SANJAY KUMAR PODDAR, MUMBAI V. JCIT (OSD) 15(1), MUMBAI

ITA 3150/MUM/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 1426 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 11 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-04-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: SMC
• Assessment Year: 2009-2010
• Appeal Filed On: 05-05-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A K NAYAK
• Keywords: Capital asset; Business income; Rule of consistency; Transactions in derivatives; Earning of tax free income; Cost of acquisition
• Section: 14A; 43(5); 10

Judgement Text

, INCOME-TAX APPELLATE TRIBUNAL -EBEN CH MUMBAI , , , BEFORE S/SHRI RAJENDRA,ACCOUNTANT MEMBER AND RAM LAL NEGI,JUDICIAL MEMBER ./I.T.A./3150/MUM/2014, /ASSESSMENT YEAR: 2009-10 SANJAY KUMAR J. PODDAR, C/O SHANKARLAL JAIN & ASSOCIATES, 12 ENGINEER BUILDING, 265, PRINCESS STREET, MUMBAI 400 002. PAN:AABPP 2018 E VS. JT. COMMISSIONER OF INCOME TAX(OSD), CIRCLE 15(1),MATRU MANDIR, MUMBAI-400 006. ( /APPELLANT ) ( / RESPONDENT ) ./I.T.A./3961/MUM/2014, /ASSESSMENT YEAR: 2009-10 JT. COMMISSIONER OF INCOME TAX(OSD), MUMBAI-400 006. VS. SANJAY KUMAR J. PODDAR, C/O SHANKARLAL JAIN & ASSOCIATES, MUMBAI 400 002. ( /APPELLANT ) ( / RESPONDENT ) REVENUE BY: SHRI A.K. NAYAK- DR A SSESSEE BY: SHRI S.L. JAIN / DATE OF HEARING: 14.03.2017 / DATE OF PRONOUNCEMENT: 05.04.2017 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA, AM - CHALLENGING THE ORDER, DATED 25/03/2014 OF CIT (A ) 26, MUMBAI THE ASSESSEE AND THE ASSESSING OFFICER (AO) HAVE FILED CROSS APPEALS FOR THE YEAR UNDER CONSIDERATION. ASSESSEE, AN INDIVIDUAL, ENGAGED IN DEALING AND INVESTMENT IN SH ARES, FILED HIS RETURN OF INCOME ON 30/09/2009, DECLARING TOTAL LOSS OF RS. 18.38 LAKHS. THE AO COMPLETED THE ASSESSMEN T, UNDER SECTION 143 (THREE) OF THE ACT, ON 23/12/2011, DETE RMINING HIS INCOME AT RS. 1,05,970/-. ITA/3961/MUM/2014: 2. EFFECTIVE GROUND OF APPEAL,FILED BY THE AO,IS ABOUT DIRECTING HIM TO ASSESS THE INCOME FROM SALE OF SHARES AS CAPITAL GAINS INSTEAD OF BUSINESS .DURING THE ASSESSMENT PROCEEDINGS, THE AO FOUND THAT THE ASSESSEE HAD DECLARED INCOME UNDER V ARIOUS HEADS NAMELY INCOME FROM HOUSE PROPERTY (RS.6.72 LAKHS) PROFIT ON SALE OF SHARES ( SPECULATIVE TRANSACTION) OF RS. 21.5 LAKHS, SHORT-TERM CAPITAL GAINS (STCG)TAXABLE UNDER SECTIO N 111A (RS. 2.39 CRORES) LONG-TERM CAPITAL GAINS(LTCG) (RS. 13.16 LAKHS), THAT HE HAD CLAIMED EXEMPTION OF RS. 4.46 LAKHS UNDER SECTION 10 (36)/10 (38) OF THE ACT, THAT HE HAD CLA IMED LOSS IN F&O SEGMENT OF RS. 3.23 CRORES. 3150 & 3961/M/14(09-10) SANJAY KUMAR PODDAR 2 AFTER CONSIDERING THE CHART SHOWING LTCG, STCG AND OTHER TRANSACTIONS, THE AO HELD THAT THE NUMBER AND FREQUENCY OF TRANSACTIONS IN SHARE TRADI NG WERE TO TAKEN AS BUSINESS,THAT THE ASSESSEE COULD NOT BE TREATED A MERE INVESTOR, THAT HE HIMSE LF HAD MADE OUT A PROFIT AND LOSS ACCOUNT SHOWING ALL HIS SHARE BUSINESS ACTIVITY UNDER THE S AME HAD,THAT NO SEPARATE PORTFOLIO FOR LONG- TERM INVESTMENT AND SHORT-TERM INVESTMENT WAS MAINT AINED,THAT THE PURCHASE AND SALE OF SHARES WAS THE MAJOR ACTIVITY OF THE ASSESSEE, THAT SUBSTA NTIAL TIME WAS DEVOTED BY THE ASSESSEE TO THE ACTIVITY OF PURCHASE AND SALE OF SHARES, THAT HE HA D EARNED MEAGRE DIVIDEND INCOME, THAT HE HAD HEAVILY BORROWED FOR INVESTING IN THE SHARES, THAT THE ENTIRE SALE PURCHASES HAD BEEN FUNDED BY UNSECURED INTEREST-BEARING LOANS, THAT HE HAD PAID INTEREST OF RS.28.78 LAKHS AS AGAINST INTERESTS OF RS.32.12 LAKHS RECEIVED DURING THE YEAR,THAT HE WAS CARRYING ORGANISED ACTIVITIES OF SHARE TRADING, THAT IT WAS COVERED BY THE DEFINITION OF B USINESS UNDER SECTION 2 (13) OF THE ACT, THAT IT WOULD BE IN THE FITNESS OF THE THINGS TO IGNORE THE CLAIM OF LTCG OF RS.4.46 LAKHS AS WELL AS THE STCG CHARGEABLE OF RS. 2.39 CRORES,THAT THE INCOME FROM THE SHARE TRADING ACTIVITIES WAS TO BE ASSESSED AS INCOME FROM BUSINESS, THAT THE LOSS OF RS. 3.23 CRORES ON F&O SEGMENT WAS TO BE ALLOWED AS BUSINESS LOSS, THAT THE SPECULATIVE BUSI NESS PROFIT WAS TO BE TAXED AS BUSINESS INCOME. 2.1. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PREF ERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY (FAA).BEFORE HIM, THE ASSESSEE ARGUED THA T IDENTICAL ISSUE HAD ARISEN IN THE AY. 2008 -09,THAT THE THEN FAA HAD DECIDED THE ISSUE IN FAVO UR OF THE ASSESSEE, THAT THE AO HIMSELF HAD, IN THE AY.S 2006-07 AND 2007-08 HAD TAXED THE PROFIT F ROM THE SHARE TRANSACTION UNDER THE HEAD CAPITAL GAINS. HE REFERRED TO THE CASE OF GOPAL PUR OHIT (228 CTR 582) AND SUBMITTED THAT NO BORROWED FUNDS WERE UTILISED FOR INVESTMENT, THAT S HARES WERE PURCHASED FROM THE SALE PROCEEDS OF THE SHARES HELD BY HIM, THAT THE CAPITAL OWNED B Y HIM FAR EXCEEDED THE INVESTMENT IN SHARES, THAT HE HAD SOLD UNLISTED SHARES HELD BY HIM TO THE TUNE OF RS.4.21 CRORES, THAT SUFFICIENT FUNDS WERE AVAILABLE WITH HIM FOR MAKING INVESTMENTS, THA T ALL ALONG HE HAD MADE INVESTMENT IN SHARES THAT HE HAD NEVER CONVERTED THE SAME INTO STOCK IN TRADE, THAT IN THE PAST THE AO HAD ASSESSED THE SAME UNDER THE HEAD CAPITAL GAINS, THAT HE HAD ASSE SS THE INCOME FROM SALE OF UNLISTED SHARES IS CAPITAL GAINS IN THE EARLIER YEARS, THAT IT HAD VAL UED ITS INVESTMENT AT COST, THAT THE NORMAL PRACTIC E REGARDING VALUATION OF CLOSING STOCK OF INVENTORY I N BUSINESS WAS COST OR MARKET PRICE WHICHEVER IS LOWER, THAT IF HIS INVESTMENT IN SHARES AS ON 31 /03/2009 WAS VALUED APPLYING THE ABOVE METHOD IT WOULD BE REDUCED BY RS. 2.60 CRORES FOR WHICH A DEDUCTION SHOULD HAVE BEEN ALLOWED BY THE AO. 3150 & 3961/M/14(09-10) SANJAY KUMAR PODDAR 3 AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AN D THE ASSESSMENT ORDER, THE FAA HELD THAT THE ASSESSEE HAD FURNISHED XEROX COPIES OF LTCG AND STC G ASSESSED IN VARIOUS AY.S, THAT HIS PREDECESSOR HAD DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE IN A DETAILED ORDER, THAT THE FUNDS OWNED BY THE ASSESSEE FAR EXCEEDED THE BORROWED FUN DS EVEN AT THE START OF THE YEAR, THAT THE AMOUNT OF BORROWED FUNDS HAD BEEN REDUCED SUBSTANTI ALLY TO ABOUT 20% DURING THE YEAR. HE ALSO TOOK JUDICIAL NOTE OF THE CASES RELIED UPON BY THE ASSESSEE AND HELD THAT THE DELIVERY OF THE SHARES WAS NOT IN DOUBT, THAT THE ASSESSEE WAS AN INVESTOR IN SHARES AND HAD BEEN SO RECORDED BY THE AO FOR THE LAST SEVERAL YEARS, THAT EVEN IN THE PRECED ING YEAR HIS PREDECESSOR HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE, THAT IN THE BALANCE SHEET H E HAD SHOWN SHARE INVESTMENT AND NO CLOSING STOCK OF SHARES WERE SHOWN IN THE BOOKS OF ACCOUNTS , THAT THE INVESTMENT IN SHARES HAD BEEN SHOWN THAT PURCHASE PRICE. REFERRING TO THE CASE OF MANISH KARWA & OTHERS(ITA/307/IND/2009- DATED 20/12/2013), THE FAA HELD THAT THE INCOME FRO M DELIVERY BE A SHARE TRANSACTION COULD NOT BE ASSESSED AS BUSINESS INCOME, THAT SAME WAS TO BE ASSESSED UNDER THE HEAD CAPITAL GAINS. 2.2. DURING THE COURSE OF HEARING BEFORE US, THE DEPARTM ENTAL REPRESENTATIVE (DR) SUPPORTED THE ORDER OF THE AO AND STATED THAT. THE AUTHORISED REP RESENTATIVE (AR) STATED THAT IDENTICAL ISSUE HAD BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE T RIBUNAL IN FAVOUR OF THE ASSESSEE,WHILE DECIDING THE APPEAL FOR THE AY.2008-09 (ITA.S/7087 &7410/MUM/2011,DTD.26.11.2014). 2.3. WE FIND THAT THE TRIBUNAL HAS DELIBERATED UPON THE ISSUE,BEFORE US,IN DETAIL WHILE ADJUDICATING THE APPEAL FOR THE EARLIER AY.(SUPRA)A ND HAS HELD AS UNDER: 7. WE HAVE CONSIDERED RIVAL CONTENTIONS, CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND ALSO STATEMENT OF INVESTMENT AND OWN FUND S VIS--VIS STATEMENT OF SOURCES OF FUNDS FOR INVESTMENT DURING THE YEAR UNDER CONSIDERATION. WE HAVE ALSO DELIBERATED UPON VARIOUS CASE LAWS CITED BY THE LD. AUTHORIZED REPRESENTATIVE AND LD. CIT DR AND IN THE CONTEXT OF FACTUAL MATRIX OF THE CASE. WE HAD ALSO DELIBERATED ON THE CASE LAWS REFERRED TO BY LOWER AUTHORITIES IN THEIR RESPECTIVE ORDERS. THE QUESTION AS TO WHETHER THE A SSESSEE HAS EARNED CAPITAL GAIN OR BUSINESS PROFITS ON THE SHARES SOLD BY HIM DEPEND ON THE FAC TS AND CIRCUMSTANCES OF EACH CASE. SUCH DECISION IS TO BE ARRIVED AT BY TAKING INTO ACCOUNT THE INTENTION OF THE ASSESSEE WHILE PURCHASING THE SHARES, AS TO WHETHER THE SAME WAS ACQUIRED FOR HOLDING AS INVESTMENT OR FOR DOING BUSINESS THEREIN. THE TREATMENT GIVEN BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT IS ALSO ONE OF THE DECISIVE FACTORS TO FIND OUT WHETHER THE SHARES WERE HELD AS INVESTMENT OR STOCK IN TRADE. IF THE SHARES ARE BOUGHT WITH THE INTENTION OF EARNING CAPITAL GAINS THEREON AND ALSO DIVIDEND INCOME BY KEEPING THE SAME AS INVESTMENT, THE GAIN ARISING THERE FROM IS REQUIRED TO BE TREATED AS CAPITAL GAINS. ON THE OTHER HAND, IF THE SHARES ARE PURCHASED WITH TH E INTENTION TO EARN PROFIT THEREON AND THE SAME IS TREATED AS STOCK IN TRADE IN THE BOOKS OF ACCOUN T, THE PROFIT ARISING OUT OF SALE OF SUCH SHARES ARE LIABLE TO BE TREATED AS BUSINESS INCOME. VOLUME AND FREQUENCY OF TRANSACTION IS ALSO ONE OF THE GUIDING FACTORS TO FIND OUT WHETHER THE ASSESSE E IS ENGAGED IN THE BUSINESS OF PURCHASE AND SALE OF SHARES OR MAKING INVESTMENT TO HAVE CAPITAL GAINS THEREON. IN THE INSTANT CASES BEFORE US, THE FACT OF THE ASSESSEE INVESTING IN SHARES FOR TH E LAST SEVERAL YEARS IS NOT IN DISPUTE. THERE IS ALSO NO DISPUTE TO THE FACT THAT THE ASSESSEE HAS T REATED THE EQUITY SHARES OF INDIAN COMPANIES AS 3150 & 3961/M/14(09-10) SANJAY KUMAR PODDAR 4 INVESTMENT I.E. CAPITAL ASSET ALL ALONG. THE ASSESS EE HAS ALSO VALUED THE SHARES AT COST THUS GIVEN A PARTICULAR TREATMENT TO THE SHARES HELD AS INVEST MENT, THEREFORE, WITHOUT BRINING ON RECORD CONTRARY MATERIAL, THE AO CANNOT CHANGE THE INTENTI ON AND MANNER OF INVESTMENT BEING MADE BY THE ASSESSEE. HAD THE ASSESSEE VALUED THE SHARES AT COST OR MARKET PRICE WHICHEVER IS LOWER, THE GAIN ARISING OUT OF SALE OF SHARES COULD EASILY BE TREATED AS BUSINESS INCOME. ASSESSEE HAD NOT VALUED THE SHARES AS STOCK BUT VALUED THE SAME AS I NVESTMENT. THUS, WHAT WAS A CAPITAL ASSET WILL REMAIN A CAPITAL ASSET UNLESS A PERSON HOLDING THE ASSET HIMSELF CHANGES THE NATURE BY A SPECIFIC ACTION LIKE CONVERSION OF CAPITAL ASSET INTO STOCK IN TRADE. IN THE INSTANT CASES BEFORE US, THE ASSESSEE HAS NOT TREATED THE INVESTMENT IN EQUITY S HARES OF INDIAN COMPANIES AS STOCK IN TRADE. IN VIEW OF THE DECISION OF HON'BLE SUPREME COURT IN TH E CASE OF RAM KUMAR AGARWAL & BROTHERS, 205 ITR 251, THE AO WAS NOT JUSTIFIED IN TREATING T HE CAPITAL GAIN EARNED FROM SALE OF THESE SHARES, AS BUSINESS PROFITS, WHICH WERE ENTERED BY THE ASSESSEE AS INVESTMENT IN BOOKS OF ACCOUNT. THERE IS ALSO NO DISPUTE TO THE WELL SETTLED LEGAL PROPOSITION THAT RES JUDICATA DO NOT STRICTLY APPLY TO THE INCOME TAX PROCEEDINGS, BUT AT THE VERY SAME TIME, IT IS WELL SETTLED THAT PRINCIPLE OF CONSISTENCY UNDER THE SAME FACTS AND CIRCUMSTANCES IS THE FUNDAMENTAL OF JUDICIAL PRINCIPLE, WHICH CANNOT BE BRUSHED ASIDE WITHOUT PROPER REASON ING. 8. MERELY BECAUSE THE ASSESSEE LIQUIDATES ITS INVES TMENT WITHIN A SHORT SPAN OF TIME, WHICH HAD GIVEN BETTER OVERALL EARNING TO THE ASSESSEE, WOULD NOT LEAD TO THE CONCLUSION THAT THE ASSESSEE HAD NO INTENTION TO KEEP ON THE FUNDS AS INVESTOR I N EQUITY SHARES, BUT WAS ACTUALLY INTENDED TO TRADE IN SHARES. 9. HERE, IT IS PERTINENT TO MENTION THE INTENTION O F GOVERNMENT FOR INTRODUCING THE SECURITY TRANSACTION TAX AND EXEMPT THE LONG TERM CAPITAL GA IN EARNED FROM SALE OF SHARES AND LEVYING 10 % TAX ON SHORT TERM CAPITAL GAIN EARNED ON SALE OF SHARES. IT IS NOTED THAT UNDER THE OLD PROVISIONS OF THE INCOME-TAX ACT, PROFITS OR GAINS ARISING TO AN INVESTOR FROM THE TRANSFER OF SECURITIES WERE CHARGED TO TAX EITHER AS LONG TERM CAPITAL GAINS OR SHORT TERM CAPITAL GAINS DEPENDING ON THE PERIOD OF HOLDING OF THE SAID SECU RITIES; SHORT-TERM CAPITAL GAINS ARISING FROM TRANSFER OF SECURITIES WERE TAXED AT THE APPLICABLE RATES (NORMAL RATE) AND LONG-TERM CAPITAL GAINS WERE TAXED @ 20%, AFTER ADJUSTING FOR INFLATI ON BY INDEXING THE COST OF ACQUISITION. FOR LISTED SECURITIES, THE 8 ITA 7087/M/11 & ITA 7410/M /11 TAXPAYER HAD AN OPTION TO PAY TAX ON LONG-TERM CAPITAL GAINS @ 10% BUT WITHOUT INDEXATIO N. FOR FOREIGN INSTITUTIONAL INVESTORS (FIIS), THE LONGTERM CAPITAL GAINS AND SHORT-TERM CAPITAL G AINS WERE TAXED AT THE RATE OF 10% (WITHOUT INDEXATION) AND 30% RESPECTIVELY. IN CASE OF A TRAD ER IN SECURITIES, HOWEVER, THE GAINS WERE TAXED AS ANY OTHER NORMAL BUSINESS INCOME. THUS TAX LIABI LITY ON THE INCOME FROM PURCHASE & SALE OF SHARES AS REGARDS TO THE STCG & BUSINESS INCOME WAS AT PAR. HOWEVER, THE ISSUE OF TREATMENT OF INCOME FROM SHARE TRANSACTION AS CAPITAL GAIN OR BU SINESS INCOME HAS IN-FACT ARISEN AFTER THE AMENDMENT BROUGHT WITH FINANCE ACT - 2004 BY INSERT ION OF PROVISIONS OF SECTION 111A AND 10(38) AS REGARDS TO LEVY OF TRANSACTION TAX AND EX EMPTION / CONCESSION ON CAPITAL GAIN ARISING FROM SECURITIES ENTERED IN A RECOGNIZED STOCK EXCHA NGE. WITH A VIEW TO SIMPLIFY THE TAX REGIME ON SECURITIES TRANSACTIONS, A TAX AT THE RATE OF 0.015 PER CENT. (SEE: CHANGE IN RATES ON SECURITIES TRANSACTIONS, BY FINANCE ACTS, AT APPROPRIATE HEAD) IS LEVIED ON THE VALUE OF ALL THE TRANSACTIONS OF PURCHASE OF SECURITIES THAT TAKE PLACE IN A RECO GNIZED STOCK EXCHANGE IN INDIA. THIS TAX IS COLLECTED BY THE STOCK EXCHANGE FROM THE PURCHASER OF SUCH SECURITIES AND PAID TO THE EXCHEQUER. THE PROVISIONS RELATING TO THE SECURITIES TRANSACTI ONS TAX ARE CONTAINED IN CHAPTER VII OF THE FINANCE (NO.2) BILL, 2004, AND CAME INTO EFFECT FRO M 01.10.2004. FURTHER, CLAUSE (38) HAS BEEN INSERTED IN SECTION 10 OF THE INCOME-TAX ACT, SO AS TO PROVIDE EXEMPTION FROM LONGTERM CAPITAL GAINS ARISING OUT OF SECURITIES SOLD ON THE STOCK E XCHANGE. A NEW SECTION 111A HAS ALSO BEEN INSERTED AND SECTION L15AD IS AMENDED, SO AS TO PRO VIDE THAT SHORT-TERM CAPITAL GAINS ARISING FROM SALE OF SUCH SECURITIES TO AN INVESTOR INCLUDI NG FIIS SHALL BE CHARGED AT THE RATE OF TEN PER CENT. THESE AMENDMENTS APPLY TO AY. 2005-2006 AND S UBSEQUENT YEARS. THROUGH FINANCE ACT, 2008, SECTIONS 111A AND 115AD HAVE FURTHER BEEN AME NDED WHEREBY THE RATE OF TAX ON SUCH SHORT-TERM CAPITAL GAIN HAS BEEN RAISED TO FIFTEEN PERCENT. THUS, W.E.F. 01.10.2004; ON THE SHARE 3150 & 3961/M/14(09-10) SANJAY KUMAR PODDAR 5 TRANSACTIONS SUBJECTED TO STT; CONCESSIONAL TAX RAT E OF 10% (WHICH HAS BEEN INCREASED TO 15% FROM AY 2009-10) ARE APPLICABLE IN RESPECT OF STCG WHEREAS NO TAX IS CHARGEABLE IN RESPECT OF LTCG. IT IS ALSO NOTED THAT THE CBDT VIDE ITS CIRCU LAR NO.4/2007, DATED 15.06.2007 HAS ALSO RECOGNIZED POSSIBILITY OF TWO PORTFOLIOS, I.E. ONE 'INVESTMENT PORTFOLIO' COMPRISING OF SECURITIES WHICH ARE TO BE TREATED AS CAPITAL ASSETS AND THE O THER 'TRADING PORTFOLIO' COMPRISING OF STOCK IN TRADE WHICH ARE TO BE TREATED AS TRADING ASSETS. IN VIEW OF THESE FACTS, PROFIT AROSE ON SHARES IN RESPECT OF DELIVERY BASED TRANSACTION ARE LIABLE TO BE TAXED AS CAPITAL GAIN AND NOT AS BUSINESS INCOME. 10. EVEN THE HON'BLE APEX COURT IN THE CASE OF K.P. VERGHESE VS TO, 131 ITR 597 (SC) OBSERVED AS UNDER:- THE TASK OF INTERPRETATION OF A STATUTORY ENACTME NT IS NOT MECHANICAL TASK. IT IS MORE THAN A MERE READING OF MATHEMATICAL FORMULAE BECAUS E FEW WORD POSSESSES THE PRECISION OF MATHEMATICAL SYMBOLS. IT IS AN ATTEMPT TO DISCOV ER THE INTENT OF THE LEGISLATURE FROM THE LANGUAGE USED BY IT AND IT MUST ALWAYS BE REMEMBERE D THAT LANGUAGE IS AT BEST AN IMPERFECT INSTRUMENT FOR THE EXPRESSION OF HUMAN TH OUGHT AND, AS POINTED OUT BY LORD DENNING, IT WOULD BE IDLE TO EXPECT EVERY STATUTORY PROVISIONS TO BE DRAFTED WITH DIVINE PRESCIENCE AND PERFECT CLARITY. 11. THE ABOVE OBSERVATIONS OF HON'BLE JUDGES OF THE APEX COURT WAS REITERATED BY HON'BLE APEX COURT IN THE CASE OF KERALA STATE INDUSTRIAL CORPOR ATION, 259 ITR 51 (SC) HOLDING AS UNDER:- THAT THE FINANCE MINISTERS SPEECH CAN BE RELIED U PON TO THROW LIGHT ON THE OBJECT AND PURPOSE OF THE PARTICULAR PROVISIONS INTRODUCTION B Y THE FINANCE BILL HAS BEEN RECOGNIZED BY THIS COURT IN K.P. VERGHESE VS ITO 1981), 131 ITR 597 (SC), AT 609. AGAIN IN THE CASE OF R & B FALCON (A) PVT. LTD VS CIT (2008) 301 ITR 309 (SC), IT WAS HELD THAT (PAGE 323):- RULES OF EXECUTIVE CONSTRUCTION IN A S ITUATION OF THIS NATURE MAY ALSO BE APPLIED. WHERE A REPRESENTATION IS MADE BY THE MAKE RS OF LEGISLATION AT THE TIME OF INTRODUCTION OF BILL OR CONSTRUCTION THEREUPON IS P UT BY THE EXECUTIVE UPON ITS COMING INTO FORCE, THE CARRIES GREAT WEIGHT. 12. THE HON'BLE DELHI HIGH COURT IN ARJ SECURITY PR INTERS, 264 ITR 276 AND NEO POLLYPACK PVT LTD. 245 ITR 492 (DEL.) HELD THAT EVEN WHEN THE DOC TRINE OF RES JUDICATA DOES NOT APPLY TO INCOME TAX PROCEEDINGS, WHERE A ISSUE HAS BEEN DECIDED CON SISTENTLY IN EARLIER AY.S IN PARTICULAR MANNER, THE SAME VIEW SHOULD PREVAIL IN SUBSEQUENT YEARS UNLESS THERE IS A MATERIAL CHANGE IN FACTS, MEANING THEREBY, THERE MUST BE MATERIAL CHAN GE IN THE FACTS. 13. THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF SHANTILAL M JAIN VS ACIT VIDE ORDER DATED 27-04-2011 (ITA NO. 269/MUM/2010) HELD THAT DESPITE LARGE VOLUME OF SHARES TRANSACTIONS, THE ASSESSING OFFICER CANNOT IGNORE THE RULE OF CONSIST ENCY TO TREAT THE GAINS ON SALE OF SHARES AS STCG. IN THAT CASE, THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF TRADING OF INVESTMENT IN SHARES AND SECURITIES OFFERED RS. 1.54 CRORESS AS SHORT TE RM CAPITAL GAIN AND RS. 2.91 CRORESS FROM LONG TERM CAPITAL GAIN. THE LONG TERM CAPITAL GAIN WAS A CCEPTED WHEREAS SHORT TERM CAPITAL GAIN WAS HELD TO BE BUSINESS PROFIT. SINCE IN EARLIER AY.S T HE CLAIM OF THE ASSESSEE WAS CONSISTENTLY ACCEPTED AS SHORT TERM CAPITAL GAIN, IT WAS HELD TH AT THE RULE OF CONSISTENCY AS PROPOUNDED BY HON'BLE BOMBAY HIGH COURT IN THE CASE OF GOPAL PURO HIT (SUPRA), IT IS FAIRLY APPLICABLE AND THE INCOME HAS TO BE TREATED AS SHORT TERM CAPITAL GAIN . IDENTICALLY IN THE CASE OF NAGINDAS P SETH (ITA NO.961/MUM/2010) IT WAS HELD THAT DESPITE LARG E NUMBER OF TRANSACTIONS IN SHARES, THE PROFIT CAN BE ASSESSED AS CAPITAL GAINS UNDER THE F ACTS OF THE CASE. THE CASE OF THE ASSESSEE IS FURTHER FORTIFIED BY THESE DECISIONS MORE SPECIFICA LLY WHEN THE ASSESSEE WAS HOLD THE SHARES IN HIS BOOKS AS INVESTOR, AS WELL AS TOCK-IN-TRADE SEPARAT ELY. THE DECISION IN THE CASE OF JANAK S RANAWALA, 11 SOT 627 (MUM.) FURTHER SUPPORTS THE CA SE OF THE ASSESSEE. LIKEWISE, THE DECISION FROM HON'BLE MADRAS HIGH COURT IN CIT VS N.S.S. INV ESTMENT PVT LTD. 227 ITR 149 (MAD), CIT VS. ASSOCIATED INDUSTRIAL DEVELOPMENT COMPANY, 82 ITR 526 (SC) SUPPORTS THE CASE OF THE ASSESSEE. IN THE PRESENT APPEAL, WE NOTE THAT THE A SSESSEE MADE INVESTMENT IN SHARES WITH 3150 & 3961/M/14(09-10) SANJAY KUMAR PODDAR 6 INTENTION TO EARN DIVIDEND INCOME ON APPRECIATION O F PRICE OF SHARES. THEREFORE, IT CANNOT BE SAID THAT THE ASSESSEE WAS DOING BUSINESS. 14. FROM THE RECORD, WE FOUND THAT THE ASSESSEE HAS MADE INVESTMENT IN SHARES AND SECURITIES OUT OF SALE PROCEEDS OF SHARES HELD AS LONG TERM INVEST MENT ON WHICH ASSESSEE HAS DECLARED LONG TERM CAPITAL GAINS OF RS.10.91 CRORESS. SINCE THE ASSESS EE HAS EARNED DIVIDEND INCOME, THE AO DISALLOWED RS.33,87,373/- BY INVOKING PROVISIONS OF SECTION 14A. THE ASSESSEE HAS ALSO EARNED LONG TERM CAPITAL GAIN OF RS.10.91 CRORESS AND SUFF ERED SHORT TERM CAPITAL LOSS OF RS.1.34 CRORESS. HOWEVER, THE AO DID NOT ACCEPT ASSESSEE S CLAIM OF CAPITAL GAIN AND TREATED THE SAME AS BUSINESS INCOME. THE BASIC PLEA OF THE AO WAS THAT ASSESSEE HAS INVESTED BORROWED FUNDS FOR THE ACQUISITION OF SHARES AND SECURITIES, THEREFORE, TH E PROFIT/LOSS EARNED THEREON WAS TREATED AS BUSINESS INCOME. FROM THE RECORD WE FOUND THAT ASSE SSEE WAS FOLLOWING CONSISTENT PRACTICE OF HOLDING SHARES AS INVESTMENT IN ITS BOOKS OF ACCOUNTS IN ALL THE YEARS. SUCH IN VESTMENT WAS CONSISTENTLY VALUED AT COST AS AGAINST COST OR MARK ET VALUE WHICHEVER IS LOWER. IN EARLIER YEARS, ASSESSMENT HAS BEEN COMPLETED BY DEPARTMENT TREATIN G SUCH ACTIVITIES AS ACTIVITY OF REALIZATION OF INVESTMENT RATHER THAN TRADING IN SHARES. WE FOUND THAT IN THE IMMEDIATELY PRECEDING AY. 2007- 08 LONG TERM CAPITAL GAIN OF RS.5.95 CRORESS WAS RE ALIZED ON SALE OF SHARES COSTING RS.1.55 CRORESS, WHICH WERE REALIZED FOR RS.7.50 CRORESS. T HE AO HAS ACCEPTED LONG TERM AND SHORT TERM CAPITAL GAIN SHOWN BY ASSESSEE WAS UNDER SCRUTINY A SSESSMENT ORDER FRAMED U/S.143(3) VIDE ORDER DATED 24-11-2009. SIMILARLY ASSESSMENT FOR AY . 2006-07 WAS COMPLETED U/S.143(3) VIDE ORDER DATED 29-12-2009, WHEREIN LONG TERM CAPITAL G AIN OF RS.4.90 CRORESS AND SHORT TERM CAPITAL GAIN OF RS.1.78 CRORESS WAS ACCEPTED BY THE DEPARTM ENT. DURING THE YEAR UNDER CONSIDERATION ALSO THE ASSESSEE HAS SHOWN LONG TERM CAPITAL GAINS OF RS.10.91 CRORESS AND SHORT TERM CAPITAL LOSS OF RS.1.47 CRORESS, HOWEVER, WITHOUT INDICATIN G ANY CHANGE IN THE FACTS AND CIRCUMSTANCES, THE AO CHANGED HIS VIEW AND HELD THE SAME AS BUSINE SS INCOME. WE FOUND THAT THERE IS NO CHANGE IN THE CIRCUMSTANCES IN THE CURRENT YEAR, THEREFORE , HAVING REGARD TO THE PRINCIPLE OF CONSISTENCY PROFIT ON REALIZATION OF INVESTMENT IS REQUIRED TO BE ASSESSED AS CAPITAL GAINS. IN THIS REGARD, RELIANCE MAY BE PLACED ON THE DECISION OF THE MUMBA I BENCH OF THE TRIBUNAL IN THE CASE OF GOPAL PUROHIT, REPORTED IN 122 TTJ 87, WHICH WAS CONFIRME D BY THE HON BLE HIGH COURT, REPORTED IN 228 CTR 582 AND THE SLP FILED BY THE DEPARTMENT BEF ORE THE HON BLE SUPREME COURT WAS ALSO DISMISSED VIDE ORDER DATED 15.11.2010. THERE IS NO DISPUTE TO THE FACT THAT IN ITS BOOKS OF ACCOUNTS ALSO THE ASSESSEE HAS TREATED THE SAME AS INVESTMENT BY PROPER DISCLOSURE IN ITS AUDITED BALANCE SHEET. THE INVESTMENTS HELD BY THE ASSESSEE CONSISTED OF INVESTMENT IN QUOTED SHARES OF RS.6.60 CRORESS AND INVESTMENT IN UNQUOTED SHARES A ND SHARES WARRANTS OF RS.11.14 CRORESS WHICH WERE VALUED AT COST. SIMILARLY IN AY. 2007-08 , ASSESSEE WAS HOLDING QUOTED SHARES AT COST OF RS.7.10 CRORESS AND UNQUOTED SHARES OF RS.2.26 C RORESS. THE DISCLOSURE OF THE INVESTMENT IN THE ACCOUNTS IS A MATERIAL FACT TO ASCERTAIN THE INTENT ION OF THE ASSESSEE TO HOLD THE SHARES AS INVESTMENT OR STOCK IN TRADE . IN THE CASE OF GOPAL PUROHIT (SUPRA), THE TRIBUNA L HELD THAT PRESENTATION IN THE BOOKS OF ACCOUNTS IS MOST CRUCI AL SOURCE OF GATHERING INTENTION OF THE ASSESSEE WITH REGARD TO THE NATURE OF TRANSACTION. IT IS ALS O NOT THE CASE OF AO THAT THE SHARES WHICH WERE HELD AS INVESTMENT IN EARLIER AY.S I.E. 2005-06, 20 06-07 & 2007-08 AND ACCEPTED BY THE DEPARTMENT AS INVESTMENT WERE CONVERTED INTO STOCK IN TRADE SO AS TO ATTRACT THE PROVISIONS OF SECTION 43(5) OF THE ACT. SINCE THE SHARES HELD AS INVESTMENT IN EARLIER YEARS AND ALSO ACCEPTED BY THE DEPARTMENT AS SUCH, THE ASSESSEE HAVING NOT CON VERTED ITS SHARES IN STOCK IN TRADE, THERE WAS NO REASON TO ASSESS THE PROFIT ARISING OUT OF S ALE AS BUSINESS INCOME IN PLACE OF CAPITAL GAINS. 15. NOW, COMING TO THE AOS OBSERVATION WITH REGARD TO THE BORROWED FUND HAVING BEEN UTILIZED FOR ACQUIRING SHARES, WE FOUND THAT INCREMENTAL INV ESTMENT MADE DURING THE YEAR WAS OF RS.3.79 CRORESS WHICH WAS COMPLETELY FINANCED OUT OF SALE P ROCEEDS OF EARLIER INVESTMENT ON WHICH LONG TERM CAPITAL OF RS.10.91 CRORESS HAS BEEN RETURNED BY THE ASSESSEE. WE FOUND THAT SHARES COSTING FOR RS.3.59 CRORESS WERE REALIZED FOR RS.14.50 CROR ES. THE SHARES WERE SOLD DURING THE PERIOD FROM APRIL2007 TO JANUARY, 2008 AND FRESH SHARES HA S BEEN ACQUIRED DURING THE PERIOD JUNE, 2007 TO MARCH, 2008. IN CASE OF UNQUOTED SHARES, TH E ASSESSEE HAS ACQUIRED THE SAME DURING THE 3150 & 3961/M/14(09-10) SANJAY KUMAR PODDAR 7 PERIOD JUNE, 2007 TO MARCH, 2008, WHICH WAS ACQUIRE D OUT OF SHARE APPLICATION GIVEN IN EARLIER YEARS, WHICH CLEARLY INDICATES THAT ASSESSEE HAS NO T USED BORROWED FUNDS FOR INVESTMENT HELD EITHER AS ON 31-3-2008 OR 31-3-2007.THE AO HAS FAIL ED TO APPRECIATE THE FACTUAL POSITION EMERGING OUT OF THE AUDITED BALANCE SHEET TO THE EF FECT THAT INCREASED UNSECURED LOANS HAS BEEN UTILIZED FOR FURTHER ADVANCING LOANS. LOANS AND ADV ANCES AS ON 31-3-2008 AMOUNTED TO RS.20.56 CRORESS AS AGAINST LOANS AND LOAN OF RS.8.96 CRORES S AS ON 31-3-2007. THUS, INCREASE IN LOANS AND ADVANCES WERE MUCH MORE THAN INCREASE IN UNSECU RED LOANS. ACCORDINGLY, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF CIT(A) FOR HOLDING THESE SHARES AS INVESTMENT GIVING RISE TO THE CAPITAL GAIN. THE CIT(A) HAS PROPERLY APPRECIATED THE VOLUM E AND FREQUENCY OF THE TRANSACTION, THE ASSESSEES INTENTION OF INVESTING IN SHARES AS WELL AS DEPARTMENT S CONCLUSION OF TREATING THESE SHARES AS INVESTMENT IN THE SCRUTINY ASSESSMENT FRA MED IN EARLIER YEARS. 16. IF THE CONCLUSION DRAWN IN THE IMPUGNED ORDER, OBSERVATIONS MADE FROM THE ASSESSMENT ORDER, ASSERTIONS MADE BY RESPECTIVE COUNSEL AND THE MATER IAL AVAILABLE ON RECORD ARE KEPT IN JUXTAPOSITION AND ANALYZED, WE FIND THAT THE ASSESS EE HAD BEEN CONSISTENTLY INVESTING IN SHARES AND INCOME ARISING FROM SALE AND PURCHASE OF SHARES HAD BEEN SHOWN AND ACCEPTED AS CAPITAL GAINS. RESPECTFULLY FOLLOWING THE ABOVE ORDER OF THE TRIBU NAL,WE DECIDE THE EFFECTIVE GROUND OF APPEAL AGAINST THE AO. ITA/3150/MUM/2014 3. IN THE APPEAL FILED BY THE ASSESSEE,EFFECTIVE GROUN D OF APPEAL IS ABOUT DISALLOWANCE MADE U/S.14A OF THE ACT. DURING THE ASSESSMENT PROCEEDIN GS, THE AO FOUND THAT THE ASSESSEE HAD PAID AND INTEREST OF RS. 28,78,444/-, THAT IT HAD SHOWN LOAN OF RS.3.28 CRORES AND CAPITAL OF RS. 25.95 CRORES, THAT HE HAD INVESTED RS.18.49 CRORES IN SHA RES, THAT HE HAD SHOWN INTEREST INCOME OF RS. 48 LAKHS INCLUDING EXCELLENT INTEREST OF RS.16 LAKH S. THE AO MADE A DISALLOWANCE OF RS.13.21 LAKHS AND RS.8.52 LAKHS RESPECTIVELY UNDER RULE 8D (2) (II) AND RULE 8D (2) (III)OF THE RULES. 3.1. DURING THE APPELLATE PROCEEDINGS, BEFORE THE FAA,TH E ASSESSEE ARGUED THAT HIS OWN CAPITAL EXCEEDED THE TOTAL INVESTMENT IN SHARES HEARING EXE MPT INCOME, NO DISALLOWANCE UNDER THE HEAD INTEREST EXPENDITURE COULD BE MADE APPLYING TO SECT ION 14A READ WITH RULE 8D OF THE RULES. HE REFERRED TO THE CASES OF RELIANCE UTILITY AND POWER LTD (313 ITR 340) AND YATISH TRADING PRIVATE LTD. (129 ITD 237). AFTER CONSIDERING THE AVAILABLE MATERIAL, THE FAA OBSERVED THAT ASSESSEE HAD NOT BEEN ABLE TO SUBSTANTIATE, BY PRODUCING THE BAN K STATEMENT SHOWING MOVEMENT OF FUNDS, THAT NO BORROWED FUNDS HAD BEEN USED FOR INVESTMENT IN S HARES, THAT DURING THE YEAR HE HAD ENTERED INTO SEVERAL SHARE TRANSACTIONS INCOME FROM WHICH H AD BEEN OFFERED FOR TAXATION UNDER THE HEAD CAPITAL GAINS, THAT HE HAD NOT BEEN ABLE TO SUBMIT HIS CERTAINTY THAT THE FUNDS FROM THE SAME BANK ACCOUNTS USED FOR ALL BUSINESS PURPOSES DID NOT INC LUDE APPLICATION OF BORROWED FUNDS ALSO FOR INVESTMENT ACTIVITIES. REFERRING THE ORDER OF HIS P REDECESSOR FOR THE EARLIER AY. HE HELD THAT THE AO HAD RIGHTLY MADE THE DISALLOWANCE APPLYING THE P ROVISIONS OF RULE 8D (2) (II) OF THE RULES. 3150 & 3961/M/14(09-10) SANJAY KUMAR PODDAR 8 3.2. DURING THE COURSE OF HEARING BEFORE US, THE AR STAT ED THAT THE TRIBUNAL HAD DELETED THE DISALLOWANCE MADE BY THE AO UNDER THE HEAD INTEREST EXPENDITURE IN THE EARLIER YEAR, THAT IT WAS HELD THAT INVESTMENTS WERE MADE OUT OF ASSESSEE OWN FUNDS, THAT THE ASSESSEE HAD RECEIVED INTEREST MORE THAN THE INTEREST PAID, THAT INVESTME NT ON WHICH EXEMPT INCOME FUNDS WERE ONLY SUBJECTED TO PROVISIONS OF SECTION 14A. HE RELIED U PON THE CASES OF HDFC BANK LTD (383 ITR 529), KARNAVATI PETROLEUM PRIVATE LTD. (ITA/2228/AH D/2012) ACB INDIA LTD. (374 ITR 1081). 3.3. WE FIND THAT WHILE DECIDING THE APPEAL FOR THE EARL IER AY.(SUPRA), THE TRIBUNAL HAS DEALT WITH THE ISSUE AS UNDER: 17. WITH REGARD TO DISALLOWANCE MADE BY THE AO U/S .14A READ WITH RULE 8D, WE FOUND THAT ASSESSEE HAS NOT INVESTED INTEREST BEARING FUNDS IN THE SHARES AND SECURITIES IN TERMS OF DETAILED DISCUSSION MADE HEREINABOVE. SINCE NO INTEREST EXPE NDITURE WAS INCURRED DURING THE YEAR IN RESPECT OF ADDITIONAL INVESTMENT PUT IN THE SHARES WHICH WERE FULLY FINANCED OUT OF THE SALE PROCEEDS OF SHARES HELD AS LONG TERM CAPITAL INVEST MENT AND SAME ALSO OFFERED AS LONG TERM CAPITAL GAINS, THERE IS NO REASON FOR DISALLOWANCE OF INTEREST EXPENDITURE BY INVOKING PROVISIONS OF SECTION 14A READ WITH RULE 8D. 18. WITH REGARD TO THE OTHER EXPENDITURE DEBITED IN THE PROFIT AND LOSS ACCOUNT, WE FOUND THAT COMMON EXPENDITURE HAVE BEEN DEBITED WHICH ARE IN T HE NATURE OF INSURANCE EXPENSES, BANK CHARGES, AUDIT FEES, REPAIRS AND MAINTENANCE, STAMP DUTY, ETC., WHICH AMOUNTS TO RS.65,925/-. SINCE THIS EXPENDITURE WAS ALSO ATTRIBUTABLE FOR TH E EARNING OF EXEMPT INCOME, WE DIRECT THE AO TO CONFIRM THE DISALLOWANCE OF THESE EXPENDITURE OF RS.65,925/- U/S.14A. RESPECTFULLY FOLLOWING THE ABOVE , WE HOLD THAT NO DISALLOWANCE SHOULD BE MADE UNDER THE HEAD INTEREST EXPENDITURE.DISALLOWANCE UNDER RULE 8D (2) (III) SHOULD BE RESTRICTED TO THE EXPENSES CLAIMED IN THE P&L ACCOUNT, AS DISALLOWED IN EARLIE R YEAR. EFFECTIVE GROUND OF APPEAL IS ALLOWED IN FAVOUR OF THE ASSESSEE, IN PART. AS A RESULT,APPEAL FILED BY THE AO IS DISMISSED AND APPEAL OF THE ASSESSEE IS ALLOWED PARTLY. ORDER PRONOUNCED IN THE OPEN COURT ON 05 TH APRIL, 2017. 05 , 2017 SD/- SD /- ( / RAM LAL NEGI ) ( / RAJENDRA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; /DATED : 05.04.2017 JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3150 & 3961/M/14(09-10) SANJAY KUMAR PODDAR 9 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR A BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.