The ACIT, Circle-1, Bhavnagar V. M/s. Madhu Silica Pvt.Ltd., Bhavnagar

ITA 3958/AHD/2008

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6379 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 6 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-06-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 14-06-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 05-12-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K GUPTA
• Assessee Lawyers: T P HEMANI
• Keywords: Capital asset; Speculation loss
• Section: 14A

Judgement Text

- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH C AHMEDABAD BEFORE S/SHRI D.K. TYAGI, JM AND D.C.AGRAWAL, AM ASSTT. CIT, CIRCLE-1, BHAVNAGAR. VS. MADHU SILICA (P) LTD., 40, GIDC, CHITRA, BHAVNAGAR. (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI S. K. GUPTA, CIT, DR RESPONDENT BY:- SHRI T. P. HEMANI, AR O R D E R PER D.C. AGRAWAL, ACCOUNTANT MEMBER . THIS IS AN APPEAL FILED BY THE REVENUE RAISING FOL LOWING GROUNDS :- 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN HOL DING THAT THE PROFIT ON SALE OF SHARES AMOUNTING TO RS.2,37,17,59 3/- HAS TO BE TREATED AS LONG TERM CAPITAL GAINS AND NOT AS PROFI T FROM SPECULATION BUSINESS, WITHOUT APPRECIATING THE FACTS OF THE CAS E AND THE MATERIAL BROUGHT ON RECORD BY THE AO. 1.2 IN DOING SO, THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN NOT APPRECIATING THAT, TAKING INTO ACCOUNT THE SUBSTANT IAL NATURE OF TRANSACTIONS AND THE MAGNITUDE OF PURCHASES AND SAL ES OF SHARES, THE SAID PURCHASES AND SALES OF SHARES WERE CARRIED OUT BY THE ASSESSEE COMPANY WITH THE MOTIVE OF EARNING PROFIT AND THE SAID SHARES WERE NOT HELD BY THE ASSESSEE AS INVESTMENT AND THEREFORE THE AO WAS JUSTIFIED IN TREATING THE SAID PROFIT ON SALE OF SHARES AS THE PROFIT FROM SPECULATION BUSINESS. 2. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN HOL DING THAT THE LONG TERM LOSS ON SALE OF DEBENTURES AMOUNTING TO R S.35,84,558/- WAS OUTSIDE THE PURVIEW OF EXPLANATION TO SECTION 7 3 OF THE IT ACT, ITA NO.3958/AHD/2008 ASST. YEAR 2005-06 ITA NO.3958/AHD/2008 ASST. YEAR 2005-06 2 WITHOUT APPRECIATING THAT THE SAID LOSS FROM DEBENT URES OF RS.35,84,558/- WAS CORRECTLY DEDUCTED BY THE AO FRO M THE GAINS OF SPECULATION BUSINESS OF RS.2,37,17,593/- AND THE NE T GAIN OF RS.2,01,33,635/- WAS RIGHTLY TAXED AS SPECULATION B USINESS INCOME. 3. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DEL ETING THE ADDITION OF RS.17,49,754/- MADE BY THE AO ON ACCOUN T OF DISALLOWANCE U/S 14A OF THE ACT IN RESPECT OF EXPEN DITURE BEING INTEREST PAID ON BORROWINGS WITHOUT PROPERLY APPREC IATING THE FACTS OF THE CASE AND THE MATERIAL BROUGHT ON RECORD BY T HE AO. 3.2 IN DOING SO, THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN NOT APPRECIATING THAT THE SAID EXPENDITURE OF RS.17,49, 754/- WAS RELATABLE TO THE DIVIDEND INCOME ON SHARES WHICH WA S EXEMPT FROM TAX AS THE BORROWINGS ON WHICH THE SAID INTEREST HA S BEEN PAID, WERE UTILIZED FOR THE PURPOSE OF INVESTMENT IN SHAR ES AND THEREFORE THE SAID DISALLOWANCE WAS RIGHTLY MADE BY THE AO I/ S 14A OF THE IT ACT. 3.3 IN DOING SO, THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN NOT APPRECIATING THAT THE FACTS OF THE DECISION OF THE HON. SUPREME COURT IN THE CASE OF MUNJAL SALES CORPORATION 298 I TR 298 RELIED UPON BY HIM IN THE APPELLATE ORDER ARE DISTINGUISHA BLE FROM THE FACTS OF THE ASSESSEES CASE. 2. THUS THERE ARE THREE ISSUES INVOLVED. THEY ARE - (1) WHETHER SUM OF RS.2,37,17,593/- SHOULD BE TREATED A S LONG TERM CAPITAL GAIN AND NOT PROFIT FROM SPECULATION BUSIN ESS; (2) WHETHER LOSS ON SALE OF DEBENTURE AMOUNTING TO RS.3 5,84,558/- IS OUTSIDE THE PURVIEW OF EXPLANATION TO SECTION 73 ; AND (3) WHETHER EXPENDITURE OF RS.17,49,754/- ON INTEREST C AN BE DISALLOWED U/S 14A. 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS M ANUFACTURER OF VARIOUS GRADES OF PRECIPITATED SILICA. THE ASSESSEE FILED ITS RETURN OF INCOME FOR ASST. YEAR ON 20.10.2005 DECLARING AN IN COME OF ITA NO.3958/AHD/2008 ASST. YEAR 2005-06 3 RS.9,66,09,170/-. THE ASSESSMENT WAS FRAMED ON AN I NCOME OF RS.11,84,91,950/-. ISSUE NO.1 4. THE ASSESSEE HAD SHOWN LONG TERM CAPITAL GAINS F ROM LISTED SECURITIES AT RS.2,37,17,593/- WHICH WAS CLAIMED EX EMPT U/S 10(36) OF THE ACT. IT HAD ALSO CLAIMED LONG TERM CAPITAL LOSS OF RS.35,84,558/- THEREBY DECLARING LONG TERM CAPITAL GAINS AT RS.2,01,33,035 /-(RS.2,37,17,583 RS.35,84,558). THE AO SOUGHT TO TREAT THIS SUM AS S PECULATIVE PROFIT BY INVOKING THE EXPLANATION TO SECTION 73 OF THE ACT. IT WAS EXPLAINED TO THE AO THAT EXPLANATION TO SECTION 73 HAS NO APPLICATIO N ON THE FACTS OF THE CASE AS ASSESSEE IS NOT CARRYING OUT BUSINESS OF BU YING AND SELLING OF SHARES. THE ASSESSEE HAS BEEN CONSISTENTLY SHOWING THE SHARES UNDER THE HEAD INVESTMENT. FURTHER LONG TERM CAPITAL LOSS O F RS.35,84,558/- ON ACCOUNT OF INVESTMENT IN DEBENTURE IS OUTSIDE THE S COPE OF EXPLANATION TO SEC.73 AS THIS EXPLANATION CONCERNS TO PURCHASE AND SALE OF SHARES. DEBENTURES CANNOT BE HELD TO BE SHARES AS PER THE F OLLOWING DECISIONS:- 1. HSBC SECURITIES & CAPITAL MARKETS (I) PVT. LTD. VS. JCIT (ITA NO.3386/MUM/2001. 2. AMAN PORTFOLIO (P) LTD. VS. DCIT (2005) 92 ITD 324 (DEL) 3. ADI (INV) VS. KUM. A.B. SHANTI (1997) 225 ITR 258 ( SC) (SIC) 4. ALLIED MOTORS (P) LTD. VS. CIT (1997) 224 ITR 677 ( SC) 5. CIT VS. PODAR CEMENT (P) LTD. (1997) 226 ITR 625 (S C) 5. THE AO, HOWEVER, DID NOT AGREE AND HELD THAT WHO LE INCOME SHOWN BY THE ASSESSEE IN PURCHASE AND SALE OF SHARES HAS TO BE TREATED AS INCOME ITA NO.3958/AHD/2008 ASST. YEAR 2005-06 4 FROM SPECULATION. HOWEVER, HE ALLOWED THE SET OFF O F LONG TERM CAPITAL LOSS ON SALE OF DEBENTURES AT RS.35,84,588/- AND FI NALLY TREATED THE SUM OF RS.2,01,33,035/- AS SPECULATION PROFIT AS PER EXPLA NATION TO SECTION 73. 6. THE LD. CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE ON TWO GROUNDS FIRSTLY HE HELD THAT EXPLANATION TO SECTION 73 IS A TTRACTED ONLY WHERE ASSESSEE SUFFERS A LOSS IN SALE AND PURCHASE OF SHA RES. IN OTHER WORDS EXPLANATION TO SECTION 73 COULD NOT BE APPLIED WHER E ASSESSEE HAS EARNED PROFIT ON SALE AND PURCHASE OF SHARES. THE SECOND R EASONING ADVANCED BY THE LD. CIT(A) WAS THAT ASSESSEE HAS BEEN HOLDING T HE SHARES SOLD DURING THE YEAR AS INVESTMENT. THIS WAS APPARENT FROM THE BALANCE SHEET OF THE ASSESSEE FOR THE IMMEDIATELY PRECEDING YEAR ALSO. O NCE SHARES ARE HELD AS INVESTMENT ANY GAIN OR LOSS SUFFERED ON THEIR SALE CAN ONLY BE TAXED UNDER THE HEAD CAPITAL GAIN AND NOT UNDER THE HEAD BUS INESS. FOR THIS HE RELIED ON THE DECISION OF THE TRIBUNAL IN THE CASE OF KRUTI MARKETING LTD. VS. ACIT 118 TAXMAN 194 (AHD)(MAG). 7. BEFORE US, THE LD. DR SUBMITTED THAT SO FAR AS T HE FIRST ISSUE DECIDED BY THE LD. CIT(A) IS CONCERNED, THIS IS AGAINST THE EXPRESS PROVISION OF EXPLANATION TO SECTION 73. IT WOULD APPLY TO BUSINE SS OF SALE AND PURCHASE OF SHARES CARRIED ON BY THE ASSESSEE IRRESPECTIVE O F WHETHER ASSESSEE HAS SUFFERED LOSS OR PROFIT. HE REFERRED TO THE DECISIO N OF HON. BOMBAY HIGH ITA NO.3958/AHD/2008 ASST. YEAR 2005-06 5 COURT IN CIT VS. LOKMAT NEWSPAPERS (P) LTD. (2010) 322 ITR 43 (BOM) WHEREIN THE HON. COURT HAS HELD AS UNDER :- THE CONTENTION THAT A LOSS WHICH ARISES ON ACCOUNT OF A TRANSACTION OF THE SALE AND PURCHASE OF SHARES WOULD CONSTITUTE A LOSS FROM A SPECULATION BUSINESS FOR THE PURPOSES OF THE EXPLANATION BUT TH AT THE PROFIT WHICH ARISES FROM A TRANSACTION INVOLVING THE ACTUAL DELIVERY OF SHARES WOULD NOT CONSTITUTE A PROFIT FOR THE PURPOSES OF SUB-SECTIONS (1) AND ( 2) OF SECTION 73 IN RESPECT OF WHICH A SET-OFF CAN BE GRANTED, INTRODUCES A RESTRI CTION INTO THE SCOPE AND AMBIT OF THE DEEMING FICTION WHICH IS CREATED BY TH E EXPLANATION TO SECTION 73, WHICH IS NOT CONTEMPLATED BY PARLIAMENT. THE DEEMIN G FICTION CREATED BY THE EXPLANATION TO SECTION 73 ARISES SPECIFICALLY IN TH E CONTEXT OF THE PROVISIONS OF SECTION 73 AND IS CONFINED TO THAT PURPOSE ALONE. W HETHER IT IS A PROFIT OR LOSS THAT HAS RESULTED FROM CARRYING ON SUCH BUSINESS, I S A CONSIDERATION ALIEN TO THE MEANING OF WHAT CONSTITUTES A SPECULATION BUSIN ESS BY THE EXPLANATION TO SECTION 73. ONCE AN ASSESSEE IS DEEMED TO BE CARRYI NG ON A SPECULATION BUSINESS FOR THE PURPOSE OF SECTION 73, ANY LOSS CO MPUTED IN RESPECT OF THAT SPECULATION BUSINESS, CAN BE SET OFF ONLY AGAINST T HE PROFITS AND GAINS OF ANOTHER SPECULATION BUSINESS. SIMILARLY, FOR THE PU RPOSES OF SUB-SECTION (2), THE LOSS IN RESPECT OF A SPECULATION BUSINESS WHICH HAS NOT BEEN SET OFF EITHER IN WHOLE OR IN PART, CAN BE CARRIED FORWARD AND CAN BE SET OFF AGAINST PROFITS AND GAINS 'OF ANY SPECULATION BUSINESS'. THE EXPRES SION 'ANY SPECULATION BUSINESS' MEANS A SPECULATION BUSINESS OF THE ASSES SEE IN RESPECT OF WHICH PROFITS AND GAINS FOR THE ASSESSMENT YEAR IN QUESTI ON HAVE ARISEN AND THERE IS NO JUSTIFICATION TO RESTRICT THE CONTENT OF THAT SP ECULATION BUSINESS WHERE PROFITS HAVE ARISEN BY EXCLUDING A BUSINESS INVOLVING ACTUA L DELIVERY OF SHARES. NO SUCH RESTRICTION IS FOUND IN THE EXPLANATION. IN OT HER WORDS, ONCE THE ASSESSEE IS CARRYING ON A SPECULATION BUSINESS AND THE PROFI TS AND GAINS HAVE ARISEN FROM THAT BUSINESS DURING THE COURSE OF THE ASSESSM ENT YEAR, THE ASSESSEE IS ENTITLED TO SET OFF THE LOSSES CARRIED FORWARD FROM A SPECULATION BUSINESS ARISING OUT OF A PREVIOUS ASSESSMENT YEAR. FOR THE ASSESSMENT YEAR 2003-04, THE ASSESSEE SHOWE D A PROFIT ON THE SALE OF SHARES AND SECURITIES HELD AS STOCK-IN-TRADE, OF FERED IT AS A PROFIT OF SPECULATION BUSINESS, SET IT OFF AGAINST SPECULATIO N LOSS BROUGHT FORWARD FROM THE ASSESSMENT YEARS 1996-97 TO 1998-99 AND SHOWED THE BALANCE AS SPECULATION INCOME. THE ASSESSING OFFICER DID NOT T REAT THE INCOME WHICH AROSE FROM THE SALE OF SHARES AS INCOME FROM A SPEC ULATION BUSINESS ON THE GROUND THAT THE ASSESSEE HAD SETTLED ITS TRANSACTIO NS OF SALE AND PURCHASE OF SHARES THROUGH PHYSICAL DELIVERY, AND REFUSED TO AL LOW SET-OFF OF THE INCOME FROM THE SALE OF SHARES AGAINST THE LOSS ON ACCOUNT OF SPECULATION BUSINESS, BROUGHT FORWARD FROM THE ASSESSMENT YEARS 1996-97 T O 1998-99. THE COMMISSIONER OF INCOME-TAX (APPEALS) CONFIRMED THE ORDER OF THE ASSESSING OFFICER. THE TRIBUNAL HELD THAT THE PROFIT FROM THE SALE OF SHARES FELL WITHIN THE PURVIEW OF THE EXPLANATION TO SECTION 73 AND WAS TO BE SET OFF AGAINST BROUGHT FORWARD LOSSES. ON APPEAL : ITA NO.3958/AHD/2008 ASST. YEAR 2005-06 6 HELD, DISMISSING THE APPEAL, THAT THE VIEW OF THE T RIBUNAL WAS CONSISTENT WITH THE PROVISIONS OF SECTION 73. 8. REGARDING THE SECOND REASONING ON THE BASIS OF W HICH LD. CIT(A) ALLOWED THE RELIEF, THE LD. DR SUBMITTED THAT THE A O HELD IT AS BUSINESS AND, THEREFORE, HE HAS RIGHTLY INVOKED EXPLANATION TO SECTION 73. 9. AGAINST THIS, THE LD. AR SUBMITTED THAT THE ASSE SSEE IS CONSISTENTLY SHOWING THE SHARES AS INVESTMENT. IT IS NOT DEALING IN AS TRADER IN SHARES. THERE IS NO FINDING THAT ASSESSEE IS A TRADER IN SH ARES AND NOT INVESTOR. HOWEVER, PROFIT EARNED ON SALE AND PURCHASE OF SHAR ES CANNOT BE IPSO FACTO TAXED AS INCOME FROM BUSINESS. ONCE THE SHARE S ARE HELD AS INVESTMENT AND ASSESSEE HAS DECLARED CAPITAL GAIN T HEN THERE IS NO REASON TO HOLD THAT EXPLANATION TO SECTION 73 IS APPLICABL E TO THE ASSESSEE. THE LD. AR RELIED ON THE JUDGMENT OF THE TRIBUNAL IN THE CA SE OF ASSTT. CIT VS. SHREE GAUTAM SHIP BREAKING INDUSTRIES LTD. IN ITA N O.379/AHD/2009 ASST. YEAR 2005-06 WHEREIN IT HAS BEEN HELD AS UNDE R :- 5. ON CONSIDERATION OF THE RIVAL SUBMISSIONS, WE A RE OF THE VIEW THAT THE DEPARTMENTAL APPEAL HAS NO MERIT AND THE SAME IS LI ABLE TO BE DISMISSED. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED UPON THE OR DER OF THE ITAT AHMEDABAD BENCH IN THE CASE OF KRUTI MARKETING LTD. (SUPRA) IN WHICH IT WAS HELD THAT THERE WAS NO MATERIAL OR EVIDENCE ON RECORD THAT TH E ASSESSEE COMPANY WAS CARRYING ON SPECULATION BUSINESS OF DEA LING IN SHARES/DEBENTURES OF OTHER COMPANIES. THE ASSESSEE COMPANY WAS MAINLY CARRYING ON BUSINESS OF TRADING IN POLYESTER FILAMENT YARN AND GREY CLOTH. THERE WAS NO SUCH FINDING THAT THE ASSE SSEE COMPANY WAS ENGAGED IN THE BUSINESS OF PURCHASE AND SALE OF SHA RES OF OTHER COMPANIES. THE SHARES IN QUESTION WERE HELD AS INVE STMENTS. EXPLANATION TO SECTION 73, WAS, THEREFORE, NOT APPL ICABLE ON THE FACTS AND CIRCUMSTANCES OF THE CASE. THEREFORE, THE LOSS WAS NOT TO BE TREATED ITA NO.3958/AHD/2008 ASST. YEAR 2005-06 7 TO BE SPECULATION LOSS. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED UPON THE DECISION OF ITAT DELHI BENCH IN THE CASE OF DCI T VS JINDAL EXPORTS LTD. 101 ITD 129 (DELHI) (TM) IN WHICH IT WAS HELD THAT IT HAD BEEN ACCEPTED THAT THE SHARES WERE HELD BY THE ASSESSEE AS CAPITAL ASS ETS (I9NVESTMENTS), LOSS ACCRUING TO THE ASSESSEE WAS LIABLE TO BE ASSE SSED AS SHORT TERM CAPITAL LOSS AND, THEREFORE, THERE WAS NO QUESTION OF TREATING IT AS SPECULATION LOSS BY APPLYING EXPLANATION TO SECTION 73. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO RELIED UPON THE DECIS ION OF ITAT KOCHIN BENCH IN THE CASE OF HARRISONS MALAYALAM LTD. VS ACIT 32 SOT 497 IN WHICH IT WAS HELD THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LOS S IS VERY MUCH IN THE NATURE OF CAPITAL LOSS, THEREFORE, THER E IS NO JUSTIFICATION IN TREATING THE SAME AS SPECULATION LOSS. THE LEARNED DR HOWEVER, SUBMITTED THAT SECTION 73 AS PER ASSESSEE TALKS OF THE LOSS BUT IT COVERS PROFIT OF BUSINESS ALSO. HOWEVER, WE DO NOT AGREE WITH THE CONTENTION OF THE LEARNED DR BECAUSE THE PROVISIONS OF SECTION 73 OF THE IT A CT ARE APPLICABLE TO LOSSES IN SPECULATION BUSINESS AND THE EXPLANATION IS ALSO RELEVANT TO THE SAME. BUT, IN THE CASE OF THE ASSESSEE ON SALE OF SHARES THE A SSESSEE HAS DECLARED INCOME. THE AO WITHOUT PASSING ANY SPEAKING ORDER M ERELY APPLIED THE EXPLANATION TO SECTION 73 OF THE IT ACT IN ORDER TO DISALLOW THE CLAIM OF THE ASSESSEE WHICH IS NOT WARRANTED UNDER THE LAW. THE LEARNED CIT(A) ON PROPER APPRECIATION OF THE FACTS ON RECORD, RIGHTLY HELD T HAT EXPLANATION TO SECTION 73 IS NOT APPLICABLE TO THE CASE OF THE ASSESSEE BECAU SE IT HAS NOT SUFFERED ANY LOW ON SALE AND PURCHASE OF THE SHARES. THE LEARNED CIT(A) ALSO ON APPRECIATION OF THE EVIDENCES ON RECORD RIGHTLY HEL D THAT THE ASSESSEE WAS HOLDING THE SHARES AND SOLD DURING THE YEAR UNDER C ONSIDERATION AS INVESTMENT. THE FINDING OF FACTS RECORDED BY THE LE ARNED CIT(A) HAVE NOT BEEN DISPUTED THROUGH ANY MATERIAL OR EVIDENCE ON RECORD . ONCE, THE SHARES ARE HELD AS INVESTMENT, ANY GAIN OR LOSS SUFFERED ON AC COUNT OF SALE OF THE SAME SHALL HAVE TO BE TAXED UNDER THE HEAD CAPITAL GAIN. WE, THEREFORE, DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LEARNED CIT(A). W E CONFIRM HIS FINDINGS AND DISMISS THE APPEAL OF THE REVENUE. HE REFERRED TO PARA 5 FROM THE THAT JUDGEMENT AS AB OVE. 10. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IN OUR CONSIDERED VIEW THERE IS NO CASE FOR INTERFERENCE IN THE ORDER OF LD. CIT(A). HOWEVER, THE FIRST REASONING G IVEN BY LD. CIT(A) FOR HOLDING IN FAVOUR OF ASSESSEE IS NOT SUSTAINABLE IN LAW. EXPLANATION TO SECTION 73 WOULD BE APPLICABLE TO AN ASSESSEE COMPA NY WHICH IS TRADING IN SHARES IRRESPECTIVE OF WHETHER IT IS EARNING PRO FIT OR LOSS. THE ISSUE IS DIRECTLY COVERED BY THE DECISION OF HON. BOMBAY HIG H COURT IN THE CASE OF CIT VS. LOKMAT NEWSPAPERS (P) LTD. (SUPRA) AS RE FERRED TO BY THE LD. ITA NO.3958/AHD/2008 ASST. YEAR 2005-06 8 DR. HOWEVER, WE UPHOLD THE SECOND REASONING ADVANCE D BY LD. CIT(A) THAT EXPLANATION TO SECTION 73 WOULD BE APPLICABLE ONLY TO THE TRADER OF SHARES AND NOT TO INVESTOR IN SHARES. FOR THE SAKE OF CONVENIENCE, WE REPRODUCE EXPLANATION TO SECTION 73 AS UNDER :- EXPLANATION TO SEC.73 --WHERE ANY PART OF THE BUSINESS OF A COMPANY OTHER THAN A COMPANY WHOSE GROSS TOTAL INCOME CONSISTS MA INLY OF INCOME WHICH IS CHAREGEABLE UNDER THE HEADS 'INTEREST ON SECURITIES ', 'INCOME FROM HOUSE PROPERTY', 'CAPITAL GAINS' AND 'INCOME FROM OTHER S OURCES' OR A COMPANY THE PRINCIPAL BUSINESS OF WHICH IS THE BUSINESS OF BANK ING OR THE GRANTING OF LOANS AND ADVANCES CONSISTS IN THE PURCHASE AND SALE OF S HARES OF OTHER COMPANIES, SUCH COMPANY SHALL, FOR THE PURPOSES OF THIS SECTIO N, BE DEEMED TO BE CARRYING ON A SPECULATION BUSINESS TO THE EXTENT TO WHICH TH E BUSINESS CONSISTS OF THE PURCHASE AND SALE OF SUCH SHARES. FOR INVOKING EXPLANATION TO SECTION 73 THE AO HAS T O SHOW - (1) THE ASSESSEE IS A COMPANY, (2) IT DOES BUSINESS OF TRADING IN SHARES, (3) ITS GROSS TOTAL INCOME DOES NOT CONSIST MAINLY OF INCOME WHICH IS CHARGEABLE UNDER THE HEAD INTEREST ON SECURITIES , INCOME FROM HOUSE PROPERTY, CAPITAL GAINS AND INCOME FROM OTHER SOU RCES & (4) ITS PRINCIPAL BUSINESS IS NOT OF BANKING OR GRANTING OF LOANS OR ADVANCES. 11. IF THESE CONDITIONS ARE SATISFIED THEN SUCH COM PANY IS CARRYING ON SPECULATION BUSINESS TO THE EXTENT TO WHICH THE BUS INESS CONSISTS OF THE PURCHASES AND SALE OF SHARES. IT IS ALSO CLEAR FROM THE EXPLANATION THAT THIS EXPLANATION DOES NOT APPLY TO AN INVESTMENT OR A CO MPANY WHOSE PRINCIPAL BUSINESS IS BANKING OR MONEY LENDING. SIN CE ASSESSEE HAS CLAIMED THAT IT IS NOT TRADING IN SHARES, BUT ONLY MAKING INVESTMENT IN SHARES IT WOULD FALL IN THE EXCLUDED CATEGORY. IN A NY CASE THE ISSUE IS ITA NO.3958/AHD/2008 ASST. YEAR 2005-06 9 COVERED BY THE DECISION OF THIS CO-ORDINATE BENCH I N THE CASE OF ACIT VS. SHREE GAUTAM SHIP BREAKING INDUSTRIES LTD. (SUPRA) WHEREIN IT IS HELD THAT IF SHARES ARE HELD AS CAPITAL ASSET LOSS ARISI NG FROM THE SALE OF THESE SHARES CANNOT BE TREATED AS SPECULATION LOSS BY APP LYING EXPLANATION TO SECTION 73. THERE IS NO ENQUIRY OR FINDING BY THE A O IN THE PRESENT CASE THAT WHAT THE ASSESSEE HAS SHOWN AS INVESTMENT IN S HARES IS IN FACT TRADING IN SHARES. NO MATERIAL IS BROUGHT ON RECORD TO HOLD AGAINST WHAT IS DECLARED BY THE ASSESSEE AS INVESTMENT. THE BALANCE SHEET OF ASSET SHOWS THE SHARES AS CAPITAL ASSET. THE INCOME FROM CAPITA L GAIN OR LOSS IS NOT ASSESSED UNDER THE HEAD BUSINESS EXCEPT THE AO TR EATING THE ENTIRE CAPITAL GAINS AS HIT BY EXPLANATION TO SECTION 73. THIS IS NOT SUFFICIENT TO HOLD THE INVESTMENT IN SHARES AS TRADING IN SHARES. A SEPARATE AND INDEPENDENT FINDING BASED ON MATERIAL ON RECORD AND PROPER REASONING IS REQUIRED FOR TREATING THE ASSESSEE AS TRADER IN SHA RES NOT AS INVESTOR IN SHARES. ACCORDINGLY, WE DO NOT FIND ANY MERIT IN TH IS GROUND OF REVENUE AND THE SAME IS DISMISSED. 12. THE SECOND ISSUE RELATES TO TRADING LOSS IN DEB ENTURE AS SPECULATION LOSS BY THE AO. THE LD. CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE BY FOLLOWING THE DECISION OF HON. SUPREME COURT IN THE CASE OF APOLLO TYRES LTD. VS. CIT (AND VICE VERSA) (2002) 255 ITR 273 (SC). ITA NO.3958/AHD/2008 ASST. YEAR 2005-06 10 13. WE HAVE HEARD THE PARTIES. IN OUR CONSIDERED VI EW THERE IS NO CASE FOR INTERFERENCE IN THE ORDER OF LD. CIT(A). THE RE ASONS ARE THAT HON. SUPREME COURT IN THE CASE OF APOLLO TYRES (SUPRA) I N THE CONTEXT OF UNITS OF MUTUAL FUND HELD THAT THEY ARE NOT SHARES. SIMIL ARLY, DEBENTURES CANNOT BE HELD EQUIVALENT TO SHARES. THE DEBENTURES ARE DE BT INSTRUMENT WHEREAS SHARES ARE INSTRUMENT FOR PARTICIPATING IN THE PROF IT OF THE COMPANY. DEBENTURE HOLDER GETS INTEREST WHEREAS SHARE-HOLDER GETS THE DIVIDEND BEING THE SHARE IN PROFIT OF THE COMPANY. ONCE EXPL ANATION TO SECTION 73 IS MADE TO APPLY TO A BUSINESS IN SALE AND PURCHASE OF SHARES THEN SUCH FICTION CANNOT BE EXTENDED TO ANY OTHER INSTRUMENT. A DEEMED FICTION IS ALWAYS CONFINED TO WHAT IS PRESCRIBED THEREIN AND C ANNOT BE EXTENDED TO OTHER AREAS OR CURTAIL ITS SCOPE. THIS IS WHAT THE HON. SUPREME COURT IN APOLLO TYRES (SUPRA) HELD. HON. BOMBAY HIGH COURT I N THE CASE OF LOKMAT NEWSPAPERS (SUPRA) ALSO HELD THAT DEEMED SEC TION CREATED BY EXPLANATION TO SECTION 73 ARISES SPECIFICALLY IN TH E CONTEXT OF PROVISION OF SECTION 73 AND IS CONFINED TO THAT PURPOSE ONLY. IN THAT CASE THE AO HAD HELD THAT PROFIT ARISING FROM TRANSACTIONS INVOLVIN G ACTUAL DELIVERY OF SHARES WOULD NOT CONSTITUTE PROFIT FOR THE PURPOSE OF SUB-SEC.(1) & (2) OF SECTION 73 IN RESPECT OF WHICH A SET OFF CAN BE GRA NTED. HON. BOMBAY HIGH COURT HELD THAT WHETHER IT IS A PROFIT OR LOSS THAT HAS RESULTED FROM CARRYING ON SUCH BUSINESS IS A CONSIDERATION ALIEN TO THE MEANING OF WHAT IS CONSTITUTED SPECULATION BUSINESS BY THE EXPLANAT ION TO SECTION 73. ITA NO.3958/AHD/2008 ASST. YEAR 2005-06 11 14. SIMILARLY, HON. MADHYA PRADESH HIGH COURT IN TH E CASE OF CIT VS. INTERMETAL TRADE LTD. (2006) 285 ITR 536 (MP) HELD THAT THE FICTION CREATED BY EXPLANATION TO SECTION 73 APPLIES ONLY T O COMPANY AND CANNOT BE EXTENDED TO INDIVIDUAL, FIRMS OR HUFS. 15. THE SECOND REASON IS THAT ASSESSEE IS HOLDING D EBENTURE AS INVESTMENT AND IS NOT HELD TO BE TRADING IN DEBENTU RES. THE REASONS ADVANCED BY US IN RESPECT OF GROUND NO.1 ARE ALSO A PPLICABLE TO DEBENTURES MEANING THEREBY THAT DEBENTURES ARE NOT HELD AS STOCK-IN-TRADE BUT ONLY HELD AS INVESTMENT AND, THEREFORE, EXPLANA TION TO SECTION 73 WOULD NOT BE APPLICABLE. THIS GROUND OF REVENUE IS ACCORDINGLY REJECTED. 16. THE THIRD ISSUE RELATES TO DISALLOWANCE OUT OF INTEREST U/S 14A. THE AO NOTED THAT ASSESSEE HAS EARNED DIVIDEND INCOME F ROM MUTUAL FUND AT RS.17,49,754/- AND INCOME FROM SHARES AT RS.21,000/ -. THE ASSESSEE HAD PAID INTEREST ON THE BORROWED FUNDS WHICH ARE INVES TED IN DIVIDEND INCOME WHICH ARE EXEMPT. THEREFORE, PART OF THE INT EREST EXPENDITURE NEEDED TO BE DISALLOWED. HE ACCORDINGLY DISALLOWED THE INTEREST EXPENDITURE TO THE EXTENT OF DIVIDEND INCOME AT RS. 17,49,754/-. 17. THE LD. CIT(A) ALLOWED THE CLAIM OF THE ASSESSE E BY FOLLOWING THE DECISION OF THE TRIBUNAL IN THE CASE OF TORRENT FI NANCIERS VS. ACIT (2001) 73 TTJ 624 (AHD). THE LD. CIT(A) FOUND THAT ASSESSEE HAS ITA NO.3958/AHD/2008 ASST. YEAR 2005-06 12 SUBSTANTIAL INTEREST FREE FUNDS. AS ON 31 ST MARCH, 2005 THE ASSESSEE HAD RS.192 LACS IN SHARE CAPITAL AND RS.1437.70 LACS AS RESERVES AND SURPLUS. AGAINST THIS, IT HAD MADE TOTAL INVESTMENT OF RS.68 2.12 LAKHS. IN THE CURRENT YEAR ITS INVESTMENT WAS ONLY OF RS.5,65,81, 682/-. ON THE OTHER HAND BORROWINGS OF THE ASSESSEE HAD GONE DOWN BY RS .791.43 LACS. FURTHER ASSESSEE HAD EARNED A PROFIT OF RS.893.27 L ACS. ONCE IT IS SO IT CANNOT BE PRESUMED THAT ASSESSEE HAD MADE INVESTMEN T IN MUTUAL FUND OUT OF INTEREST BEARING BORROWED FUNDS. HE ACCORDIN GLY STATED THAT THERE IS NO REASON FOR MAKING DISALLOWANCE OF INTEREST BY IN VOKING SECTION 14A. 18. WE HAVE HEARD THE PARTIES. IN VIEW OF THE FACT THAT ASSESSEE HAD SUFFICIENT PROFIT, CAPITAL AND RESERVES WHICH ARE M ORE THAN INVESTMENT MADE BY THE ASSESSEE IN MUTUAL FUND, IT CANNOT BE P RESUMED THAT INVESTMENT IN MUTUAL FUND MADE BY THE ASSESSEE WERE OUT OF INTEREST BEARING BORROWED FUNDS. HON. SUPREME COURT IN THE C ASE OF MUNJAL SALES CORPORATION VS. CIT (2008) 298 ITR 298 (SC) HELD TH AT WHERE THE ASSESSEE HAD CAPITAL AND PROFITS MORE THAN THE INTE REST FREE FUNDS ADVANCED THEN IT HAS TO BE PRESUMED THAT SUCH INTER EST FREE ADVANCES WERE GIVEN OUT OF INTEREST FREE CAPITAL AVAILABLE WITH T HE ASSESSEE. IT IS FOR THE AO TO SHOW THE NEXUS BETWEEN THE INTEREST BEARING B ORROWED FUNDS AND INVESTMENT WHOSE INCOME IS EXEMPT. ITA NO.3958/AHD/2008 ASST. YEAR 2005-06 13 19. FURTHER, PROVISIONS OF SUB-SECTIONS (2) & (3) O F SECTION 14A OF THE ACT AND RULE 8D ARE APPLICABLE W.E.F. ASST. YEAR 20 07-08 AS HELD BY HON. BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE MFG. CO. LTD. (2010) 328 ITR 81 (BOM). THE DISALLOWANCE U/S 14A FOR THE YEAR UNDER CONSIDERATION CAN BE MADE ON REASONABLE BASIS AFTER FOLLOWING THE AUTHORITIES ON THE SUBJECT. EVEN OTHERWISE HON'BLE BOMBAY HIGH COURT IN CIT VS. RELIANCE UTILITIES AND POWER LTD {2009) 313 ITR 340 (BOM.) HELD THAT IF THERE ARE FUNDS AVAILABLE, BOTH INTERE ST-FREE AND OVERDRAFT AND/OR LOANS TAKEN, THEN A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE INTEREST-FREE FUNDS GENERATED O R AVAILABLE WITH THE COMPANY, IF THE INTEREST FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. IN VIEW OF ABOVE, THIS GROUND OF REVEN UE IS ALSO REJECTED. AS A RESULT, THE APPEAL FILED BY THE REVENUE IS DIS MISSED. 19. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER WAS PRONOUNCED IN OPEN COURT ON 17.06.2011. SD/- SD/- (D. K. TYAGI) (D.C. AGRAWAL) JUDICIAL MEMBER ACCOUNTANT MEMB ER AHMEDABAD, DATED : 17.06.2011. MAHATA/- ITA NO.3958/AHD/2008 ASST. YEAR 2005-06 14 COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD 1.DATE OF DICTATION 14/6/11. 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING MEMBER 16/6/11. /OTHER MEMBER. 3.DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S. 4.DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT.. 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR .P.S./P.S 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER..