HIREN M SHAH, MUMBAI V. ASST CIT 17(2), MUMBAI

ITA 3879/MUM/2013

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 2796 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 5 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-11-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Next Hearing Date: 13-08-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 16-05-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANUPAMA SHUKLA
• Keywords: Capital asset; Business income; Depreciation
• Section: 143(3)

Judgement Text

HIREN M SHAH ITA 3879 /M/20 1 3 1 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH H, MUMBAI , , BEFORE SHRI AMIT SHUKLA , JUDICIAL MEMBER AND SHRI RAMIT KOCHAR , ACCOUNTAN T MEMBER ITA NO. : 3879 /MUM/20 1 3 ( ASSESSMENT YEAR: 200 8 - 0 9 ) HIREN M SHAH , 371, SUKH NIWAS, 1 ST FLOOR, BHANDARKAR ROAD, MATUNGA (EAST), MUMBAI - 400 019 .: PAN: A A UPS 0624 G VS ASST . COMMISSIONER OF INCOME TAX 17 ( 2 ), PIRAMAL CHAMBERS, MUMBAI (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI VIJAY MEHTA RESPONDENT BY : MISS ANUPAMA SHUKLA /DATE OF HEARING : 13 - 08 - 201 5 / DATE OF PRONOUNCEMENT : 09 - 11 - 201 5 ORDER , . . : PER AMIT SHUKLA, J M : THE AFORESAID APPEAL HA S BEEN FILED BY THE ASSESSEE AGAINST IMPUGNED ORDER DATED , 0 6 .0 3 .201 3 PASSED BY CIT(A) - 29 , MUMBAI FOR THE QUANTUM OF ASSESSMENT PASSED U/S 143(3) FOR THE ASSESSMENT YEAR 200 8 - 0 9 . IN VARIOUS GROUNDS OF APPEAL, THE ASSESSEE HA S MAINLY CHALLENGED THE FOLLOWING ADDITIONS/ DISALLOWANCES: - F IRSTLY , THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN TREATING THE AMOUNT OF LONG - TERM - CAPITAL - GAINS OF RS. 13,04,76, 692/ - ON SALE OF SHARES AS SHARE TRADING INCOME AND ASSESSING THE SAME UNDER THE HEAD PROFIT AND GAINS OF THE BUSINESS ; AND SECONDLY , LD. CIT(A) HAS ERRED IN LAW AND IN FACTS IN DISALLOWING DEPRECIATION OF RS. 3,85,043/ - WITHOUT CONDUCTING ANY BUSINES S ACTIVITIES DURING THE YEAR. HIREN M SHAH ITA 3879 /M/20 1 3 2 2. THE BRIEF F ACTS QUA THE FIRST ISSUE IS THAT, ASSESSEE IS AN INDIVIDUAL WHO HA S DECLARED LONG - TERM - CAPITAL - GAIN IN SHARE TRANSACTION S AMOUNTING TO RS. 13,05,45,813/ - WHICH WAS CLAIMED AS EXEMPT U/S 10(38). THE AO REQUIRED T HE ASSESSEE TO FURNISH THE DETAILS OF SHARE TRANSACTIONS ALONG WITH THE COPIES OF BILLS, DEMAT ACCOUNT ETC. IN RESPONSE TO THE SHOW CAUSE NOTICE AS TO WHY THE PROFIT/GAIN S DECLARED AS LONG - TERM - CAPITAL - GAIN SHOULD NOT BE TREATED AS BUSINESS INCOME , T HE ASS ESSEE SUBMITTED THAT, IN THE EARLIER YEARS, SIMILAR TRANSACTION OF SALE OF SHARES AND SECURITIES WERE ASSESSED UNDER THE HEAD CAPITAL GAINS (EITHER AS STCG OR LTCG) BY THE DEPARTMENT UNDER THE SCRUTINY PROCEEDINGS U/S 143(3) IN THE ASSESSMENT YEAR 2005 - 0 6, 2006 - 07 & 2007 - 08. EVEN PRIOR TO AY 2004 - 05 ALSO THE ASSESSEE HA D TREATED THE PROFIT /GAIN ON SALE OF SHARES AS CAPITAL GAIN AND NOT AS BUSINESS INCOME , I.E. MUCH BEFORE THE INTRODUCTION OF STT. ASSESSEE FURTHER SUBMITTED THAT HE HAS BEEN MAINTAINING THR EE SEPARATE SETS OF BALANCE SHEETS; ONE, F OR THE PROPRIETARY CONCERN, CHERRY INTERNATIONAL; SECOND, FOR SHARE TRADING INCOME; AND THIRD, FOR PERSONAL ACCOUNT. THE ASSESSEE ALL THROUGHOUT AND CONSISTENTLY HAS BEEN SHOWING PURCHASE OF SHARES AS INVESTMENTS IN THE PERSONAL ACCOUNT WHICH HAVE BEEN ACCOUNTED FOR IN THE BOOKS OF ACCOUNTS UNDER THE HEAD INVESTMENT ONLY. ALL THESE SHARES WHICH HAVE BEEN SOLD IN THIS YEAR HAVE BEEN SHOWN IN THE PERSONAL BALANCE SHEET AS ON 31 ST MARCH, 2006 AND ALSO AS ON 31 ST MA RCH, 2008. THE INVESTMENTS HAVE BEEN VALUED AT COST AND NOT AT COST OR MARKET VALUE, WHICHEVER IS LOWER. DURING THE YEAR THE ASSESSEE HAD ONLY EARNED LONG - TERM - CAPITAL - GAIN ON THE SHARES WHICH WERE HELD FOR AVERAGE PERIOD OF MORE THAN 600 DAYS. ASSESSEES SUBMISSIONS IN THIS REGARD HAVE BEEN INCORPORATED BY THE AO FROM PAGES 2 TO 5 OF THE ASSESSMENT ORDER. HOWEVER, THE AO REJECTED THE ASSESSEES CONTENTION AFTER REFERRING TO VARIOUS CASE LAWS ON THE ISSUE THAT MERE ENTRY IN THE BOOKS OF ACCOUNTS ( WHERE IN TH E SHARE S HAVE BEEN SHOWN AS INVESTMENT ) CANNOT BE THE ONLY DETERMINATIVE FACTOR FOR DECIDING THE HEAD OF ACCESSIBILITY OR ITS TAXABILITY AND ALSO REFERRED HIREN M SHAH ITA 3879 /M/20 1 3 3 TO CBDT INSTRUCTION DATED 16.05.2006. THE AO NOTED THAT ASSESSEE HAD SHOWN LONG - TERM - CAPITAL - GAIN ON 6 SCRIPTS UNDER THE HEAD LONG - TERM - CAPITAL - GAIN AND THE MAJOR GAIN H AS COME FROM SCRIPT NAME D AS PYRAMID SAIMIRA THEATRE LTD. FOR RS. 12,96,87,900/ - . THE DETAILS OF SUCH SCRIPTS AS NOTED BY THE AO ARE AS UNDER: - 1 BAUSCH & LOMB R S. 1,030/ - 2 GENESYS SECURITY RS. 6,47,135/ - 3 P G FOILS LTD RS. 1,94,155/ - 4 PBA INFRA RS.( - ) 5,46,618/ - 5 PAYRAMID SAIMIRA RS. 12,96,87,900/ - 6 RELIANCE COMM. RS. 4,93,090/ - TOTAL RS. 13,04,76,692/ - THEREAFTER, HE NOTED THAT, OUT OF THE AFORESAID SCRIPTS, THREE SCRIPTS, THAT IS, BAUSCH & LOMB, PBA INFRA & RELIANCE COMM. WERE SHOWN AS OPENING STOCK, HOWEVER , LATER ON IN THE REVISED STATEMENT OF LONG - TERM - CAPITA L - GAIN , THESE SCRIPTS HAVE BEEN REMOVED FROM THE WORKING OF LONG - TERM - CAPITAL - GAIN. FURTHER, THE ASSESSEE HAS NOT EARNED ANY DIVIDEND INCOME AND NOTED THAT ASSESSEE HAD PURCHASED 3,99,950 UNQUOTED SHARES OF PYRAMID SAIMIRA FOR CONSIDERATION OF RS. 1,19,9 8,250/ - IN MAY & NOVEMBER, 2006 WHICH HAD A LOCK - IN - PERIOD 12 MONTHS AND WERE SUBSEQUENTLY SOLD IN THE MONTHS OF JANUARY TO MARCH, 2008 FOR A CONSIDERATION OF RS. 14,16,86,117/ - AND THEREBY EARNING A PROFIT OF RS. 12,96,87,900/ - . HE HAS ALSO NOTED THE FACT OF AVAILABILITY OF OWN FUNDS AND BORROWED IN THE BALANCE SHEET OF THE ASSESSEE AND LATER ON CAME TO THE CONCLUSION THAT ASSESSEE WAS ENGAGED IN THE BUSINESS OF SHARE. LASTLY , HE HAS ALSO REFERRED TO CERTAIN CIRCUMSTANTIAL EVIDENCES THAT HOW THE LONG - TERM - CAPITAL - GAIN HAS BEEN DERIVED FROM ONE SCRIPT NAMELY , PYRAMID SAMIRA WHICH WAS PURCHASED BEFORE ITS LAUNCH IN BSE, DIRECTLY FROM THE MAIN PROMOTER OF THE COMPANY. OUT OF APPROXIMATELY 4 LAKHS SHARES PURCHASED, 2 LAKHS SHARES WERE PURCHASED JUST BEFORE THE INITIAL PUBLIC OFFER ( IPO ) WAS LAUNCHED AND ASSESSEE HA D BEEN ALLOTTED SHARES FROM THE PROMOTERS QUOTA DIRECTLY AND ALSO NOTED THAT SEBI HAS NOTED HIREN M SHAH ITA 3879 /M/20 1 3 4 CERTAIN DISCREPANCY AND SOME KIND OF ALLEGED FORGED LETTER MANAGED BY THE PROMOTER OF THE COMPANY IN THE NA ME OF SEBI TO MAKE A N OPEN OFFER OF THE SHARE PAR TICULARS OF RS. 250/ - PER SHARE THAT IS, SOLD FOR MORE THAN 4 TIMES OF THE ORIGINAL MARKET PRICE /IPO . ULTIMATELY, IT WAS FOUND THAT, NO SUCH LETTER WAS ISSUED BY THE SEBI ON THIS SCRIPT AND PRICE WAS RIGGED TO GET HIGHER PRICE OF THE SHARES. AFTER ALL THESE OBSERVATIONS , ULTIMATELY THE AO HAS SIMPLY MADE THE ADDITION BY TREATING LONG - TERM - CAPITAL - GAIN AS INCOME FROM BUSINESS. THIS ACTION OF THE AO TOO HAS BEEN CONFIRMED BY THE CIT(A) EXACTLY ON THE SAME REAS ON S AS GIVEN BY THE AO. 3. BEFORE US THE LD. COUNSEL, SHRI VIJAY MEHTA SUBMITTED THAT , FIRSTLY , THE ASSESSEE HAS EARNED ONLY LONG - TERM - CAPITAL - GAIN DURING THE YEAR ON SALE OF 3 SCRIPTS , THEREFORE, THERE CANNOT BE ANY CASE OF HUGE FREQUENCY OR REPETITIV E TRANSACTION. THE ASSESSEE HAD HELD THE INVESTMENT IN SHARES FOR A MINIMUM PERIOD OF 499 DAYS AND MAXIMUM PERIOD OF 842 DAYS ; S ECONDLY , A BOUT 89% OF THE TOTAL INVESTMENT WAS MADE IN SCRIPT OF M/S PYRAMID SA I MIRA WHICH HA D A LOCK - IN - PERIOD OF ONE YEAR AN D WAS ACTUALLY WAS KEPT FOR A PERIOD OF 17 MONTHS. IN THE EARLIER YEARS, SIMILAR NATURE OF TRANSACTIONS HAVE BEEN HELD TO BE ASSESSABLE UNDER THE CAPITAL GAIN AND IN SUPPORT HE HAS REFERRED TO VARIOUS ASSESSMENT ORDERS PLACED IN THE PAPER BOOK ; THIRDLY , R EGARDING FUNDS UTILIZED FOR INVESTING IN SHARES , HE SUBMITTED THAT , THE ASSESSEE HAD MADE THE ENTIRE INVESTMENT FROM HIS OWN FUNDS AND THE FIGURES OF LOAN AS REFLECTED IN THE BALANCE SHEET AS NOTED BY THE AO IS THAT OF THE PROPRIETARY CONCERN AND NOT OF T HE INDIVIDUAL . IT IS IN THE B ALANCE SHEET OF THE INDIVIDUAL THAT THE INVESTMENTS HAVE BEEN SHOWN AND IN SUCH PERSONAL BALANCE SHEET, THERE IS NO LOAN AT ALL, RATHER ASSESSEE HAS HUGE SURPLUS/OWN FUND S FOR MAKING INVESTMENT ; LASTLY , HE SUBMITTED THAT THE SE INVESTMENTS HAVE ALWAYS BEEN CLASSIFIED IN BALANCE SHEET AS INVESTMENT AND VALUED AT COST AND, THEREFORE, SUCH A GAIN CANNOT BE TREATED AS BUSINESS INCOME. HE FURTHER CLARIFIED THAT, ASSESSEE HAS EARNED DIVIDEND INCOME OF RS. HIREN M SHAH ITA 3879 /M/20 1 3 5 23,300/ - WHICH THE AO HA S HELD THAT ASSESSEE HAS NOT EARNED ANY DIVIDEND INCOME . LASTLY, IN SUPPORT OF HIS CONTENTION THAT ON C E THE ASSESSEE HAS PURCHASED THESE SHARES ALLOTTED THROUGH IPO , THEN IT CAN BE INFERRED AS AN INVESTMENT IN A CAPITAL ASSET , HE FILED VARIOUS TRIBUNAL DECIS IONS. 4. ON THE OTHER HAND, LD. DR STRONGLY RELIED UPON THE ORDER OF THE AO AND CIT(A). 5. WE HAVE HEARD THE RIVAL CONTENTIONS AND ALSO PERUSED THE RELEVANT MATERIAL PLACED ON RECORD. HERE IN THIS CASE, THE ASSESSEE HAD SHOWN LONG - TERM - CAPITAL - GAIN MOS TLY ON SALE OF 3 SCRIPTS AND PARTICULARLY FROM THE SALE OF SCRIPT OF M/S PYRAMID SAIMIRA. THE ASSESSEE HAS BOUGHT THESE SHARES THROUGH IPO FOR SUM S AGGREGATING RS. 1,20,00,000/ - IN THE MONTH OF MAY & NOVEMBER, 2006. THIS STOCK HAD A LOCK - IN - PERIOD OF 12 MO NTHS F ROM THE YEAR OF LAUNCH OF THE SAID COMPANY IN BOMBAY STOCK EXCHANGE. THESE SHARES HAVE BEEN SOLD DURING THE MONTH OF MARCH, 2008 FOR A CONSIDERATION OF RS. 14,16,86,117/ - , THEREBY EARNING A GAIN OF RS. 12.97 CRORES. THE AO AT PAGE 11 OF THE ORDER HAD NOTED THE ORDER OF SEBI WHEREIN IT HAS BEEN FOUND THAT THE PROMOTER OF PYRAMID SA I MIRA HAD FORGED LETTER FOR RIGGING THE SHARE PRICE. FROM THE PERUSAL OF THE SEBI ORDER, IT IS SEEN THAT THE SAID ORDER IS DATED 16.04.2009 AND THE ALLEGED RIGGING OF THE S ALE PRICE HAS BEEN DONE IN THE MONTH OF DECEMBER, 2008 , W HEREAS THE ASSESSEE HAD ALREADY SOLD ITS SHARES BEFORE THE MONTH OF MARCH, 2008 , HENCE NO ADVERSE INFERENCE OF SUCH AN EVENT CAN BE DRAWN . IN ANY CASE, THE THE AO AND CIT(A) HAVE BASED THEIR ORDER ON THE ISSUE OF TREATMENT OF LONG - TERM - CAPITAL - GAIN AS BUSINESS INCOME AS POINTED OUT EARLIER, THE ASSESSEE HAD PURCHASED THE LOT OF SHARES OF PYRAMID SAIMIRA THROUGH IPO AND ONCE THAT IS SO, THE N THE NORMAL PRESUMPTION IS THAT IT IS MOSTLY DONE BY AN IN VESTOR FOR THE PURPOSE OF INVESTMENT AS THERE IS LESS RISK OF LOSS AND ALSO IT FORTIFIES THE INTENTION THAT IT IS FOR THE PURPOSE OF TREATING IT AS AN HIREN M SHAH ITA 3879 /M/20 1 3 6 INVESTMENT AND NOT AS A STOCK - IN - TRADE. HERE IN THIS CASE AS POINTED OUT BY LD. COUNSEL THE A VERAGE PERIO D OF HOLDING OF MOST OF THESE SHARES IS 628 DAYS WHICH IS FAIRLY A LON G PERIOD. IN CERTAIN SCRIPTS ASSESSEE HAD ALSO INCURRED LOSS . ON THESE FACTS AND CIRCUMSTANCES, IT CAN BE VERY WELL HELD THAT THE ASSESSEES INTENTION FOR PURCHASING THE SHARES WAS PUREL Y FOR INVESTMENT AND TO EARN GAIN ON A LONG TERM INVESTMENT. NOT ONLY THIS, IN EARLIER YEARS ALSO THE ASSESSEE S INVESTMENT IN SHARES HAVE BEEN HELD TO BE ASSESSED UNDER THE HEAD CAPITAL GAIN , BECAUSE CONSISTENTLY ASSESSEE HAS BEEN SHOWING INVESTMENT IN SHARES IN HIS PERSONAL BALANCE SHEET PURCHASED OUT OF HIS OWN SURPLUS FUND. AS POINTED OUT BY LD. COUNSEL, THE LD. AO HAS MISLED HIMSELF BY TAKING THE BALANCE SHEET OF THE PROPRIETARY CONCERN WHEREIN THE ASSESSEE HAD SHOWN CERTAIN LOAN, WHEREAS THE INVESTM ENT HAVE BEEN MADE THROUGH PERSONAL ACCOUNT WHICH IS REFLECTED IN THE PERSONAL BALANCE SHEET, WHEREIN THERE ARE SUFFICIENT OWN FUND FOR MAKING THE INVESTMENT. THUS, ON THESE FACTS AND CIRCUMSTANCES, WE HOLD THAT THE SHARES WHICH HAVE BEEN HELD AS INVESTME NT IN THE BALANCE SHEET ARE TO BE TREATED AS ASSESSABLE UNDER THE HEAD CAPITAL GAIN AND NOT AS BUSINESS INCOME. ACCORDINGLY, GROUND NO. 1 & 2 ARE TREATED AS ALLOWED. 6. SO FAR AS ISSUE RELATING TO DISALLOWANCE OF DEPRECIATION OF RS. 3,85,043/ - , WE F IND THAT AO HAS MADE THE DISALLOWANCE MAINLY ON THE GROUND THAT, THERE WAS NO BUSINESS ACTIVITY CARRIED OUT BY THE ASSESSEE IN HIS PROPRIETARY CONCERN CHERRY INTERNATIONAL. SUCH AN ACTION OF THE AO HAS ALSO BEEN CONFIRMED BY THE CIT(A). 7. BEFORE US TH E LD. COUNSEL, SHRI VIJAY MEHTA SUBMITTED THAT THERE WAS TEMPORARY LULL D URING THIS PERIOD AND THE BUSINESS OF THE ASSESSEE HAS AGAIN STARTED WHICH IS EVIDENT FROM THE FACT THAT, IN THE SUBSEQUENT YEARS THE ASSESSEES SALES HAVE BEEN RS. 11.57 CRORES WITH A NET PROFIT OF RS. 3.99 CRORES. FURTHER, THE D EPRECIATION HIREN M SHAH ITA 3879 /M/20 1 3 7 HAS BEEN CLAIMED ON THE ASSETS WHICH ARE APPEARING IN THE BALANCE SHEET AND HENCE ARE ALLOWABLE AS EXPENDITURE. 8. AFTER CONSIDERING THE CONTENTION OF THE PARTIES AND ON PERUSAL OF THE IMPUGNED ORDE R, WE FIND THAT ASSESSEE HAD SHOWN LOSS FROM PROPRIETARY CONCERN , M/S CHERRY INTERNATIONAL OF RS. 2,66,636/ - . AFTER INCLUDING DEPRECIATION, THE LOSS HAS INCREASED TO RS. 2,83,490/ - . EVEN IF THERE WAS A TEMPORARY LULL IN THE BUSINESS THAT DOES NOT MEAN DEPR ECIATION ON THE ASSETS APPEARING IN THE BALANCE SHEET HAVE TO BE DISALLOWED ESPECIALLY WHEN IT HAS BEEN BROUGHT ON RECORD THAT IN THE SUBSEQUENT YEARS THE ASSESSEES BUSINESS HAS AGAIN TAKEN - UP AT A VERY HIGH SCALE FROM WHERE THE ASSESSEE HAD SHOWN HUGE PR OFITS. THUS, IT CANNOT BE HELD THAT SIMPLY THERE WAS TEMPORARILY LULL IN THE BUSINESS ACTIVITY IN THIS YEAR THE DEPRECIATION CLAIMED ON THE ASSETS IS TO BE DISALLOWED. ACCORDINGLY, DEPRECIATION CLAIMED BY THE ASSESSEE IS ALLOWED. 9. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 9 TH NOVEMBER , 2015. SD/ - SD/ - ( ) ( ) (RAMIT KOCHAR ) ( AMIT SHUKLA ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATE: 9 TH NOVEMBER , 2015 / COPY TO: - 1 ) / THE APPELLANT. 2 ) / THE RESPONDENT. 3) THE CI T (A) - 29 , MUMBAI. 4 ) THE CIT 1 7 , MUMBAI. 5 ) H , , / THE D.R. H BENCH, MUMBAI. 6 ) \ COPY TO GUARD FILE. / BY ORDER HIREN M SHAH ITA 3879 /M/20 1 3 8 / / TRUE COPY / / / , DY. / ASSTT. REGISTRAR I.T.A.T., MUMBAI * . . *CHAVAN, SR.PS