Sharsh Finance and Investment Co. Pvt. Ltd, New Delhi V. ACIT Range-8, New Delhi

ITA 2738/DEL/2008

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 8352 (ITAT-DELHI)
• Duration Of Justice: 11 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-07-2009
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: G
• Next Hearing Date: 17-06-2009
• Assessment Year: 2005-2006
• Appeal Filed On: 22-08-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S VENKATESWARLU SENIOR
• Assessee Lawyers: V K AGGARWAL
• Keywords: Capital asset; Business income; Proportionate interest; Advance ruling; Onus to prove

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH G : NEW DELHI) BEFORE HON'BLE SENIOR VICE PRESIDENT, SHRI R.P. GAR G AND HON'BLE JUDICIAL MEMBER, SHRI RAJPAL YADAV ITA NO.2738/DEL./2008 (ASSESSMENT YEAR : 2005-06) M/S. SHARSH FINANCE AND INVESTMENT CO. PVT. LTD. V S. ADDL.CIT, RANGE 8, 16 L, CONNAUGHT PLACE, NEW DELHI. NEW DELHI. (PAN : AAHCS1410L) ITA NO.2881/DEL./2008 (ASSESSMENT YEAR : 2005-06) ADDL.CIT, RANGE 8, VS. M/S. SHARSH FINANCE AND IN VESTMENT CO. PVT. LTD., NEW DELHI. 16 L, CONNAUGHT PLACE, NEW DELHI. (PAN : AAHCS1410L) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI V.K. AGGARWAL, AR REVENUE BY : SHRI S. VENKATESWARLU, SENIOR DR O R D E R GARG, SENIOR VP : THESE CROSS APPEALS ARE FILED AGAINST THE ORDER OF THE CIT (APPEALS) FOR ASSESSMENT YEAR 2005-06. 2. IN ASSESSEES APPEAL INASMUCH AS FOUR GROUNDS HA VE BEEN RAISED IN THE MEMO OF APPEAL, HOWEVER AT THE TIME OF HEARING, ONL Y GROUND NO.3 IS PRESSED WHICH IS AS UNDER : 3. THE LD. CIT (A) HAS ERRED ON FACTS AS WELL AS IN LAW IN CONFIRMING THE DISALLOWANCE OF RS.15,43,526/- ON AC COUNT OF INTEREST PAID TO M/S. KRISHNA MARUTI LTD. ON THE GR OUND THAT INTEREST FREE ADVANCE WAS GIVEN TO SHRI ASHOK KAPUR . 2 ITA NO.2738/DEL./2008 ITA NO.2881/DEL./2008 3. AS A PART OF INTEREST HAD BEEN ALLOWED AND THE O THER PART IS CONFIRMED BY THE CIT (APPEALS), REVENUE IS ALSO IN APPEAL FOR THE RELIEF GRANTED TO THE ASSESSEE ON ACCOUNT OF INTEREST DISALLOWANCE. BOTH THE GROUNDS ARE TAKEN TOGETHER. 4. THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HA S GIVEN INTEREST FREE LOANS AND ADVANCES TO THE EXTENT OF RS.21.98 CRORES TO VARIOUS PERSONS INCLUDING SHRI ASHOK KAPUR WHO IS RELATED TO ONE OF THE DIRECTORS MRS. ARTI KAPUR. HE FORMED AN OPINION THAT INTEREST ON BORRO WED FUNDS HAS BEEN DIVERTED AS INTEREST FREE LOANS TO PERSONS UNCONNEC TED WITH BUSINESS. HE, THEREFORE, DISALLOWED PROPORTIONATE INTEREST BY REJ ECTING THE ASSESSEES CONTENTION THAT LOANS GIVEN WERE FOR PURPOSES OF BU SINESS AND ALSO PAID OUT OF CAPITAL RESERVES AND SURPLUS WHICH WERE NON-INTERES T BEARING FUNDS AVAILABLE WITH THE ASSESSEE. THE CIT (APPEALS) OBSERVED IN PARAGRAPHS 4.3 TO 4.6 CONFIRMING THE DISALLOWANCE OF A PART INTEREST OF R S.15,43,526/- OUT OF RS.31,45,675/- AS UNDER : 4.3 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS MA DE ON BEHALF OF APPELLANT. IF WE SEE THE ISSUE IN PROPER PROSPECTIVE IT IS NOTED THAT THE APPELLANT HAS CLAIMED SOME INTEREST AS DEDUCTION IN RESPECT OF FUNDS BORROWED. THE INTEREST ON BORROWE D FUNDS IS ADMISSIBLE AS DEDUCTION U/S 36(1)(III). IT IS A SE TTLED LAW THAT THE PRIMARY ONUS TO PROVE THE CONDITIONS OF ADMISSIBILI TY IN RESPECT OF ANY CLAIM OF EXPENDITURE IS UPON THE ASSESSEE. AS PER SECTION 36(1)(III) INTEREST PAID IN RESPECT OF CAPITAL BORR OWED FOR THE PURPOSE OF BUSINESS OR PROFESSION IS ALLOWABLE AS D EDUCTION. THEREFORE IT IS FOR THE APPELLANT TO SHOW THAT THE CAPITAL IN RESPECT OF WHICH INTEREST IS PAID WAS BORROWED FOR THE PURP OSE OF BUSINESS OR PROFESSION. FROM THE DETAILS OF INTERES T IT IS SEEN THAT IT WAS PAID ONLY TO ONE PARTY NAMELY KRISHNA MARUTI LTD. IT IS SUBMITTED BY THAT THE APPELLANT WAS HAVING A RUNNIN G ACCOUNT WITH THAT PARTY AND THE FUNDS WERE TAKEN AS AND WHE N REQUIRED. 3 ITA NO.2738/DEL./2008 ITA NO.2881/DEL./2008 COPY OF ACCOUNT OF KRISHNA MARUTI LTD IN THE BOOKS OF APPELLANT COMPANY WAS FILED BEFORE THE AO AND ALSO IN APPEAL. COPY OF THAT ACCOUNT IS MADE PART OF THIS ORDER AS ANNEXURE -B FOR READY REFERENCE. IT IS SEEN THAT AS ON 1/4/04 THERE WAS A DEBIT BALANCE OF RS.95,544 INDICATING THAT THE APPELLANT WAS TO RECE IVE THIS AMOUNT FROM KRISHNA MARUTI LTD. HOWEVER AT THE END OF THE YEAR THERE WAS A CREDIT BALANCE OF RS 8,53,21,566 WHICH THE APPELLANT HAD TO PAY TO THAT PARTY. THERE WERE A NUMBER OF TR ANSACTIONS DURING THE YEAR WHERE THE FUNDS WERE OBTAINED AND A LSO PAID BACK. THE FUNDS OBTAINED FROM KRISHNA MARUTI LTD AR E TO BE TREATED AS BORROWED FUNDS BECAUSE THE INTEREST WAS PAID ON THE BALANCE REMAINING PAYABLE ON A PARTICULAR DAY. IT M AY BE SEEN THAT ON 18/10/04 THE APPELLANT COMPANY BORROWED A S UM OF RS 5.05 CRORES FROM KRISHNA MARUTI LTD. THE INTEREST I N RESPECT OF THIS AMOUNT WOULD BE ALLOWABLE IF IT WAS BORROWED A ND USED FOR THE PURPOSE OF BUSINESS OF THE APPELLANT COMPANY. H OWEVER WHAT IS NOTED THAT ON THE SAME AMOUNT OF RS.5.05 CRORES WAS PAID TO SH. ASHOK KAPUR FROM THE SAME CITY BANK ACCOUNT NO 223. FOR READY REFERENCE COPY OF A/C OF SH ASHOK KAPUR IS AL SO MADE PART OF THIS ORDER AS ANNEXURE-C. IT IS THEREFORE QUITE CLEAR THAT THE AMOUNT BORROWED FROM KRISHNA MARUTI LTD WAS NOT FOR THE PURPOSE OF BUSINESS OF THE APPELLANT COMPANY BUT WA S FOR ADVANCING TO SH ASHOK KAPUR. SIMILARLY IT IS NOTED THAT ON 21/3/05 THE APPELLANT COMPANY BORROWED ANOTHER SUM OF RS 1 CRORE FROM KRISHNA MARUTI LTD. IT WAS DEPOSITED IN CITY BANK ACCOUNT NO 223. OUT OF THIS SUM OF RS 1 CRORE BORRO WED FROM KRISHNA MARUTI LTD, THE AMOUNT OF RS 75 LACS WAS TR ANSFERRED TO SH ASHOK KAPUR BY WAY OF TWO PAYMENTS OF RS 50 LACS AND RS 25 LACS ON THE SAME VERY DAY FROM THE SAME CITY BAN K ACCOUNT NO.223. ACCORDINGLY OUT OF THE BORROWING OF RS 1 CR ORES THE AMOUNT OF RS 75 LACS WAS NOT FOR THE PURPOSE OF BUS INESS BUT WAS FOR MAKING ADVANCED TO SH ASHOK KAPUR. THE NEXUS OF FUNDS BORROWED ON THE ONE HAND AND PAYMENT TO SH ASHOK KA PUR IS CLEARLY ESTABLISHED FROM THE FACTS DISCUSSED AS ABO VE. THEREFORE PRIMA FACIE IT IS QUITE APPARENT THAT THE APPELLANT DOES NOT SATISFY CONDITIONS FOR ALLOWABILITY OF INTEREST IN RESPECT OF AMOUNT OF RS 5.05 CRORES AND RS 75 LACS. THE APPELLANT HAS CLAIM ED THAT MONEY ADVANCED TO SH ASHOK KAPUR WAS FOR THE PURPOSE OF B USINESS OF THE COMPANY BUT HAS FAILED TO EXPLAIN AS TO WHAT TH E SAID BUSINESS PURPOSE WAS? FROM ANNEXURE-C IT MAY BE NOT ED THAT AT THE END OF THE YEAR A SUM OF RS 5,79 CRORES WAS REC EIVABLE FROM 4 ITA NO.2738/DEL./2008 ITA NO.2881/DEL./2008 HIM. THERE WERE NO TRANSACTIONS WHICH COULD BE SAID TO BE BUSINESS TRANSACTION. THEREFORE THIS CLAIM OF THE A PPELLANT IS REJECTED BEING UNSUPPORTED & MISLEADING. 4.4 ANOTHER ARGUMENT OF THE APPELLANT IS THAT THERE WERE PLENTY OF NON-INTEREST BEARING FUNDS IN THE FORM OF RESERV ES & SURPLUS, SHARE CAPITAL ETC WITH THE COMPANY AND THEREFORE TH E INTEREST FREE ADVANCE TO SH ASHOK KAPUR SHOULD BE TREATED TO HAVE BEEN PAID OUT OF THOSE FUNDS AND NO INTEREST SHOULD BE DISALL OWED. IN THIS REGARD IT IS TO BE NOTED THAT THE FUNDS OF ANY BUSI NESS ARE USED FOR VARIOUS PURPOSES AND STAY INVESTED I DIFFERENT ASSE TS. BALANCE SHEET OF A BUSINESS ON ANY PARTICULAR DAY (OR RATHE R AT A PARTICULAR MOMENT) SHOWS THE SOURCES OF FUNDS (LIABILITIES) AN D THE FORM IN WHICH THESE FUNDS ARE INVESTED AND ARE AVAILABLE (A SSETS). LARGE QUANTUM OF FUNDS IS INVESTED IN FIXED ASSETS, INVES TMENTS, CURRENT ASSETS, DEBTORS ETC AND IT IS NOT AVAILABLE IN THE LIQUID FORM. THE NEED FOR BORROWING ARISES BECAUSE OF THE FACT THAT THE LIQUID FUNDS ARE NOT AVAILABLE. WHEN THERE IS SOME NEED FO R THE BUSINESS OR OTHERWISE THE FUNDS ARE BORROWED IN THE FORM OF LIQUID MONEY SO THAT THEY CAN BE UTILIZED AS PER NEEDS. THE FACT THAT THE APPELLANT COMPANY BORROWED A SUM OF RS 5.05 CRORES FROM KRISHNA MARUTI LTD MAKES IT OBVIOUS THAT APPELLANT WAS NOT HAVING LIQUID FUNDS TO THE EXTENT OF RS 5.05 CRORES ON THAT DAY. IF THE SO CALLED RESERVES AND SURPLUS, SHARE CAPITAL E TC WERE AVAILABLE WITH THE APPELLANT ON THAT DAY IN THE FOR M OF LIQUID CASH FOR UTILIZING IN WHATEVER MANNER REQUIRED, THERE WA S NO NEED TO BORROW FUNDS FROM KRISHNA MARUTI LTD. HOWEVER THE P URPOSE OF BORROWING WAS NOT TO USE THEM FOR ANY BUSINESS TRAN SACTION BUT TO MAKE AVAILABLE AS INTEREST FREE ADVANCE TO SH AS HOK KAPUR WHO APPEARS TO BE RELATIVE OF SOME DIRECTOR OF THE COMPANY. SIMILAR WAS THE SITUATION ON 21/3/05 WHEN ANOTHER S UM OF RS 1 CRORE BORROWED FROM KRISHNA MARUTI LTD. THEREFORE T HE CONTENTION THAT THE ADVANCE TO SH ASHOK KAPUR SHOUL D BE TREATED AS OUT OF INTEREST FREE FUNDS WAS A KIND OF PRESUMP TIVE ARGUMENTS AND NOT ACCEPTABLE ON FACTS. THE APPELLANT HAS GIVE N THE POSITION OF FUNDS ETC AS ON 31/3/05 FROM THE BALANCE SHEET. THE FUNDS POSITION, AVAILABILITY OF LIQUID FUND, REQUIREMENT FOR BORROWING ETC CHANGE FROM DAY TO DAY BASIS OR RATHER WITH EAC H FINANCIAL TRANSACTION. THEREFORE THE FUND POSITION AS ON THE DATE OF BORROWING IS RELEVANT & NOT THAT ON THE DATE OF BAL ANCE SHEET. THE CONTENTION THAT BORROWING ON A PARTICULAR DAY W AS MADE FOR 5 ITA NO.2738/DEL./2008 ITA NO.2881/DEL./2008 THE PURPOSE OF BUSINESS AND THE PAYMENT MADE DIRECT LY OUT OF THE SAME BORROWING SHOULD BE PRESUMED TO HAVE BEEN PAID FROM THE INTEREST FREE FUNDS WHICH ARE ACTUALLY INVESTED IN THE FIXED ASSETS STOCK ETC IS QUITE ILLOGICAL AND CONTRARY TO THE FA CTS. THE DECISIONS RELIED UPON BY THE APPELLANT ARE DISTINGUISHABLE ON FACTS. IN VIEW OF THIS IT IS HELD THAT THE APPELLANT BORROWING OF RS 5.05 CRORES ON 18/10/04 AND RS 75 LACS (OUT OF RS 1 CRORE) ON 21/3 /05 WAS NOT MADE FOR THE PURPOSE OF BUSINESS AND THEREFORE THE APPELLANT IS NOT ENTITLED TO DEDUCTION OF INTEREST IN RESPECT OF THE SAME U/S 36(1)(III). 4.5 HOWEVER ALTERNATE ARGUMENTS OF THE APPELLANT NE EDS CONSIDERATION. IT IS SEEN THAT HAVING GIVEN THE FAC TUAL FINDING ABOUT DISALLOWANCE, THE AO HELD THAT INTEREST AT TH E RATE OF 12% ON THE ADVANCES (TO SH ASHOK KAPUR) WAS TO BE DISAL LOWED. HOWEVER SINCE THAT WOULD WORK OUT TO MUCH. MORE THE N THE TOTAL INTEREST CLAIMED/ ENTIRE INTEREST OF RS 31,45,675 W AS DISALLOWED. IT IS CONTENDED THAT THE INTEREST TO KRISHNA MARUTI HAS BEEN PAID @ 6.5% & NOT @ 12% PRESUMED BY THE AO. THE APPELLAN T HAS SUBMITTED IN APPEAL THE CALCULATION OF INTEREST PAY ABLE TO KRISHNA MARUTI LTD. THE INTEREST HAS BEEN COMPUTED FOR EACH DAY ON THE CLOSING BALANCE OF THE DAY AT THE RATE OF 6.5% PER ANNUM. IT IS SEEN THAT THE MAXIMUM OUTSTANDING BALANCE WAS FROM 31/3/04 TO 16/1/05 WHICH WAS RS 13,08,79,672. ON THE OTHER HAN D MINIMUM CREDIT BALANCE WAS RS 8,04,79,672 FROM 7/3/05 TO 20 /3/05. IT WAS CONTENDED BY THE APPELLANT/S AR THAT SINCE THE INTE REST WAS PAID @ 6.5% THE DISALLOWANCE HAS TO BE WORKED OUT ACCORD INGLY. MOREOVER THE LOAN OF RS.5.05 CRORE TAKEN ON 18/10/0 4 WAS RETURNED ON 4/11/05 WHEN PAYMENT OF RS 9,16,20,328 WAS MADE TO KRISHNA MARUTI LTD. THEREFORE THE SAID LOAN OF R S 5.05 CRORES REMAINED WITH THE APPELLANT ONLY FOR 17 DAYS AND OT HER LOAN OF RS 75 LACS REMAINED FOR 9 DAYS. THEREFORE THE ACTUA L INTEREST DISALLOWABLE WOULD BE MUCH LESS. 4.6 SO FAR AS THE CONTENTION REGARDING RATE OF INTE REST IS CONCERNED IT APPEARS TO BE CORRECT & ACCEPTABLE. HO WEVER THE OTHER CONTENTION THAT THE LOAN REMAINED WITH THE AP PELLANT ONLY 17 DAYS IS INCORRECT ON FACTS BECAUSE THERE WAS NO MATERIAL TO PROVE THAT THE REPAYMENT OF RS 9,16,20,328 ON 4/11/ 04 WAS RELATED TO THE BORROWING OF RS 5.05 CRORES. IN ABSE NCE OF ANY OTHER SPECIFIC EVIDENCE OR MATERIAL FIFO (FIRST IN FIRST OUT) 6 ITA NO.2738/DEL./2008 ITA NO.2881/DEL./2008 METHOD IS TO BE APPLIED. SINCE THE APPELLANT HAD TA KEN A LOAN OF RS 10 CRORES ON 15/10/04 THE PAYMENT ON 4/11/04 HAS TO BE TREATED AS REPAYMENT OUT OF THAT AMOUNT. IF SUBSEQU ENTLY FURTHER AMOUNT WAS REPAID AND THE TOTAL BALANCE OUTSTANDING FEEL BELOW RS 5.05 CRORES THAN ONLY IT COULD BE TREATED AS REP AYMENT OF PART OF LOAN OF RS 5.05 CRORE. HOWEVER AS DISCUSSED ABOV E THE MINIMUM OUTSTANDING BALANCE PAYABLE TO KRISHNA MARU TI LTD WAS ALWAYS MUCH HIGHER THAN RS 5.05 CRORES, IT CANN OT BE SAID THAT ANY PART OF LOAN WAS REPAID DURING THE YEAR. T HEREFORE THE INTEREST @ 6.5% ON 5.05 CRORES FROM 18/10/04 TO 31/ 3/05 AND ON RS 75 LACS FROM 21/3/04 TO 31/3/05 IS NOT ALLOWABLE TO THE APPELLANT. THIS AMOUNT OF INTEREST WORKS OUT TO RS 15,28,835 AND RS 14,691 RESPECTIVELY. THEREFORE THE AGGREGATE AMO UNT OF RS 15,43,526 IS TO BE DISALLOWED OUT OF THE SUM OF RS 31,45,675. THE DISALLOWANCE TO THAT EXTENT IS CONFIRMED AND BA LANCE IS DELETED. 5. WE HAVE HEARD THE PARTIES AND CONSIDERED THE RIV AL SUBMISSIONS. THE CONTENTION OF THE LEARNED COUNSEL THAT IT HAD SHARE CAPITAL RESERVES AND SURPLUS WHICH WERE NON-INTEREST BEARING FUNDS AND THE MONEY ADVANCE THEREFROM AND CANNOT BE ACCEPTED IN VIEW OF THE FACT THAT THE MON EY HAS DIRECTLY BEEN GIVEN TO SHRI ASHOK KAPUR OUT OF THE BORROWINGS. A COPY OF ACCOUNT OF THE CITI BANK CLEARLY SHOWS THAT THE MONEY HAS BEEN ADVANCED OUT OF THE BORROWINGS AND IT HAS A DIRECT LINK. WE, THEREFORE, DO NOT AC CEPT THE CONTENTION OF THE ASSESSEE THAT THE MONEY WAS ADVANCED OUT OF ITS SHA RE CAPITAL OR SURPLUS OR THE NON-INTEREST BEARING FUNDS. THE CONTENTION OF THE LEARNED COUNSEL OF THE ASSESSEE HOWEVER IS THAT THE MONEY WAS TAKEN ONLY F OR FEW DAYS AS THE LOAN OF THE CITI BANK WAS REPAID WITHIN A FEW DAYS THEREAFT ER AND, THEREFORE, THE INTEREST CANNOT BE SAID TO BE ATTRIBUTABLE TO THE S AID BORROWING TILL THE END OF 7 ITA NO.2738/DEL./2008 ITA NO.2881/DEL./2008 PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR. WE FIND FORCE IN THE CONTENTION OF THE ASSESSEE. WE DIRECT THE ASSESSING OFFICER TO V ERIFY THAT PART OF THE INTEREST FOR WHICH PERIOD THE MONEY WAS OUTSTANDING AND TO D ISALLOW INTEREST UP TO THE PERIOD OF REPAYMENT OF THE BORROWINGS FROM CITI BAN K BY THE ASSESSEE. IF HOWEVER REPAYMENT TO CITI BANK BORROWING WAS FROM I NTEREST BEARING FUND, THE INTEREST TO THAT EXTENT WOULD NOT BE ALLOWABLE. WE DIRECT ACCORDINGLY. 6. THE DISPUTE IN REVENUES APPEAL IS WITH REGARD T O THE RATE OF INTEREST TO BE DISALLOWED WHICH THE ASSESSING OFFICER HAS ADOPT ED AT 12% WHEREAS THE INTEREST WAS PAID AT 6.5%. THE CIT (APPEALS) THERE FORE HAS DIRECTED TO WORK OUT DISALLOWANCE AT 6.5%. FOR THIS, THE DEPARTMENT IS IN APPEAL. HOWEVER, LOOKING TO THE FACTS AND CIRCUMSTANCES OF THE CASE, WHEN THE RATE OF INTEREST PAID IS @ 6.5% ON RS.5.05 CRORES AND THE DISALLOWA NCE CANNOT BE MADE BY ADOPTING A FLAT RATE OF 12%. THE CIT (APPEALS) R IGHTLY DIRECTED THE DISALLOWANCE OF THE INTEREST @ 6.5%. THE ORDER OF THE CIT (APPEALS) IS ACCORDINGLY UPHELD. 8. IN REVENUES APPEAL, ANOTHER DISPUTE IS WITH REG ARD TO THE FINDING OF THE CIT (APPEALS) THAT THE PROFIT OF RS.2,56,27,495/- O N SALE OF MUTUAL FUND UNITS AS LONG TERM CAPITAL GAIN INSTEAD OF BUSINESS GAIN SINCE MERE TWO TRANSACTIONS ON WHICH HUGE PROFIT HAS BEEN EARNED CANNOT BE HELD AS SALE OF INVESTMENT 8 ITA NO.2738/DEL./2008 ITA NO.2881/DEL./2008 AND RESULTANT PROFIT IS LONG TERM CAPITAL GAIN. TH E DETAILS OF PROFIT AND SALE ON THE SALE OF SECURITIES IS AS UNDER: NAME OF SECURITY DATE OF PURCHASE DATE OF SALE PROFIT/LOSS ICICI PRUDENTIAL INCOME 15/11/01 28/07/04 2,07 ,089 ING INCOME BONUS 20/11/03 20/12/04 74,21,182 UTI BOND ADVANTAGE 23/03/04 29/03/05 1,82,06,313 TOTAL 2,58,34,584 9. THE PROFIT IN RESPECT OF SALE OF ING INCOME FUND AND UTI BOND WAS SHOWN AS LONG TERM CAPITAL GAIN WHEREAS THE PROFIT ON SALE OF ICICI UNITS WAS SHOWN AS BUSINESS PROFIT. THEREFORE, THE ASSESSIN G OFFICER REQUIRED THE ASSESSEE TO EXPLAIN THE DIFFERENT TREATMENT AND ALS O ISSUED A SHOW CAUSE NOTICE AS TO WHY THE LONG TERM GAIN SHOULD NOT BE TREATED AS BUSINESS PROFIT. IT WAS SUBMITTED BY THE ASSESSEE THAT IT HAD INVESTED RS.1 .9 CRORES AND RS.4.5 CRORES RESPECTIVELY IN THE UNITS ING VYSYA INCOME FUND AND ILFS BOND FUND OF UTI IN THE FINANCIAL YEAR 2003-04, I.E. RELEVANT TO ASSESSMENT YEAR 2004-05. THE MUTUAL FUNDS NORMALLY GIVES THREE OPTIONS OF EA RNING (I) DIVIDEND OPTION; (II) GROWTH OPTION; AND (III) BONUS OPTION. THE ASSESSEE IN THIS CASE HAD OPTED THE BONUS OPTION. THE INVESTMENT IN THES E BONDS/FUNDS WERE CLAIMED TO BE WITH INTENTION TO HOLD THEM TILL THE BONUS UNITS WERE ALLOTTED AND THEREAFTER TO HOLD BONUS UNITS AS LONG TERM INVESTM ENT. THE ORIGINAL UNITS WERE REDEEMED AND THE LOSS ON SUCH REDEMPTION WAS D ECLARED IN THE RELEVANT ASSESSMENT YEAR. IN THE YEAR, THE BONUS UNITS HAVE BEEN SOLD AND PROFIT 9 ITA NO.2738/DEL./2008 ITA NO.2881/DEL./2008 THEREFROM WAS CLAIMED AS A LONG TERM CAPITAL GAIN. THE CLAIM OF THE ASSESSEE WAS REJECTED BY THE ASSESSING OFFICER AS, ACCORDING TO HIM, THE PROFITS AND GAINS WERE ASSESSABLE AS BUSINESS PROFIT. HE HAS G IVEN THE FOLLOWING REASONS FOR NOT ACCEPTING THE CONTENTION OF THE ASSESSEE : I) BONUS UNITS UNDER CONSIDERATION WERE NOT SHOWN IN THE SCHEDULE OF INVESTMENT WHEREAS ALL THE UNITS WHICH THE COMPANY INTENDS TO HOLD FOR LONG TERM ARE SHOWN UNDER THE H EAD 'INVESTMENT' II) UNITS IN THREE MUTUAL FUNDS WERE SOLD AFTER HOL DING FOR LONG TERM AS PER THE DETAILS FILED BY THE APPELLANT . HOWEVER PROFIT EARNED ON ICICI UNITS WAS SHOWN AS BUSINESS INCOME WHILE IN RESPECT OF OTHER TWO, IT WAS SHOWN LONG TERM CAPITA L GAIN. THEREFORE SIMILAR TREATMENT WAS NOT GIVEN TO THE T RANSACTION OF SIMILAR NATURE. III) THE APPELLANT'S CLAIM THAT THE LOSS ON TRANSFE R OF ORIGINAL UNITS (ON WHICH BONUS UNITS WERE ALLOTTED) WAS SHOW N AS CAPITAL LOSS IN AY 04-05 WAS FACTUALLY INCORRECT. IN THAT Y EAR THE LOSS ON SALE OF ORIGINAL UNITS WERE CONSIDERED UNDER THE BU SINESS HEAD AS BUSINESS LOSS. SINCE THE ORIGINAL UNITS WERE HELD A S STOCK-IN-TRADE AND LOSS ON THE SAME WAS DECLARED AS BUSINESS LOSS, THE BONUS UNITS ARE ALSO TO BE HELD AS STOCK IN TRADE AND SIM ILAR TREATMENT IS TO BE GIVEN TO THE PROFIT ARISING ON THE SAME. IV) IN AUDITED ACCOUNTS FOR THE YEARS ENDING ON 31/ 3/02, 31/3/03, 31/3/04 & 31/3/05 ALL THE UNITS OF VARIOUS MUTUAL FUNDS HAVE BEEN SHOWN AS STOCK IN TRADE UNDER THE HEAD CU RRENT ASSETS. V) THE CONTENTION THAT INVESTMENT IN THESE MUTUAL F UND WERE MADE WITH THE INTENTION TO HOLD THEM FOR LONG TERM WAS FACTUALLY INCORRECT BECAUSE THE APPELLANT WITHIN SHORT TIME O F PURCHASE REDEEMED THE UNITS OF MUTUAL FUNDS. VI) IT IS NOTED THAT DURING THE YEAR UNDER CONSIDER ATION THE APPELLANT HAD MADE NUMEROUS TRANSACTION OF PURCHASE AND SALE OF SHARES. THE ENTIRE PROFIT/LOSS ON SUCH TRANSACTIONS WAS TREATED AS 10 ITA NO.2738/DEL./2008 ITA NO.2881/DEL./2008 PART OF NORMAL BUSINESS PROFIT. THEREFORE THERE WAS NO BASIS TO SHOW ONLY THESE TWO PARTICULAR TRANSACTIONS AS INVE STMENT AND TREAT THE PROFIT AS LONG TERM CAPITAL GAIN. THIS TR EATMENT WAS GIVEN ONLY TO AVOID PAYMENT OF HIGHER RATE OF TAX. HE ACCORDINGLY TREATED THE BONUS UNITS AS PART OF T HE STOCK-IN-TRADE AND ACCORDINGLY ASSESSED THE PROFITS ON SALE AS BUSINES S PROFIT. 10. CIT (APPEALS) ALLOWED THE CLAIM OF THE ASSESSEE BY TAKING INTO CONSIDERATION THE BOARD CIRCULAR NO.4/2007 DATED 15 .6.2007 WHEREIN VIDE PARAGRAPH 10, THE CBDT EMPHASIZED THAT IT WAS POSSI BLE FOR A TAX PAYER TO HAVE TWO PORTFOLIOS, I.E. AN INVESTMENT PORTFOLIO C OMPRISING OF SECURITIES WHICH ARE TO BE TREATED AS CAPITAL ASSETS AND A TRA DING PORTFOLIO COMPRISING OF STOCK-IN-TRADE WHICH ARE TO BE TREATED AS TRADING A SSETS. WHERE THE ASSESSEE HAS TWO PORTFOLIOS, THE ASSESSEE MAY HAVE INCOME UN DER BOTH HEADS ASSESSED, I.E. CAPITAL GAIN AS WELL AS BUSINESS INCOME. HE A LSO QUOTED THE SUPREME COURT DECISION IN THE CASE OF G. VENKATASWAMI NAIDU 35 ITR 59 (SC) WHEREIN IT IS HELD THAT IN CASE WHERE THE PURCHASE WAS MADE SOLELY WITH THE INTENTION OF RESALE AT A PROFIT AND THE PURCHASER H AS NO INTENTION OF HOLDING THE PROPERTY FOR HIMSELF OR OTHERWISE ENJOYING IT OR US ING IT, IT WAS A RELEVANT FACTOR AND WOULD GIVE RISE TO STRONG PRESUMPTION TH AT A TRANSACTION WAS AN ADVENTURE IN THE NATURE OF TRADE. HE ALSO REFERRED TO THE DECISION OF AUTHORITY FOR ADVANCE RULING IN THE CASE OF FIDELITY NORTHERN FUND & ORS. REPORTED IN 288 ITR 641 WHEREIN IT IS OBSERVED THAT ORDINARILY THE PURCHASE AND SALE OF 11 ITA NO.2738/DEL./2008 ITA NO.2881/DEL./2008 SHARES WITH THE MOTIVE OF EARNING A PROFIT, WOULD R ESULT IN THE TRANSACTION BEING IN THE NATURE OF TRADE/ADVENTURE IN THE NATUR E OF TRADE; BUT WHERE THE OBJECT OF THE INVESTMENT IN SHARES OF A COMPANY IS TO DERIVE INCOME BY WAY OF DIVIDEND ETC. THEN THE PROFITS ACCRUING BY CHANGE I N SUCH INVESTMENT WILL YIELD CAPITAL GAIN AND NOT REVENUE RECEIPT. TAKING THIS PRINCIPLE INTO CONSIDERATION AND THE RESOLUTION OF BOARD OF DIRECTORS DATED 5.8. 2003 AND 18.9.2003 AT THE TIME OF PURCHASING THESE UNITS, THE CIT (APPEALS) H ELD THAT INTENTION TO HOLD THE ORIGINAL UNIT WAS A BUSINESS VENTURE BUT THE IN TENTION TO HOLD THE BONUS UNITS ACCRUING THEREFROM UNDER THE BONUS OPTION SCH EME WAS TO HOLD AS A LONG TERM CAPITAL INVESTMENT AND, THEREFORE, DIRECTED TH E GAIN ARISING ON THE SALE OF THESE BONUS UNITS TO BE ASSESSED AS LONG TERM CAPIT AL GAIN AND NOT BUSINESS PROFIT AS HELD BY THE ASSESSING OFFICER. 11. WE HAVE HEARD THE PARTIES AND CONSIDERED THE RI VAL SUBMISSIONS. AS RIGHTLY OBSERVED BY THE CIT (APPEALS), IT IS THE IN TENTION OF THE PARTY AT THE TIME OF PURCHASE WHICH DETERMINES THE NATURE OF TRA NSACTION, I.E. WHERE THE FUNDS WERE INVESTED TO ACQUIRE STOCK-IN-TRADE OR TO ACQUIRE INVESTMENT AND THAT INTENTION CAN BE FOR BOTH IN THE INDIVIDUAL TR ANSACTIONS OR IN A MIXED TRANSACTION AS WELL. THE PUNJAB & HARYANA HIGH COU RT DECISION IN THE CASE OF CIT VS. PARAGON UTILITY FINANCIERS PVT. LTD. 152 IT R 7 IS ALSO WORTH NOTING IN THIS REGARD WHEREIN IT IS HELD THAT INITIAL INTENTI ON ALONE IS RELEVANT TO DECIDE 12 ITA NO.2738/DEL./2008 ITA NO.2881/DEL./2008 WHETHER THE TRANSACTION IS AN ADVENTURE IN THE NATU RE OF TRADE OR AS CAPITAL INVESTMENT. IN THE PRESENT CASE, THE ORIGINAL BOND S WERE ACQUIRED WHILE CARRYING ON THE BUSINESS OF THE ASSESSEE WITH AN IN TENTION THAT THE BONUS SHARES ACQUIRED UNDER THE BONUS OPTION SCHEME WOULD BE HELD AS LONG TERM CAPITAL ASSET UNLIKE THE ORIGINAL UNITS. THIS IS C LEAR FROM THE RESOLUTIONS DATED 5.8.2003 AND 18.9.2003 WHICH READ AS UNDER : ['RESOLVED THAT PURSUANT TO THE PROVISIONS OF SECT ION 292(1)(D) OF THE COMPANIES ACT, 1956, THE COMPANY B E AND IS HEREBY AUTHORIZED TO MAKE INVESTMENT IN ILFS BOND F UND - BONUS OPTION FOR AN AMOUNT UPTO RS.5,00,00,000/-(RS . FIVE CRORE ONLY) FROM TIME TO TIME AS THE COMPANY MAY DE EM FIT.' 'RESOLVED FURTHER THAT THE INVESTMENT IN ILFS BOND FUND - BONUS OPTION SCHEME IS WITH THE SOLE INTENTION OF G ETTING BONUS UNITS WHICH WOULD BE HELD AS LONG - TERM CAPITAL AS SET UNLIKE THE ORIGINAL UNITS.'] ['RESOLVED THAT PURSUANT TO THE PROVISIONS OF SECTI ON 292(1)(D) OF THE COMPANIES ACT, 1956, THE COMPANY B E AND IS HEREBY AUTHORIZED TO MAKE INVESTMENT IN ING VYSYA I NCOME FUND (REGULAR) - BONUS OPTION FOR AN AMOUNT UPTO RS .1,90, 00,000/- (RS ONE CRORE NINETY LACS ONLY)' 'RESOLVED FURTHER THAT THE INVESTMENT IN ING VYSYA INCOME FUND (REGULAR) -BONUS OPTION SCHEME IS WITH THE SOL E INTENTION OF GETTING BONUS UNITS WHICH WOULD BE HELD AS LONG - TERM CAPITAL ASSET UNLIKE THE ORIGINAL UNITS.'] 12. THESE RESOLUTIONS CLEARLY DEPICT THE INTENTION OF THE ASSESSEE THAT INVESTMENT IN ILFS BOND FUND AND IN ING VYSYA INCOM E FUND WAS WITH THE SOLE INTENTION OF GETTING BONUS UNITS, WHICH WOULD BE HELD AS LONG TERM CAPITAL 13 ITA NO.2738/DEL./2008 ITA NO.2881/DEL./2008 ASSET UNLIKE THE ORIGINAL UNITS. THE OBSERVATION O F THE ASSESSING OFFICER THAT WHEN THE ORIGINAL UNITS WERE STOCK-IN-TRADE THE FRU ITS ARISING THEREFROM IN THE SHAPE OF BONUS WOULD ALSO BE OF THAT NATURE, MAY BE VALID IN AN ORDINARY CIRCUMSTANCES WHERE NO INTENTION OTHERWISE IS EXPRE SSED AT THE TIME OF PURCHASING THE ORIGINAL UNITS FROM WHERE THE BONUS SPRINGS. BUT, HERE IN THIS CASE, IT IS ABUNDANTLY CLEAR BY THE TWO RESOLUTIONS PASSED BY THE ASSESSEE THAT THE BONUS UNITS ACCRUING FROM THE ORIGINAL BONDS/IN COME FUND WOULD BE HELD AS LONG TERM CAPITAL ASSETS UNLIKE THE ORIGINAL UNI TS AND, THEREFORE, THE BONUS UNIT ARE TO BE TAKEN AS A LONG TERM CAPITAL GAIN. WE, THEREFORE, DO NOT FIND ANY MERIT IN THE REVENUES APPEAL ON THIS POINT AND UPHOLD THE ORDER OF CIT (APPEALS). 13. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED AND THE REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON THIS 31 ST DAY OF JULY 2009. SD/- SD/- (RAJPAL YADAV ) (R.P. GARG) JUDICIAL MEMBER SENIOR VICE PRESIDENT DATED THE 31 ST DAY OF JULY, 2009/TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A)-XI, NEW DELHI. 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.