DURING THE RELEVANT PERIOD. THEREFORE, IN ORDER TO AVOID LOSS BY HOLDING THE SH ARES FOR A LONGER TIME, THE ASSESSEE HAD TO SELL THE SHARES. DURING THE YEAR THE ASSESSEE HAD SOLD SHARES OF ALL 16 COMPANIES. HE FURTHER SUBMITTED THAT WHERE SHARES ARE HELD LESS THAN 12 M ONTHS ARE TO BE TREATED AS SHORT TERM CAPITAL GAINS. THE LD. CIT (A) HAS CATEGORIZED THAT WHERE SHARES WERE HELD MORE THAN SIX MONTHS SHOULD BE TREATED AS INVESTMENT AND SHARES HELD FOR LESS T HAN SIX MONTHS SHOULD BE TREATED AS STOCK IN TRADE. THERE IS NO MANDATE FOR THE TREATMENT GIVEN BY THE LD. CIT (APPEALS). THE ASSESSEE WAS HOLDING SHARES AS INVESTMENT AND, THEREFORE, PROFIT S ARISING ON SALE OF SUCH SHARES HAVE TO BE ASSESSED AS CAPITAL GAINS DEPENDING UPON THE PERIOD OF HOLDING. THE LD. AR OF THE ASSESSEE PLACED RELIANCE ON THE FOLLOWING DECISIONS:- (I) CIT VS. ESS . JAY. ENTERPRISES P. LTD. 173 TAXMAN P AGE 1 (DEL.); (II) CIT VS. GULMOHAR FINANCE LTD. 6 DTR 327; 6 I. T. APPEAL NO. 2694 (DEL) OF 2009 A N D I. T. A. NO. 3317 (DEL) OF 2009. 8. ON THE OTHER HAND, THE LD. SR. DR SUBMITTED THAT THE ASSESSEE WAS FREQUENTLY ENGAGED IN THE TRADING OF SHARES AND, THEREFORE, THE AO HAS RI GHTLY TREATED THE ENTIRE PROFITS ON SALE OF SHARES UNDER THE HEAD BUSINESS INCOME. REFERRING TO AUD ITORS REPORT THE LD. SR. DR REFERRED TO NOTE (III)(C) WHEREIN IT HAS BEEN MENTIONED THAT THE ASS ESSEE COMPANY HAS TAKEN UNSECURED LOANS FROM FOUR PARTIES COVERED IN THE REGISTERED MAINTAINED U NDER SECTION 301 OF THE COMPANIES ACT. THE MAXIMUM TIME SPENDING DURING THE YEAR WAS RS.550.75 LAKHS. THE YEAR-END BALANCE LOAN TAKEN FROM SUCH PARTIES IS RS.92.33 LAKHS. IT HAS, THERE FORE, BEEN SUBMITTED THAT BORROWED FUNDS HAVE BEEN UTILIZED FOR THE PURPOSE OF PURCHASE OF SHARES , HENCE THE ENTIRE PROFIT AROSE ON SALE OF SHARES IS TO BE ASSESSED AS BUSINESS INCOME. THE ASSESSEE HAS DERIVED SMALL INCOME FROM CONSULTANCIES. THEREFORE, THE ACTIVITY INVOLVING PURCHASE AND SALE OF SHARES HAS TO BE TREATED AS ONE OF THE BUSINESS ACTIVITIES OF THE ASSESSEE. FURTHER CIRCUL AR NO. 4 OF CBDT PRESCRIBES CERTAIN PARAMETERS FOR IDENTIFYING WHETHER THE ACTIVITIES WERE IN NATU RE OF BUSINESS OR INVESTMENTS. THE ASSESSING OFFICER HAD FOLLOWED CBDT CIRCULAR TO ARRIVE AT THE DECISION THAT THE ASSESSEE WAS INVOLVED IN BUSINESS ACTIVITIES OF SALE - PURCHASE OF SHARES. HE ALSO SUBMITTED THAT THE ASSESSEE HAS USED SUBSTANTIAL TIME IN TRADING ACTIVITIES. HE, THEREFO RE, SUBMITTED THAT THE LD. CIT (A) WAS NOT JUSTIFIED IN ALLOWING THE CLAIM OF THE ASSESSEE IN RESPECT OF SHARES HELD FOR MORE THAN SIX MONTHS. 9. WE HAVE HEARD BOTH THE PARTIES. THE ASSESSING O FFICER HAS TREATED THE PURCHASE AND SALE OF SHARES AS CONTINUOUS ACTIVITY OF THE ASSESSEE. IN THE CASE BEFORE US, THERE IS NO DISPUTE ABOUT THE FACT THAT THE SHARES PURCHASED WERE TRANSFERRED TO DE-MAT ACCOUNT. THE LD. CIT (A) HAS HELD THAT WHERE THE PERIOD OF HOLDING IS MORE THAN SIX M ONTHS, THE TRANSACTION WILL BE IN THE NATURE OF CAPITAL GAINS AND WHERE IT IS LESS THAN SIX MONTHS; IT WILL BE IN THE NATURE OF BUSINESS. LONG TERM CAPITAL GAIN HAS BEEN DEFINED UNDER SECTION 2(29B) OF THE ACT AND MEANS CAPITAL GAIN ARISING FROM TRANSFER OF A LONG TIME ASSET. LONG TERM CAPI TAL ASSET HAS BEEN DEFINED UNDER SECTION 2(29A) AND MEANS A CAPITAL ASSET WHICH IS NOT A SHO RT TERM CAPITAL ASSET. SECTION 2(42A) DEFINES SHORT TERM CAPITAL ASSET TO MEAN A CAPITAL ASSET WH ICH IS HELD BY AN ASSESSEE FOR NOT MORE THAN 36 MONTHS IMMEDIATELY PRECEDING ITS DATE OF TRANSFER. HOWEVER, IN RESPECT OF SHARES THE SHORT TERM CAPITAL ASSET WOULD MEAN THAT SUCH SHARES ARE HELD BY THE ASSESSEE FOR NOT MORE THAN 12 MONTHS. THE LD. CIT (A), HOWEVER, TREATED THE SHORT TERM CA PITAL GAINS IN RELATION TO SHARES, WHICH HAVE 7 I. T. APPEAL NO. 2694 (DEL) OF 2009 A N D I. T. A. NO. 3317 (DEL) OF 2009. BEEN HELD BY THE ASSESSEE MORE THAN SIX MONTHS AND THE SHARES HELD FOR LESS THAN SIX MONTHS HAVE BEEN TREATED AS BUSINESS INCOME. THIS, IN OUR OPIN ION, IS NOT IN ACCORDANCE WITH THE PROVISIONS OF LAW. THE ASSESSEE HAD TREATED THE SHARES IN ITS BO OKS OF ACCOUNTS AS INVESTMENTS AND NOT STOCK IN TRADE. THE ASSESSEE HAD RECEIVED DELIVERY OF SHARE S AND HAVE BEEN DEPOSITED IN DE-MAT ACCOUNT. MERELY BECAUSE THE SHARES ARE SOLD WITHIN THE SHORT SPAN OF ONE TO TWO MONTHS WOULD NOT CHANGE THE CHARACTER OF CAPITAL GAINS TO THE BUSINESS INCO ME. THE ASSESSEE HAS ONLY 19 TRANSACTIONS DURING THE YEAR IN RESPECT OF SHARES OF 16 COMPANIE S. THEREFORE, IN OUR CONSIDERED OPINION, THE LD. CIT (A) WAS NOT JUSTIFIED IN TREATING THE SHARE S HELD FOR LESS THAN SIX MONTHS AS BUSINESS ASSETS. HOWEVER, HE HAS TREATED THE SHARES HELD FO R MORE THAN ONE YEAR AS LONG TERM CAPITAL ASSETS. IN VIEW OF THE ABOVE FACTS, IN OUR CONSIDE RED OPINION, THE LD. CIT (A) IS JUSTIFIED IN TREATING THE SHARES AS LONG TERM CAPITAL GAINS WHIC H WERE HELD FOR MORE THAN ONE YEAR. AS REGARDS THE SHARES HELD FOR PERIOD LESS THAN SIX MO NTHS, IN OUR CONSIDERED OPINION, THE VIEW TAKEN BY THE LD. CIT (A) IS CONTRARY TO THE PROVISIONS OF LAW. THEREFORE, WE ARE NOT IN AGREEMENT WITH THE VIEWS OF THE LD. CIT (A). 10. IN THE CASE OF CIT VS. GULMOHAR FINANCE LTD. (S UPRA) WHERE THE ASSESSEE HAD SHOWN THE SHARES AS INVESTMENTS IN THE BALANCE SHEET IN THE E ARLIER YEARS AND NO OBJECTION WAS TAKEN TO THIS POSITION, HONBLE DELHI HIGH COURT HAS UPHELD THE O RDER OF THE TRIBUNAL HOLDING THAT SHARES WERE HELD AS INVESTMENT. IN THE CASE OF ESS JAY ENTERPR ISES P. LTD. (SUPRA) HONBLE DELHI HIGH COURT HAS ALSO HELD THAT THE ASSESSEE HAVING SHOWN THE SH ARES AS INVESTMENT IN THE BOOKS OF ACCOUNT AND THERE WAS NO MATERIAL ON RECORD TO SHOW THAT TH E SAME WERE CONVERTED INTO STOCK IN TRADE, HONBLE DELHI HIGH COURT UPHELD THE STAND TAKEN BY THE ITAT THAT THE PROFITS ARISING ON SALE OF SHARE WAS ASSESSABLE AS CAPITAL GAINS AND NOT AS BU SINESS INCOME. IN THE CASE BEFORE US THE LD. AO HAS NOT BROUGHT ANY MATERIAL ON RECORD TO SHOW T HAT THE SHARES WERE NOT HELD BY THE ASSESSEE AS INVESTMENT. THEREFORE, IN OUR CONSIDERED OPINIO N, THE PROFITS ARISING ON SALE OF SHARES HELD AS INVESTMENT WILL BE ASSESSABLE AS CAPITAL GAINS DEPE NDING UPON THE PERIOD OF HOLDING AS LONG TERM OR SHORT TERM CAPITAL GAIN. ACCORDINGLY, WE ALLOW T HIS GROUND OF APPEAL IN FAVOUR OF ASSESSEE. 8 I. T. APPEAL NO. 2694 (DEL) OF 2009 A N D I. T. A. NO. 3317 (DEL) OF 2009. 11. DURING THE COURSE OF HEARING THE ASSESSEE RAISE D ADDITIONAL GROUND OF APPEAL IN RESPECT OF DISALLOWANCE MADE UNDER SECTION 14A. THIS GROUND W AS ADMITTED, AFTER HEARING BOTH THE PARTIES. THE ADDITIONAL GROUND RAISED IS REPRODUCED AS UNDER :- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE TREATMENT UNDER SECTION 14-A OF THE ACT AS ORDERED BY THE CIT (A) IS ERRONEOUS AND ILLEGAL, AND MUST BE QUASHED WITH DIRECTIONS FOR RELIEF TO T HE ASSESSEE. 12. THE FACTS OF THE CASE STATED IN BRIEF ARE THAT THE ASSESSEE EARNED DIVIDEND OF RS.98,550/- ON SHARES OF NINE COMPANIES AND MOST OF THE INVESTM ENTS WERE MADE BEFORE THE RELEVANT ASSESSMENT YEAR. THE ASSESSING OFFICER DISALLOWED RS.20,000/- OUT OF ADMINISTRATIVE EXPENDITURE RELATING TO MANAGEMENT AND CONSULTATION ON INVESTME NT OF SHARES OF VARIOUS COMPANIES. ON APPEAL THE LD. CIT (APPEALS) FOLLOWING THE DECISION OF ITAT, SPECIAL BENCH IN THE CASE OF ITO VS. DAGA CAPITAL MANAGEMENT P. LTD., MUMBAI (SB) 11 9 TTJ (MUM.) (SB) 289 DIRECTED THE ASSESSING OFFICER TO MAKE DISALLOWANCE AS PER RULE 8D OF THE ACT. 13. WE HAVE HEARD BOTH THE PARTIES. THE ASSESSING O FFICER HAD DISALLOWED RS 20,000/- U/S 14A ON AD-HOC BASIS. LD CIT(A) HAS DIRECTED THE ASSESS ING OFFICER TO COMPUTE DISALLOWANCE AS PER RULE 8D IN THE LIGHT OF DECISION SPECIAL BENCH IN T HE CASE OF ITO VS. DAGA CAPITAL MANAGEMENT P. LTD.(SUPRA). WE FIND THAT THIS ISSUE IS NOW COVE RED BY THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. V S. DCIT 194 TAXMAN 203 WHEREIN IT HAS BEEN HELD THAT RULE 8-D IS APPLICABLE FOR ASSESSMEN T YEAR 2008-09 AND ONWARDS. WE ALSO FIND THAT HONBLE BOMBAY HIGH COURT HAS FURTHER HELD THA T THE ASSESSING OFFICER HAD TO ENFORCE THE PROVISIONS OF SECTION 14A(1) AND FOR THAT PURPOSE, THE ASSESSING OFFICER WAS DUTY BOUND TO DETERMINE EXPENDITURE WHICH HAS BEEN INCURRED IN RE LATION TO INCOME WHICH DID NOT FORM PART OF TOTAL INCOME UNDER THE ACT BY ADOPTING A REASONABLE BASIS OR METHOD CONSISTENT WITH ALL RELEVANT FACTS AND CIRCUMSTANCES. THEREFORE, THE LD. CIT (AP PEALS) WAS NOT JUSTIFIED IN INVOKING THE PROVISIONS OF RULE 8-D FOR ASSESSMENT YEAR 2006-07, WHICH IS UNDER CONSIDERATION. HOWEVER, 9 I. T. APPEAL NO. 2694 (DEL) OF 2009 A N D I. T. A. NO. 3317 (DEL) OF 2009. SINCE THE DISALLOWANCE UNDER SECTION 14A IS TO BE M ADE IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO THE EXEMPTED INCOME, WE FEEL IT PROPER TO SET ASIDE THE MATTER TO THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTIONS TO DETERMINE THE DISALLOWANCE OF THE EXPENDITURE RELATABLE TO THE EXEMPT INCOME IN THE LIGHT OF DECISION OF HONB LE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. (SUPRA). THE ASSESSING OFFIC ER IS DIRECTED ACCORDINGLY. 14. IN THE RESULT THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES AND THE APPEAL FILED BY THE REVENUE IS DISMISSED. THE ORDER PRONOUNCED IN THE OPEN COURT ON : 30 TH SEPTEMBER, 2011. SD/- S D/- [ R. P. TOLANI ] [ K. D. RANJAN ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 30 TH SEPTEMBER, 2011. *MEHTA * COPY OF THE ORDER FORWARDED TO : - 1. APPELLANTS. 2. RESPONDENTS. 3. CIT, 4. CIT (APPEALS), 5. DR, ITAT, NEW DELHI. TRUE COPY. BY ORDER. ASSISTANT REGISTRAR, ITAT. 10 I. T. APPEAL NO. 2694 (DEL) OF 2009 A N D I. T. A. NO. 3317 (DEL) OF 2009.