HARIT EXPORTS LTD., MUMBAI V. THE ASST.C.I.T., CIR 4(2), MUMBAI

ITA 3694/MUM/2009

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 49209 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-06-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 25-05-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 05-06-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: HAROM TULSIYAN
• Keywords: Business income; Revenue expenditure; Rule 8D; Set aside; Capital Gains
• Section: 14A

Judgement Text

1 ITA NO. 3694/MUM/2009 (ASST YEAR 2005-06) IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI H BENCH MUMBAI BENCHES, MUMBAI BEFORE SHRI J SUDHAKAR REDDY, AM & SHRI VIJAY PAL RAO, JM ITA NO. 3694/MUM/2009 (ASST YEAR 2005-06) HARIT EXPORTS LTD 3G, 3 RD FLOOR 11 KAKAD HOUSE NW MARINE LIENS MUMBAI 20 VS THE ASST COMMR OF INCOME TAX CIR 4(2), MUMBAI (APPELLANT) (RESPONDENT) PAN NO.AAACH2826C A SSESSEE BY SHRI HAROM TULSIYAN REVENUE BY SHRI V V SHASHI PER VIJAY PAL RAO, JM THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER DATED 30.3.2009 OF THE CIT(A) FOR THE ASSESSMENT YEAR 2005-06. 2 THE ASSESSEE HAS RAISED THE FOLLOWING EFFECTIVE G ROUNDS IN THIS APPEAL: I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN TREATING SHOR T TERM CAPITAL GAIN AND LONG TERM CAPITAL GAIN AS BUSINESS INCOME. II) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE GAIN IN RESPECT OF TRANSACTION CARRIED OUT OF INVESTMENT MADE SHOULD HA VE BEEN TREATED AS LONG TERM AND SHORT TERM GAIN. III ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DISALLOWANCE OF RS. 57,692/- U/S 14A BE DELETED. IV) ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE C IT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF RS. 79,78,082/- OUT OF THE KEYM AN INSURANCE PREMIUM OF RS. 80 LACS. V) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, DISAL LOWANCE OF RS. 79,78,082/- OUT OF THE KEYMAN INSURANCE PREMIUM PAID B DELETED. 3 GROUND NOS. 1 & 2 REGARDING THE CAPITAL GAINS OR BUSINESS INCOME. 2 ITA NO. 3694/MUM/2009 (ASST YEAR 2005-06) 3.1 THE ASSESSEE FILED ITS RETURN OF INCOME SHOWING THE INCOME AS UNDER: INCOME FROM SHARE BUSINESS 1,58,17,986 SHORT TERM CAPITAL GAINS 56,48,442 LONG TERM CAPITAL GAINS 11,42,917 INCOME FROM SPECULATION BUSINESS 6,15,414 DIVIDEND INCOME 58,89,408 3.2 THE ASSESSEE STARTED THE BUSINESS FROM THE EARL IER YEAR. THE ASSESSMENT YEAR 2004-05 WAS THE FIRST YEAR OF THE ASSESSES BUSINES S,. THE ASSESSING OFFICER NOTED THAT 75% OF THE SHARES WERE PURCHASED DURING THE YEAR HA VE BEEN SOLD BY THE ASSESSEE. THE ASSESSEE HAS CARRIED OUT THE PURCHASE AND SALE ACTIVITIES OF SHARE THROUGHOUT THE YEAR. THE ASSESSEE HAS ALSO DECLARED RS. 1,58,1 7,986/- AS BUSINESS INCOME FROM DEALING IN SHARES AND RS. 6,15,414/ AS PROFITS AND GAINS OF SPECULATION BUSINESS. THE ASSESSING OFFICER FURTHER NOTED THAT THE ASSESSEE H AS BORROWED HUGE LOANS TO FUND HIS ACTIVITIES AS HE DID NOT HAVE HIS OWN FUNDS TO TRADE AT A HUGE LEVEL. THE SCALE OF OPERATION OF THE ASSESSEE WAS HUGE. THE ASSESSING OFFICER FURTHER NOTED THAT THE ASSESSEE HAS PURCHASED 26500 SHARES OF COLGATE OUT OF WHICH 20000 SHARES WERE KEPT IN THE INVESTMENT ACCOUNT AND THE BALANCE OF 6500 WERE REFLECTED IN THE TRADING ACCOUNT. ACCORDINGLY, THE ASSESSING OFFICER TREATED THE ASSESSEE AS A TRADER IN SHARES ON THE FOLLOWING GROUNDS: A) THE PURCHASE AND SALE OF SHARES IS NOT AN UNRELATE D ACTIVITY BUT INCIDENTAL TO THE BUSINESS OF THE ASSESSEE. B) IT IS A WELL SETTLED LAW THAT EVEN A SINGULAR TRA NSACTION OF PURCHASE AND SALE COULD BE IN THE NATURE OF TRADE. BUT HERE THE ASSESSEE HAS CONTINUOUSLY AND SYSTEMATICALLY CARRIED OUT THE ACTIVITY OF TRADING IN SHARES OVER THE PERIOD OF ONE YEAR. I) THE ASSESSEE HAS BORROWED FUNDS TO FUND HIS ACTIV ITY FOR PURCHASE AND ALE OF HARES. THE PRESENCE OF BORROWED FUNDS IMPA RTS THE ACTIVITY 3 ITA NO. 3694/MUM/2009 (ASST YEAR 2005-06) THE COLOUR OF TRADE RATHER THAN INVESTMENT. THERE CANN OT BE A BUSINESS OF INVESTMENT AS HAS BEEN HELD IN THE FOLLOWING CAS ES: I) MOHAN T ADVANCE FINANCE P LTD VS ITO 9 SOT 675 (MUM) II) SUNASH FINANCE CO LTD V ACIT 106 TTJ 855 (MUM ) III) PUNJAB NATIONAL BANK V DCIT 103 TTJ 908AND IV) EVERPLUS SECURITY AND FINANCE LTD V DCIT 101 I TD 151 C) THE ASSESSEE HAS NOT FURNISHED ANY REASON FOR PU RCHASE NEITHER HAS HE FURNISHED THE REASON FOR SALE. IN THE ABSENCE OF A DE FINITIVE REASON ON THE PART OF ASSESSEE WHAT CAN BE GAUGED FROM THE FACTS IS THA T THE ASSESSEE HAS BROUGHT AND SOLD DEPENDING ON THE VITALITY OF THE M ARKET. THIS BEHAVIOUR REASSEMBLES THAT OF THE TRADER. D) THE ASSESSEE HAS ARGUED THAT IT HAS RECORDED THE A BOVE PURCHASES AS INVESTMENTS THEREFORE THE INCOME FROM THE SAME SHOULD BE TREATED AS CAPITAL GAINS. THE RECORDING IN THE BOOKS OF ACCOUNTS IS ILL UMINATORY BUT IT IS NOT SACROSANCT. THE INCOME FROM THE SAME CAN BE ASSESSED AS BUSINESS INCOME DEPENDING ON THE FACTS AND CIRCUMSTANCES OF THE CAS E. E) COMMODITIES AND SCRIPS, AS HELD BY ROYAL COMMISS ION OF ENGLAND ARE NORMALLY THE SUBJECT MATTER OF TRADING AND VERY EXCEP TIONALLY THE SUBJECT OF INVESTMENT. F) USUALLY THE PROFITS ON THIS PROPERTY HAVE BEEN REAL IZED IN A VERY SHORT DURATION. AS DISCUSSED ABOVE, IT IS SEEN THAT THE ASSESSEE AH S SHOWN ALL THE CHARACTERISTICS OF A TRADER RATHER THAN AN INVESTOR. 3.3 ON APPEAL, THE CIT(A) UPHELD THE ACTION OF THE ASSESSING OFFICER TREATING THE CAPITAL GAINS ADMITTED BY THE ASSESSEE AS BUSINESS INCOME. 4 BEFORE US, THE LD AR OF THE ASSESSEE HAS SUBMITT ED THAT THE ASSESSEE COMPANY CARRIED OUT THE TRADING IN SECURITIES AND MUTUAL FUNDS. THE ASSESSEE MAINTAINS TWO PORTFOLIOS I.E. TRADING AND INVESTMEN T AND TWO SEPARATE ACCOUNTS FOR THIS PURPOSE WERE MAINTAINED. THE LD AR OF THE ASSE SSEE HAS FURTHER SUBMITTED THAT RIGHT AT THE TIME OF MAKING THE PURCHASE, THE ASSES SEE WOULD DECIDE WHETHER THE PURCHASE WAS FOR THE PURPOSES OF TRADING OR FOR THE PURPOSES OF INVESTMENT. THE EXPENDITURE RELATING TO THE PURCHASE AND SALES LIKE SERVICE TAX, SECURITIES TRANSACTION TAX AND TRANSACTION CHARGES WERE DEBITED TO SEPARAT E ACCOUNT AND IT WAS NOT MERGED WITH THE SAME ACCOUNT. HE HAS FURTHER SUBMI TTED THAT THE ASSESSEE HAS ONLY 39 TRANSACTIONS IN RESPECT OF SHORT TERM CAPITAL GA INS. CERTAIN TRANSACTIONS ARE SHOWN 4 ITA NO. 3694/MUM/2009 (ASST YEAR 2005-06) AS MORE THAN ONE BECAUSE THE PURCHASE DATES ARE DIF FERENT. THIS HAPPENS BECAUSE WHEN THE ORDER HAS NOT BEEN COMPLETED IN ONE DAY, T HE TRANSACTION CARRIED TO ANOTHER DATE AND THEREFORE, THE SAME SCRIPS HAS BEE N SOWN AS PURCHASE AND SALE FOR MORE THAN ONE DATE. SOME OF THE TRANSACTIONS W HICH WERE COMPLETED IN ONE DAY ALSO HAD SHOWN AS MORE THAN ONE TRANSACTION BEC AUSE THE ORDER OF PURCHASE AND SALE HAS BEEN COMPLETED IN MORE THAN ONE LOT. THUS, THE LD AR OF THE ASSESSEE HAS SUBMITTED THAT THERE ARE ONLY 27 TRANSACTIONS I N RESPECT OF 15 SCRIPS FOR WHICH THE ASSESSEE HAS ADMITTED THE SHORT TERM CAPITAL GAIN. HE HAS POINTED OUT THAT THE TOTAL TURNOVER IN RESPECT OF TRADING IN SHARES IS MORE TH AN 1200 WHEREAS IN RESPECT OF SHARE REPRESENTING CAPITAL GAINS IS ONLY TO THE TUNE OF 3 .30 CRORES. WHEN THE ASSESSEE IS MAINTAINING SEPARATE PORTFOLIOS AND ACCOUNTS, THEN THE TRANSACTION IN THE TRADING ACCOUNT CANNOT BE CONSIDERED FOR DECIDING THE TRANS ACTION IN THE INVESTMENT PORTFOLIO. THE ASSESSING OFFICER HAS TAKEN INTO CO NSIDERATION THE ENTIRE TRANSACTIONS OF TRADING PORTFOLIOS AS WELL AS INVESTMENT PORTFOL IOS TO JUSTIFY HIS ACTION THAT THE ASSESSEE IS INVOLVED HUGE NUMBER OF TRANSACTIONS. 4.1 THE LD AR FURTHER POINTED OUT THAT THE ASSESSIN G OFFICER RECORDED 12000 SHARERS IN THE CLOSING STOCK WHEREAS THE ACTUAL NUMBER OF S HARES IS 1,20,000 SHARES IN THE CLOSING STOCK. HE HAS RELIED ON THE CBDT CIRCULAR NO. 4/2007 DATED 15.6.2007 AND SUBMITTED THAT AS PER THE SAID CIRCULAR DETAILED GU IDELINES ON THE BASIS OF WHICH THE DISTINCTION BETWEEN TRADING PORTFOLIO AND INVESTMEN T PORTFOLIO CAN BE MADE. HE HAS RELIED UPON THE DECISION OF THE HONBLE SUPREME COU RT IN THE CASE OF ASSOCIATED INDUSTRIAL DEVELOPMENT CO P LTD REPORTED IN 82 ITR5 86 AND SUBMITTED THAT WHEN THE ASSESSEE HAS TREATED THE SHARES AS INVESTMENT AND N OT STOCK-IN-TRADE THEN THE 5 ITA NO. 3694/MUM/2009 (ASST YEAR 2005-06) RECORD OF THE ASSESSEE IS RELEVANT EVIDENCE TO DETE RMINE THE DISTINCTION BETWEEN THE STOCK IN TRADE AND INVESTMENT. THE LD AR FURTH ER SUBMITTED THAT THE ASSESSEE OWN FUNDS FROM SHARE CAPITAL AND SURPLUS IS RS.3.25 CRORES WHEREAS THE INVESTMENT S ONLY 3.03 CRORES. THEREFORE, THE ASSESSEE HAS USED ITS OWN FUNDS FOR THE PURPOSE OF INVESTMENTS. HE HAS REFERRED THE DETAILS OF SHARES REPRESENTING SHORT TERM CAPITAL GAINS AT PAGE 7 OF THE PAPER BOOK AND SUBMITTED THA T THE SHARES PURCHASED ON THE SAME DATES ARE RECORDED AS MORE THAN ONE TRANSACTIO N BECAUSE ONE ORDER HAS BEEN COMPLETED BY THE NUMBER OF LOTS OF SHARES AVAI LABLE. HE RELIED UPON THE ORDER OF THE TRIBUNAL IN THE CASE OF GOPAL PUROHIT AND AL SO SUBMITTED THAT THE ORDER OF THE TRIBUNAL HAS BEEN UPHELD BY THE HONBLE JURISDICTIO NAL HIGH COURT VIDE ORDER DATED 6.1.2010. HE HAS ALSO RELIED UPON THE FOLLOWING DEC ISIONS: I) CIT VS GOPAL PUROHIT 188 TAXMAN 140 (BOM) II) GOPAL PUROHIT VS JCIT 122 TTJ 87(MUM) III) JANAK S RANGWALA (ITA NO.1163/MUM/2004 DT 19. 12.2006) IV) ACIT VS SUNDAR IYER (ITA NO.295/MUM/2001 DT 15 .10.2002) V) ACIT VS MOTILAL OSWAL (ITA NO.3861/MUM/2001 DT 28.8.6) VI) MANAGEMENT STRUCTURE & SYSTEMS P LTD VS ITO (ITA NO.6966/MUM/2007DT 30.4.2 010) VII WALFORT FINANCIAL SERVICES LTD VS ACIT (ITA NO.847/MUM/209 DT 30.6.2010) VIII) JM SHARE & STOCK BROKERS LD VS JCIT (ITA NO.28010/MUM/2000 DT 30.11.2007 ) 4.2 THE LD DR, ON THE OTHER HAND, HAS SUBMITTED THA T THE MAINTENANCE OF SEPARATE PORTFOLIOS IS NOT A SOLE CRITERIA FOR DETE RMINING THE NATURE OF TRANSACTION. THE ASSESSEE HAS CARRIED OUT THE TRANSACTIONS OF REPEAT ED NATURE AND SOME OF WHICH ARE TREATED AS TRADING WHEREAS OTHER ARE TREATED AS INV ESTMENT. THEREFORE, IT IS NOT CLEAR AT THE TIME OF PURCHASE THAT WHETHER PARTICULAR SCR IPS WERE PURCHASE BY THE ASSESSEE FOR INVESTMENT PURPOSE OR FOR TRADING PURP OSE. THE ASSESSING OFFICER HAS SPECIFICALLY POINTED OUT THE INSTANCES OF THE PURCH ASE AND SALE WHETHER THE ASSESSEE 6 ITA NO. 3694/MUM/2009 (ASST YEAR 2005-06) HAS PURCHASED NUMBER OF SAME SCRIPS AND PART OF WHI CH SHOWN IN THE INVESTMENT ACCOUNT; BUT THE SAME WERE REFLECTED IN THE TRADING ACCOUNT. FROM THE NATURE OF ACTIVITY OF THE ASSESSEE, IT IS CLEAR THAT THE ASSE SSEE WAS DOING ACTIVITY IN AN ORGANIZED AND SYSTEMATIC MANNER AS A TRADER AND NOT A INVESTOR. HE RELIED UPON THE ORDERS OF THE LOWER AUTHORITIES. 5 WE HAVE CONSIDERED THE RIVAL CONTENTION AND PERUS ED THE RELEVANT MATERIAL ON RECORD. THE ASSESSING OFFICER HAS RECORDED THE D ETAILS OF TRANSACTIONS, WHICH ARE SHOWN BY THE ASSESSEE AS SHORT TERM CAPITAL GAIN AN D FROM THE REASON RECORDED BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER, IT I S EVIDENT THAT THE ASSESSING OFFICER HAS GIVEN CERTAIN GROUND IN SUPPORT OF HIS ACTION BY TREATING THE SHORT TERM CAPITAL GAIN AS TRADING INVESTMENT AND NO SPECIFIC INSTANCE HAS BEEN MENTIONED EXCEPT IN THE CASE OF SHARES OF COLGATE WHERE THE ASSESSEE P URCHASED 26500 SHARES OUT OF WHICH 20000 WERE HELD AS INVESTMENT AND 6500 WERE S HOWN IN TRADING PORTFOLIO. IT IS TO BE NOTED THAT THERE IS NO BAR OF TRADING IN SHAR E AS WELL AS KEEPING SOME SCRIPS IN THE INVESTMENT PORTFOLIO. WHEN THE ASSESSEE HAS MA INTAIN A SEPARATE PORTFOLIOS RIGHT FROM THE BEGINNING AS IN THE CASE IN HAND, AND FROM THE DETAILS OF SHORT TERM CAPITAL GAINS, IT IS CLEAR THAT THE TOTAL NUMBER OF TRANSAC TIONS ARE ONLY 27 DURING THE ENTIRE PERIOD, WHICH ITSELF SHOWS THAT THE ACTIVITY OF SAL E AND PURCHASE OF SHARES IN THE INVESTMENT PORTFOLIO IS NOT SO FREQUENT. FURTHER, N ONE OF THE TRANSACTIONS IN THE SAME SCRIPS ARE REPETITIVE IN NATURE. NO SINGLE FORMULA OR PRINCIPLE CAN BE THE DETERMINATIVE FACTOR FOR DECIDING THE NATURE OF THE TRANSACTION I.E. AS TRADING TRANSACTION OR INVESTMENT. A BUNDLE OF CRITERIA/ FACTORS/PRINCIPLES ARE TO BE TAKEN INTO ACCOUNT IN ORDER TO DETERMINE THE NATURE OF TR ANSACTION. 7 ITA NO. 3694/MUM/2009 (ASST YEAR 2005-06) 5.1 THE HONBLE SUPREME COURT IN THE CASE OF CIT VS ASSOCIATED INDUSTRIAL DEVELOPMENT CO P LTD REPORTED IN 82 ITR 586 AS WELL AS IN THE CASE OF CIT VS H HOLSCK LARZEN REPORTED IN 160 ITR 67 HAS LAID DOWN VARIOUS PRINCIPLES, WHICH HAS BEEN CONSIDERED BY THE CBDT FOR ISSUING THE CIRCULAR NO. 4/2007 DATED 15.6.2007. IN SHORT, THE PRINCIPLES LAID DOWN IN THOSE CASES FOR DECIDI NG THE QUESTION OF NATURE OF THE TRANSACTION AS TRADING OR INVESTMENT, MAINLY/BROAD LY ARE;- WHAT IS THE INTENTION OF THE ASSESSEE AT THE TIME OF PURCHASE OF SHARES; WH ETHER THE ASSESSEE HAS BORROWED MONEY TO PURCHASE AND PAID INTEREST THEREON; WHAT IS THE FREQUENCY OF SUCH PURCHASE AND DISPOSAL IN THAT PARTICULAR ITEM; WHET HER THE PURCHASE AND SALE IS FOR REALIZING PROFIT OR PURCHASES ARE MADE FOR RETENT ION AND APPRECIATION IN ITS VALUE; HOW THE VALUE OF ITEMS HAS BEEN TAKEN IN THE BALANC E SHEET. THUS, NO SINGLE FACTOR CAN BE SAID TO BE DECISIVE FACTOR AND NO SINGLE PRI NCIPLE CAN BE LAID DOWN TO DETERMINE THE NATURE OF THE TRANSACTION I.E. TRADIN G ACTIVITY OR INVESTMENT. EACH CASE HAS TO BE DECIDED BASED ON THE PARTICULAR FACTS OF THE SAID CASE. THEREFORE, THERE CANNOT BE ANY PRECEDENT IN THE MATTER OF ADJUDICATI ON OF THE ISSUE OF NATURE OF TRANSACTION WITH REGARD TO PURCHASE AND SALE OF SHA RES AND SECURITIES. THE ISSUE CAN BE DETERMINED ONLY BY TAKING INTO ACCOUNT ALL THE R ELEVANT FACTS AND PRINCIPLES AS LAID DOWN BY THE HONBLE SUPREME COURT AND OTHER HI GH COURTS. THUS, PRINCIPLES ARE TAKEN AS GUIDELINES TO BE APPLIED IN THE FACTS OF E ACH CASE AND CANNOT BE TAKEN AS STRICT JACKET/FORMULA. 5.2 UNDISPUTEDLY, WHEN THE ASSESSEE HAS BEEN TREATI NG THE TRANSACTIONS SEPARATELY IN THE BOOKS OF ACCOUNT FROM STOCK IN TR ADE, AS THE ASSESSEE IS MAINTAINING TWO SEPARATE PORTFOLIOS FOR INVESTMENT AND TRADING TRANSACTIONS. IT IS NOW SETTLED PROPOSITION OF LAW THAT AN ASSESSEE CAN HAVE TWO SEPARATE PORTFOLIOS ONE FOR INVESTMENT AND OTHER FOR TRADING TRANSACTIO NS AND THE INCOME FROM THESE 8 ITA NO. 3694/MUM/2009 (ASST YEAR 2005-06) TWO PORTFOLIOS IS ASSESSABLE UNDER THE DIFFERENT HE ADS I.E. CAPITAL GAIN AND BUSINESS. THUS, FROM THE FACTS AND MATERIALS ON R ECORDS, IT IS CLEARLY ESTABLISHED THAT THE INTENTION OF THE ASSESSEE, AT THE TIME OF ACQUI RING THE SHARES, WHICH ARE CLAIMED AS INVESTMENT WAS FOR INVESTMENT AND NOT FOR TRADIN G. 5.3 AS REGARDS THE FUNDS USED BY THE ASSESSEE FOR I NVESTMENT PURPOSES, IT IS CLEAR FROM THE BALANCE SHEET OF THE ASSESSEE THAT THE ASS ESSEES OWN FUND IS MORE THAN THE INVESTMENT ADMITTED BY THE ASSESSEE. THEREFORE, IT CANNOT BE SAID THAT THE ASSESSEE HAS USED THE BORROWED FUNDS FOR THE PURPOS E OF INVESTMENT. WHEN THE FREQUENCY OF THE TRANSACTIONS IS ALSO VERY LIMITED AS THE ASSESSEE CARRIED ONLY 27 TRANSACTIONS IN15 SCRIPS, THEN IT CANNOT BE SAID TH AT FOR INVESTMENT PURPOSE, THE ASSESSEE HAD HIGH FREQUENCY OF SALE AND PURCHASE. WHEN THE ASSESSEE HAS SHOWN THE INVESTMENT AT COST AND NEVER VALUED THE SAME IN THE BALANCE SHEET AT THE BEGINNING OR AT THE END OF THE YEAR AT MARKET PRICE OR REALIZATION PRICE THEN THE INTENTION OF THE ASSESSEE IS CLEAR. EVEN OTHERWISE, STOCK IN TRADE HAS BEEN VALUED AT MARKET OR REALIZATION PRICE, WHICH SEPARATES THE TR ADING ACCOUNT FROM THE INVESTMENT. 6 IN VIEW OF THE ABOVE DISCUSSION, WE HAVE NO DOUB T IN MIND THAT THE NATURE OF THE TRANSACTION REPRESENTING SHORT TERM CAPITAL GAI NS IS INVESTMENT AND NOT TRADING. ACCORDINGLY, WE SET ASIDE THE ORDERS OF THE LOWER A UTHORITIES ON THIS ISSUE AND ALLOW THE CLAIM OF THE ASSESSEE. 7 GROUND NO.3 RELATES TO DISALLOWANCE U/S 14A. 7.1 THE ASSESSING OFFICER DISALLOWED 10% OF THE TRA NSACTION CHARGES AND DEPOSITARY CHARGES AS EXPENDITURE INCURRED FOR EARN ING TAX FREE INCOME. 9 ITA NO. 3694/MUM/2009 (ASST YEAR 2005-06) 7.2 ON APPEAL, THE CIT(A) HAS DIRECTED THE ASSESSIN G OFFICER TO APPLY RULE 8D FOR THE PURPOSE OF DISALLOWANCE U/S 14A. 8 WE HAVE HEARD THE LD AR OF THE ASSESSEE AND THE L D DR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. IN VIEW OF THE DECISI ON OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG P LTD VS ACIT RE PORTED IN 328 ITR 81, RULE 8D IS NOT APPLICABLE FOR THE ASSESSMENT YEAR UNDER CONSIDERAT ION. FURTHER, THE ISSUE IS SET ASIDE TO THE RECORD OF THE ASSESSING OFFICER TO DECIDE TH E ISSUE AFRESH IN VIEW OF THE DECISION OF THE JURISDICTIONAL HIGH COURT CITED SUP RA. 9 THE REMAINING GROUND IS REGARDING DISALLOWANCE ON ACCOUNT OF KEYMAN INSURANCE PREMIUM. 9.1 THE ASSESSEE TOOK KEYMAN INSURANCE AND PAID THE PREMIUM OF RS. 80 LACS ON 31.3.2005. THE ASSESSING OFFICER ALLOWED AN AMOUNT OF RS. 21,918/- AS EXPENDITURE PERTAINING TO THE CURRENT YEAR AND HAS DISALLOWED A SUM OF RS. 79,78,082/-. 9.2 ON APPEAL, THE CIT(A) HAS CONFIRMED THE DISALLO WANCE MADE BY THE ASSESSING OFFICER . 10 BEFORE US, THE LD AR OF THE ASSESSEE HAS SUBMITT ED THE INSURANCE PREMIUM IS A REVENUE EXPENDITURE AND THE PAYMENT OF PREMIUM DUE ON THE DATE WHEN THE INSURANCE IS TAKEN. THEREFORE, THERE IS NO JUSTIFIC ATION IN DISALLOWING THE PREMIUM ON THE GROUND THAT IT WAS TAKEN ON THE LAST DAY OF THE PREVIOUS YEAR. HE HAS RELIED UPON THE ORDER OF THE TRIBUNAL IN THE CASE OF SUNI TA FINLEASE LTD REPORTED IN 118 TTJ 263 (BILASPUR) AND THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF PG 10 ITA NO. 3694/MUM/2009 (ASST YEAR 2005-06) ELECTRONICS REPORTED IN 98 TTJ 896 (DEL). HE HAS AL SO RELIED UPON THE CBDT CIRCULAR NO. 762 DATED 18.2.1998. 10.1 THE LD DR, ON THE OTHER HAND, SUPPORTED THE OR DERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT WHEN THE ASSESSEE HAS PAID THE PREMIUM ONLY ON THE LAST DAY OF THE YEAR; THEN THE EXPENDITURE DOES NOT PERTAINING TO THE PERIOD RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION; BUT IT RELATES TO THE NEXT FINANCIAL YEAR AND THEREFORE, THERE IS JUSTIFICATION IN DISALLOWING T HE EXPENDITURE IN PROPORTION TO THE PERIOD, WHICH RELATES TO THIS ASSESSMENT YEAR. 11 WE HAVE CONSIDERED THE ARGUMENTS OF THE LD AR OF THE ASSESSEE AND THE LD DR AND THE RELEVANT MATERIAL ON RECORD. THERE IS NO DISPUTE REGARDING THE ALLOWABILITY OF KEYMAN INSURANCE. THE DISALLOWA NCE MADE BY THE ASSESSING OFFICER IS ON THE GROUND THAT THE ASSESSEE TOOK THE INSURAN CE POLICY ON THE LAST DAY OF THE FINANCIAL YEAR; THEREFORE, PROPORTIONATE AMOUNT OF THE PREMIUM PAID HAS BEEN DISALLOWED TREATING THE SAME AS PERTAINING TO THE N EXT FINANCIAL YEAR. IT IS TO BE NOTED THAT THE INSURANCE PREMIUM BECOMES DUE AT THE BEGINNING OF THE POLICY PERIOD OR AT THE TIME OF TAKING THE POLICY. THEREFO RE, IT CANNOT BE BIFURCATED AS PER THE BROKEN PERIOD. WHEN THE EXPENDITURE BECOME DUE DURING THE FINANCIAL YEAR RELEVANT TO ASSESSMENT YEAR UNDER CONSIDERATION THE N THE SAME IS AN ALLOWABLE EXPENDITURE AND CANNOT BE DISALLOWED ON THE GROUND THAT THE INSURANCE COVERS THE PERIOD WHICH EXPENDED TO THE NEXT FINANCIAL YEAR. T HEREFORE, WE ARE OF THE CONSIDERED OPINION THAT THE INSURANCE PREMIUM PAID BY THE ASSESSEE DURING THE YEAR IS AN ALLOWABLE EXPENDITURE FOR THE YEAR IN WH ICH IT IS PAID IRRESPECTIVE OF THE FACT THAT THE INSURANCE POLICY COVERS THE PERIOD OF THE NEXT FINANCIAL YEAR. 11 ITA NO. 3694/MUM/2009 (ASST YEAR 2005-06) 12 IN VIEW OF THE ABOVE DISCUSSION, WE SET ASIDE T HE ORDERS OF THE LOWER AUTHORITIES ON THIS ISSUE AND THE SAME IS DEC IDED AGAINST THE REVENUE AND IN FAVOUR OF THE ASSESSEE. 13 IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON THE 29 TH , DAY OF JUNE 2011. SD/- S D/- ( J SUDHAKAR REDDY ) ACCOUNTANT MEMBER ( VIJAY PAL RAO ) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 29 TH , JUNE 2011 RAJ* COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 C IT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI