M/s. The General Talkies Ltd., Delhi V. ITO, New Delhi

ITA 4224/DEL/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 66060 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 3 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-12-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 15-10-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 13-09-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MEETA SINHA
• Assessee Lawyers: Y K KAPUR S; KANNAN KAPUR
• Keywords: Capital asset; Business income; Depreciation; Business expenditure; Advance ruling; Speculation loss; Unabsorbed depreciation; Capital expenditure
• Section: 143(3); 37(1); 32

Judgement Text

. IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH H NEW DELHI) BEFORE SMT. DIVA SINGH, JUDICIAL MEMBER AND SHRI T.S. KAPOOR, ACCOUNTANT MEMBER I.T.A. NO.4224/DEL/2010 ASSESSMENT YEAR : 2006-07 M/S GENERAL TALKIES LTD., ITO, 8-D, 2 ND FLOOR, M.J. BLDG., WARD-16 (2), BHAGILRATH PLACE, CHANDNI CHOWK, NEW DELHI. DELHI. V. (APPELLANT) (RESPONDENT) PAN /GIR/NO. PAN /GIR/NO. PAN /GIR/NO. PAN /GIR/NO.AAACT AAACT AAACT AAACT- -- -0030 0030 0030 0030- -- -C CC C APPELLANT BY : SHRI KANNAN KAPUR & SHRI Y.K. KAPUR, ADVOCATES. RESPONDENT BY : MS. MEETA SINHA, SR. DR. ORDER PER TS KAPOOR, AM: THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDE R OF LD CIT(A) DATED 3.8.2010. THE GROUNDS RAISED BY THE ASS ESSEE ARE AS UNDER:- 1. THAT THE LD CIT(A) AND ASSESSING OFFICER HAVE ERRED IN LAW AND ON FACTS OF THE CASE BY ASSESSING BUSINESS INCOME OF ` .98,95,886/- AS INCOME FROM CAPITAL GAINS. 2. THAT THE LD CIT(A) AND ASSESSING OFFICER HAVE ERRED IN LAW AND ON FACTS OF THE CASE BY DISALLOWING COMMISSION OF ` .20,61,266/- PAID TO WHOLE TIME DIRECTOR. ITA NO4224/DEL/10 2 3. THAT THE LD CIT(A) AND ASSESSING OFFICER HAVE ERRED IN LAW AND ON FACTS OF THE CASE BY DISALLOWING BUSINESS LOSS OF ` .15,05,035/- ON SALE OF INVESTMENTS DEBITED TO P&L ACCOUNT. 4. THAT THE LD CIT(A) AND ASSESSING OFFICER HAVE ERRED IN LAW AND ON FACTS OF THE CASE BY DISALLOWING EXPENSES OF ` .1,81,430/- DEBITED TO P&L ACCOUNT ON ESTIMATE BASIS. 5. THAT THE ORDER PASSED BY LD CIT(A) AND ASSESSING OFFICE R ARE AGAINST THE PRINCIPLES OF CONSISTENCY. 6. THAT THE APPELLANT PRAY FOR LEAVE TO ADD, ALTER, AM END OR DELETE THE ABOVE GROUND OF APPEAL EITHER BEFORE OR AT THE TIME OF HEARING. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMP ANY IS ENGAGED IN THE BUSINESS OF EXHIBITING FILMS AND IT FILE D ITS RETURN OF INCOME ON 23.11.2006 DECLARING INCOME OF ` .7,41,684/-. THE CASE WAS SELECTED FOR SCRUTINY UNDER CASS. DURING ASSESSMENT PROCE EDINGS, THE ASSESSING OFFICER NOTED THAT IN THE COMPUTATION OF INCO ME, THE ASSESSEE HAD DECLARED INCOME FROM BUSINESS AFTER SETTING OF F OF BUSINESS LOSS AND UNABSORBED DEPRECIATION BROUGHT FORWARD FROM EARLIER YEARS. THE ASSESSING OFFICER FURTHER NOTED THAT AS A NOTE TO COMPUTATION OF INCOME, THE ASSESSEE HAD DECLARED PROFIT & LOSS ON SALE OF SHARES AND MUTUAL FUNDS AS BUSINESS INCOME AND BUSINESS LO SS AMOUNTING TO ` .98,95,886/- AND ` 15,05,035/- RESPECTIVELY. ON PERUSAL OF BALANCE SHEET AS ON 31.3.2006, THE ASSESSING OFFICER O BSERVED THAT IN SCHEDULE-D IN BALANCE SHEET, THE INVESTMENTS WERE SH OWN AT ` .4,01,19,160/- AS LONG TERM INVESTMENTS (OTHER THAN T RADE INVESTMENTS). FROM THE ABOVE FACTS, THE ASSESSING OFFICE R OBSERVED THAT ASSESSEE WAS HAVING INVESTMENTS IN SHARES AND MUTUAL F UNDS WHICH WERE CLASSIFIED IN THE BALANCE SHEET AS LONG TERM INVESTMENTS (OTHER THAN TRADE) AND THEREFORE HE ARRIVED AT THE CONCLUSION THAT ITA NO4224/DEL/10 3 INCOME EARNED ON SALE OF SHARES AND MUTUAL FUNDS WAS IN THE NATURE OF SHORT TERM CAPITAL GAIN AND OR LONG TERM CAPITAL GAI N OR LOSS AS THE CASE MAY BE. WHEN CONFRONTED BY THE ASSESSING OFFICER AS TO WHY THE INCOME SHOWN BY THE ASSESSEE AS BUSINESS INCOME BE NOT TREA TED AS INCOME FROM SHORT TERM CAPITAL GAIN, THE ASSESSEE SUBMITT ED THAT DUE TO DETERIORATION OF BUSINESS OF THE COMPANY IT HAD SHIF TED ITS BUSINESS ACTIVITY AND HAD INCLUDED INVESTMENT IN SHARES AS BUSIN ESS OF THE COMPANY AND THEREFORE IT ARGUED THAT INCOME FROM SA LE OF SHARES WAS A BUSINESS INCOME. THE ASSESSEE FURTHER EXPLAINED THAT HOW FROM 2004 ONWARDS WHEN IT STARTED INVESTING IN STOCK MARKET, T HE PROFITS OF THE COMPANY HAD STARTED INCREASING. THE ASSESSING OFFICER, HO WEVER, HELD THAT ASSESSEE HAD TRIED TO JUSTIFY SET OFF OF ACCUMULATED LOSSES OF YEARS AGAINST SHORT TERM CAPITAL GAIN BY TREATING THEM AS B USINESS PROFITS. THE ASSESSING OFFICER FURTHER NOTED FROM THE COPY OF LE DGER ACCOUNT THAT PROFIT ON SALE OF SHARES WAS BEING RECORDED AS SHORT TERM CAPITAL GAIN AND SPECIFIC ACCOUNT OF SHORT TERM CAPITAL GAIN WAS MAINTAINED BY THE COMPANY. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTA NCES, THE ASSESSING OFFICER HELD THE INCOME FROM SALE OF SHARES AND MUTUAL FUNDS AS INCOME FROM SHORT TERM CAPITAL GAIN. SIMILA RLY, HE ALSO NOTED THAT ASSESSEE HAD DEBITED TO ITS P&L ACCOUNT A SUM OF ` .15,05,035/- ON ACCOUNT OF LOSS ON SALE OF INVESTMENT BEING LONG TERM ( OTHER THAN TRADE). ON AN ANALYSIS, THE ASSESSING OFFICER FOUND THAT ` .16,100/- OUT OF THE ABOVE AMOUNT WAS LOSS ON ACCOUNT OF SPECULATION LOSS AND THEREFORE HE DISALLOWED THE SAME AND FOR THE REMAININ G AMOUNT OF ` .14,88.935/- BEING LOSS ON SALE OF LONG TERM INVESTMENT , HE HELD THAT THE SAME CAN BE SET OFF ONLY AGAINST LONG TERM CAPITA L GAIN ONLY. FURTHER THE ASSESSING OFFICER NOTED THAT AN AMOUNT OF ` .20,61,266/- WAS CLAIMED AS EXPENSES ON ACCOUNT OF COMMISSION PAID TO WHOLE TIME DIRECTOR WHICH WAS PAID AS 50% ON NET PROFIT IN EXCE SS OF ` .20 LAKHS BEFORE CHARGING SUCH COMMISSION. THE ASSESSING OFFICER DI SALLOWED ITA NO4224/DEL/10 4 THIS AMOUNT HOLDING THAT SINCE SHORT TERM CAPITAL GAIN WAS NOT PART OF PROFIT OF THE BUSINESS AND THEREFORE THE NET PROFIT OF THE COMPANY WAS BELOW ` .20 LAKHS AND NO SUM WAS PAYABLE TO THE DIRECTOR. 3. THE ASSESSING OFFICER FURTHER NOTED THAT SINCE THE BU SINESS INCOME DECLARED BY THE ASSESSEE WAS BEING ASSESSED AS INCOME UNDER THE HEAD SHORT TERM CAPITAL GAIN, NO EXPENSES OTHER TH AN COST OF ASSET SOLD WERE ALLOWABLE AND KEEPING IN VIEW THIS FACT HE DISALLOWED A SUM OF ` .1,81,430/- BEING 1/10 TH OF THE EXPENSES CLASSIFIED UNDER THE HEAD PERSONAL EXPENSES AFTER REDUCING COMMISSION PAID TO DIR ECTOR. 4. DISSATISFIED WITH THE ORDER, THE ASSESSEE FILED APPEAL BEFORE LD CIT(A) AND SUBMITTED AS UNDER:- A) THAT APPELLANT COMPANY BOUGHT SHARES OF VARIOUS COMPAN IES DURING THE PREVIOUS YEAR AND SOLD THE SAME IN THE PRE VIOUS YEAR AND SINCE THERE WERE FREQUENT TRANSACTIONS AND THEREFO RE IT AMOUNTED TO BUSINESS TRANSACTIONS. B) THAT THE PERIOD FOR WHICH SHARE WERE HELD WAS VERY LESS WHICH CLEARLY REFLECTS THE INTENTION OF APPELLANT WHICH WA S JUST TO EARN PROFIT ON SALE RATHER THAN TO HOLD IT FOR PURPOSES OF DIVIDEND AND APPRECIATION. C) THAT DURING THE YEAR UNDER CONSIDERATION THE APPELLA NT COMPANY WAS ENGAGED IN THE BUSINESS OF EXHIBITION OF FILMS AND INVESTMENT IN SHARES, THEREFORE, GAIN ON SALE OF SHARES SH OULD BE TREATED AS BUSINESS INCOME AND LOSS ON SALE OF SHARES SHOULD BE TREATED AS BUSINESS LOSS. RELIANCE WAS PLACED ON THE J UDGMENT OF THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF C IT V. MALABAR INDUSTRIAL CO. LTD. 320 ITR 486 HOLDING THAT LOSSES INC URRED BY THE ASSESSEE ON THE SALE & PURCHASE OF SHARES WAS A BUSINESS LOSS ITA NO4224/DEL/10 5 AND NOT A CAPITAL LOSS. FURTHER RELIANCE WAS PLACED O N THE FOLLOWING JUDGMENTS:- 1. CIT, CALCUTTA V. ASSOCIATED INDUSTRIAL DEVELOPMENT CO . (P) LTD. 82 ITR 586 (SC). 2. CIT, BOMBAY V. HOL/CK LARSEN 160 ITR 67 (SC). 3. AUTHORITY FOR ADVANCE RULING (AAR) 288 ITR 641 (SC) . 4. G. VENKATA SWAMI NAIDU & CO. V. CIT 35 ITR 594 (SC) . 5. SARDAR INDRA SINGH & SONS LTD. V. CIT 24 ITR 415 (SC ). 6. KEDARNATH JUTE MFG. CO. LTD., V. CIT 82 ITR 363 (S C). 7. SUTLEJ COTTON MILLS LTD.V. CIT 116 ITR 10 (SC). 8. KARAN CHAND THAPAR & BROS. PVT. LTD. V. CIT 83 ITR 8 99 (SC). & 9. RURAL ELECTRIFICATION CORPORATION LTD. 177 TAXMANN 460, AUTHORITY OF ADVANCE RULING, NEW DELHI. 5. WITH REGARD TO DISALLOWANCE OF COMMISSION, THE LD AR SUBMITTED THAT GAIN OF ` .98,95,886/- WAS ACTUALLY THE INCOME FROM BUSINESS AND PROFESSION INSTEAD OF SHORT TERM CAPITAL GAIN AND THERE FORE SAME FORMED PART OF PROFITS OF BUSINESS OF THE COMPANY AND H ENCE COMMISSION PAID TO DIRECTOR AS PER RESOLUTION PASSED BY T HE COMPANY WAS AN ALLOWABLE EXPENDITURE U/S 37(1) OF THE IT ACT AND FURTHER SUBMITTED THAT THE DIRECTOR THAT MR. RAVI SAYAL HAS O FFERED THE REMUNERATION FOR TAX AND NECESSARY TAX AT SOURCE WAS AL SO DEDUCTED. AS REGARDS THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AMOUNTING TO ` .1,83,430/-, THE LD AR SUBMITTED BEFORE LD CIT(A) TH AT THE ASSESSING OFFICER HAD WRONGLY HELD THE INCOME FROM BUSINESS AS SH ORT TERM CAPITAL GAIN AND DISALLOWANCE EQUIVALENT TO 1/10 TH OF PERSONAL EXPENSES IS ON ESTIMATE BASIS AND FURTHER SUBMITTED THAT FOR AN A LLOWABLE EXPENDITURE WITHIN THE MEANING OF SECTION 37(1) THE NECESSARY ITA NO4224/DEL/10 6 CONDITION IS THAT IT MUST BE PAID OUT AND SPENT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OR PROFESSION AND FURTHER IT MUST NOT BE A CAPITAL EXPENDITURE, A PERSONAL EXPENSE OR AN ALLOWAN CE OF THE CHARACTER DESCRIBED IN SECTIONS 32 TO 36 OF THE IT ACT . IT WAS FURTHER ARGUED THAT SINCE INVESTING IN SHARES AND SECURITIES WAS O NE OF THE MAIN OBJECT OF THE APPELLANT COMPANY AS PER MEMORAND UM OF ASSOCIATION, THE EXPENDITURE INCURRED ON GIVING SALARY TO STAFF WHO WERE ENGAGED IN LOOKING AFTER THE SALE AND PURCHASE O F SHARES WAS ALLOWABLE EXPENDITURE AS BUSINESS EXPENDITURE U/S 37(1) OF THE ACT. HOWEVER, THE LD CIT(A) DID NOT AGREE WITH THE CONTE NTIONS OF THE LD AR AND HELD THAT THE BUSINESS INCOME DECLARED BY ASSESSEE FRO M SALE OF SHARES/MUTUAL FUNDS WAS IN THE FORM OF SHORT TERM CAPITA L GAIN AS THE ASSESSEE HAD NOT SHOWN ANYTHING ELSE IN STOCK IN TRADE AN D RATHER HAD SHOWN THE VALUE OF SHARES/MUTUAL FUNDS INVESTMENT UNDER THE HEAD INVESTMENTS. 6. AGGRIEVED, THE ASSESSEE FILED APPEAL BEFORE THIS TRIB UNAL. 7. AT THE OUTSET, THE LD AR SUBMITTED THAT ASSESSING OFF ICER TREATED THE BUSINESS INCOME OF COMPANY AS CAPITAL GAIN MERELY B ECAUSE THE VALUE OF SHARES/INVESTMENTS WERE SHOWN AS INVESTMENTS AND W ERE NOT SHOWN AS STOCK IN TRADE. HE FURTHER SUBMITTED THAT OBJE CT CLAUSE 27 OF MEMORANDUM OF ASSOCIATION DULY AUTHORIZES THE COMPANY TO INVEST IN SHARES/MUTUAL FUNDS. HE TOOK US TO PAGE 13 OF PAPER BOO K INVITING OUR ATTENTION TO THE FACT THAT INVESTMENT DURING THE YEA R HAD INCREASED CONSIDERABLY AS COMPARED TO EARLIER YEAR. HE FURTHER ARGUED THAT PROFIT ON SALE OF SHARES/MUTUAL FUNDS HAS BEEN CLASSIFIED AS OTHE R INCOME ON PAGE 10 OF PAPER BOOK. HE ALSO REFERRED TO ASSESSMENT OR DER RELATING TO PRECEDING YEAR PLACED AT PAPER BOOK PAGE 1,2 & 3 INVITING OUR ATTENTION TO THE FACT THAT IN THE IMMEDIATELY PRECE DING YEAR, THE ITA NO4224/DEL/10 7 ASSESSMENT WAS DONE U/S 143(3) AND THE INCOME FROM SALE O F SHARE WAS ASSESSED AS BUSINESS INCOME AND SINCE THERE IS NO CHANGE IN FACTS FROM THE PREVIOUS YEAR THE REVENUE WAS NOT JUSTIFIED I N TREATING THE BUSINESS PROFIT AS INCOME FROM SHORT TERM CAPITAL GAIN. THEREFORE, HE ARGUED THAT BUSINESS INCOME OF THE COMPANY BE NOT TRE ATED AS INCOME FROM CAPITAL GAINS. SIMILARLY HE ARGUED THAT LOSS INCU RRED ON SALE OF SHARES SHOULD BE TREATED AS BUSINESS LOSS. IN THIS RESPECT, RE LIANCE WAS PLACED ON THE FOLLOWING JUDGMENTS:- 1. JAI SHRE PRADEEP SHAH 131 ITD 326. 2. CIT V. DARIUS PANDOLE 330 ITR 485 (BOM.). 3. CIT V. MALABAR INDUSTRIAL CO. LTD. 320 ITR 486. 8. HE FURTHER TOOK US TO PAGES 7 TO 14 OF PAPER BOOK WHERE COPIES OF MINUTES BOOK CONTAINING RESOLUTION AUTHORIZING THE PAYMENT OF COMMISSION TO DIRECTOR WAS PLACED. IN VIEW OF THE ABOV E, HE ARGUED THAT THE REVENUE HAS WRONGLY DISALLOWED PAYMENT MADE TO DIRECTOR WHICH WAS IN ACCORDANCE WITH RESOLUTION PASSED BY COMPA NY AND WAS OUT OF PROFITS OF THE COMPANY. SIMILARLY, HE ARGUED THE DISALLOWANCE OF 1/10 TH OF PERSONAL EXPENSES WAS NOT JUSTIFIED. 9. THE LD DR, ON THE OTHER HAND, RELIED UPON THE OR DER OF ASSESSING OFFICER AND LD CIT(A) AND IN VIEW OF JUDGMENT OF HO N'BLE SUPREME COURT IN THE CASE OF CIT V. ASSOCIATED INDUSTRIAL DEVEL OPMENT CO. (P) LTD. REPORTED IN THE CASE OF 83 ITR 586 AND FURTHER ARGUED THAT EVERY ASSESSMENT YEAR WAS A DIFFERENT ASSESSMENT YEAR AND RULE OF RES JUDICATA DO NOT APPLY TO IT PROCEEDINGS. THEREFORE SH E ARGUED THAT FACTS OF THE PRESENT CASE SHOULD BE SEEN IN ITS ENTIRETY AND ARGUED THAT ON THE FACTS AND CIRCUMSTANCES, THE ASSESSING OFFICER HAD RIGHTLY HELD THE INCOME AS SHORT TERM CAPITAL GAIN & THEREFORE HAD RIGHTLY DISALLOWED THE AMOUNT OF LONG TERM CAPITAL LOSS DEBITED IN P&L ACCOU NT. IN VIEW OF THIS SHE ITA NO4224/DEL/10 8 ALSO ARGUED THAT AFTER CONSIDERING THE AMOUNT EARNED ON SALE OF SHARES/MUTUAL FUNDS AS CAPITAL GAIN, THE BUSINESS INCOME O F THE COMPANY FALLS BELOW ` .20 LAKHS AND THEREFORE COMMISSION TO DIRECTOR AMOUNTING TO ` .20,61,266/- WAS NOT PAYABLE. SHE ALSO ARGUED THAT SINCE COMPANY WAS ENGAGED IN INVESTMENT ACTIVITIES, TH EREFORE, DISALLOWANCE OF 1/10 TH OF PERSONAL EXPENSES WAS JUSTIFIED. 10. THE LD AR IN HIS REJOINDER SUBMITTED THAT CIRCULA R NO.4 DATED 15.6.2007 STATES THAT HOLDING OF SHARES BY WAY OF INVEST MENT OR STOCK IN TRADE IS A MATTER WHICH IS WITHIN THE KNOWLEDGE OF THE ASSESSEE WHO HOLDS THE SHARE AND THEREFORE ASSESSEES VERSION OF HOLDING OF SHARES WHETHER AS BUSINESS ASSETS OR INVESTMENT ASSETS SHOULD BE KEPT IN MIND. 11. WE HAVE HEARD THE RIVAL SUBMISSIONS OF BOTH THE PA RTIES AND HAVE GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT ASSESSEE COMPANY WAS ENGAGED IN THE BUSINESS OF EXHIBITION OF FILMS AND HAD ACCUMULATED LOSSES AND UNABSORBED DEPRECIATION. THE ASSESSEE COMPANY HAD MADE INVESTMENTS IN BONDS, MUTUAL FUN DS AND SHARES OF VARIOUS LISTED AND UNLISTED COMPANIES AND COST O F SUCH INVESTMENT AFTER PROVIDING DIMINUTION IN THE VALUE O F INVESTMENT AS ON 31.3.2004 AND AS ON 31.3.2005 WAS REFLECTED IN THE BA LANCE SHEET AS INVESTMENTS. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE COMPANY MADE FURTHER SUBSTANTIAL INVESTMENTS OUT PROCE EDS OF PREVIOUS YEAR INVESTMENTS AND OUT OF FRESH RESOURCES. NO WHERE, DURING APPELLATE PROCEEDINGS, THE LD AR DEMONSTRATED THAT ASSESSEE HAD CARRIED OUT VARIOUS TRANSACTIONS OF PURCHASES AND SA LES OF SHARES/MUTUAL FUNDS. NOTHING WAS PRODUCED BEFORE THE ASSE SSING OFFICER OR BEFORE THE LD CIT(A) OR BEFORE US WHICH C OULD PROVE THAT ASSESSEE WAS REGULARLY ENGAGED IN THE BUSINESS OF SALE/PURCH ASE OF ITA NO4224/DEL/10 9 SHARES. FROM THE COMPARISON OF SCHEDULE-D, IN AUDITE D ACCOUNTS IN FINANCIAL YEAR 2004-05 & 2005-06 , IT IS APPARENT TH AT ASSESSEE HAD HELD THE INVESTMENTS FOR A FAIRLY LONG PERIOD WHICH ESTABLISHES THAT THE INCOME EARNED BY THE ASSESSEE WAS NECESSARILY FROM SHORT TE RM CAPITAL GAIN. COMPARISON OF SCHEDULE-D IN TWO YEARS I .E. AS ON 31.3.2005 AND 31.3.2006 REVEALS THAT OUT OF INVESTMEN TS WORTH ` .167.70 LAKHS AS ON 31.3.2005, THE ASSESSEE HAD SOLD INVEST MENTS WORTH ` .121.52 LAKHS DURING THE YEAR ENDING 31.3.2006 THAT MEANS THE ASSESSEE HAD SOLD A SUBSTANTIAL PART OF INVESTMENT AS ON 31. 3.2005 AFTER HOLDING FOR FAIRLY GOOD NUMBER OF MONTHS DURIN G THE YEAR 31.3.2005 AND 31.3.2006. FOR REST OF THE INVESTMENTS AMOUNTING TO ` .46.18 LAKHS, THE ASSESSEE CONTINUED TO HOLD BEYOND 31.3 .2006 AND DURING THE YEAR ENDING 31.3.2006 IT AGAIN INVESTED I N OTHER SCHEMES OF MUTUAL FUNDS AND SHARES OF OTHER COMPANIES. FROM THESE FACTS, IT EMERGES THAT ASSESSEE USED TO INVEST IN SHARES AND MUTUAL FU NDS AND USED TO EXIST AFTER GETTING APPRECIATION THEREON WHIC H NECESSARILY IS AN INVESTMENT ACTIVITY AND NOT A BUSINESS ACTIVITY. MOREOV ER, THE VALUE OF INVESTMENTS AS ON 31.3.2005 & 31.3.2006 IS QUITE SIGNIFI CANT WHEN COMPARED WITH SALES OF SHARES MADE BY THE COMPANY. FOR EXAMPLE DURING THE YEAR CONSIDERATION, THE ASSESSEE HAD SOLD INVE STMENTS WORTH ` .121.52 LAKHS, WHEREAS THE VALUE OF INVESTMENTS AS ON 31.3.2006 IS ` .401.19 LAKHS WHICH FURTHER PROVES THAT ASSESSEE INDEED WAS AN INVESTOR AND NOT A TRADER BECAUSE IN THAT CASE T URNOVER OF SHARES GENERALLY IS MUCH MORE THAN THE VALUE OF INVEST MENTS AT A PARTICULAR POINT OF TIME. 12. CIRCULAR NO.4 OF 2007 DATED 15.6.2007 ISSUED BY T HE CBDT HAS GIVEN BROAD GUIDELINES TO TEST WHETHER INVESTMENT INTO STOCKS IN A GIVEN CIRCUMSTANCES WAS A BUSINESS ASSET OR A CAPITAL ASSET. ACCORDINGLY, THE AUTHORITY FOR ADVANCE RULING (AAR) 288 ITR 641 HAS ITA NO4224/DEL/10 10 CULLED OUT THE FOLLOWING PRINCIPALS AFTER REFERRING TO THE DECISION OF SUPREME COURT IN SEVERAL CASES. I) WHERE A COMPANY PURCHASES AND SELL SHARES, IT MUST BE SHOWN THAT THEY WERE HELD AS STOCK IN TRADE AND THAT EXISTENCE OF THE POWER TO PURCHASE AND SELL SHARES IN TH E MEMORANDUM OF ASSOCIATION IS NOT DECISIVE OF THE NATUR E OF TRANSACTION. II) THE SUBSTANTIAL NATURE OF TRANSACTION, THE MANNER OF MAINTAINING BOOKS OF ACCOUNTS, THE MAGNITUDE OF PURCH ASES AND SALES AND THE RATIO BETWEEN PURCHASES AND SALES WITH HOLDING WOULD FURNISH A GOOD GUIDE TO DETERMINE THE NATURE OF TRANSACTION. APPLYING THE ABOVE PRINCIPALS TO THE FACTS AND CIRCUM STANCES OF THE PRESENT, WE OBSERVE AS UNDER:- 1. THE ASSESSEE HAS CLASSIFIED THE INVESTMENT IN SHARES/MUTUAL FUNDS UNDER THE HEADING INVESTMENTS AFTER PROVIDING FOR DIMINUTION IN THE VALUE THEREOF AND H AS NOT SHOWN THEM AS STOCK IN TRADE. 2. THE ASSESSEE HAS NOT REFLECTED ANY PURCHASES & SALES OF SHARES/MUTUAL FUNDS AND HAS NOT PREPARED ANY TRADING ACCOUNT TO REFLECT THE TURNOVER OF THE COMPANY AND HAS RATHER TAKEN THE NET RESULT AS INCOME OF THE ASSESSEE. 3. THE ASSESSEE IN SCHEDULE-K AT PAGE 15 OF ANNUAL REPORT HAS SHOWN THE SAID INCOME UNDER THE HEAD OTHER INCOM E (BEING INCOME FROM LONG TERM INVESTMENT OTHER THAN TRADE). ITA NO4224/DEL/10 11 4. THE ASSESSEE IN SCHEDULE-N AT PAGE 16 DEBITED THE AMOUN T OF ` .15,05,035/- AS LOSS ON SALE OF INVESTMENT (LONG TERM OTHER THAN TRADE). 5. THE ASSESSEE IN SCHEDULE-D AT POINT (G) OF ACCOUNTING POLICIES HAS MENTIONED THAT INVESTMENTS ARE VALUED AT COST INCLUSIVE OF EXPENSES. 6. THERE IS NO POLICY STATEMENT IN ACCOUNTING POLICIES WI TH RESPECT TO VALUATION OF STOCK IN TRADE. HAD THE ASSESSEE S INTENTION WAS TO INDULGE IN BUSINESS ACTIVITY, THE POLI CY RELATING TO VALUATION OF STOCK IN TRADE MUST HAVE BEE N THERE IN ACCOUNTING POLICIES. 13. FROM THE FACTS AND CIRCUMSTANCES AS ENUMERATED ABOV E, THE ARGUMENT OF LD AR THAT ASSESSEE HAD BY MISTAKE CLASSIFIED THE STOCK IN TRADE AS INVESTMENT CANNOT BE ACCEPTED SPECIALLY KEEPI NG IN VIEW THE FACT THAT ASSESSEE IS A LIMITED COMPANY SUBJECT TO STATUTO RY AUDIT AND IT CANNOT BE SAID THAT EVERY WHERE THE ASSESSEE CONTINUE D MISTAKE IN RECORDING OF TRANSACTION. THE MANNER OF RECORDING O F TRANSACTIONS RELATING TO SHARES IS ONE OF THE INDICATOR OF INTENT ION OF ASSESSEE AS TO WHETHER THE PURPOSE WAS INVESTMENT OR TRADE WHICH IN T HE PRESENT CASE WAS INVESTMENT. 14. THE HON'BLE SUPREME COURT IN THE CASE OF CIT V. ASSOCIATED INDUSTRIAL DEVELOPMENT CO. PVT. LTD. 82 ITR 586 (SC) HELD AS UNDER:- WHETHER A PARTICULAR HOLDING OF SHARE IS BY WAY OF INVESTMENT OR FORMS PART OF STOCK IN TRADE IS A MATTER WHICH IS WITHI N THE KNOWLEDGE OF ASSESSEE WHO HOLDS THE SHARE AND IT SHOULD IN NORMAL CIRCUMSTANCES BE IN A POSITION TO PRODUCE EVIDE NCE FROM ITS RECORD AS TO WHETHER IT HAS MAINTAINED ANY DISTINCT ION ITA NO4224/DEL/10 12 BETWEEN THOSE SHARES WHICH ARE ITS STOCK IN TRADE AND T HOSE WHICH ARE HELD BY WAY OF INVESTMENT. IN THE PRESENT CASE FROM RECORDING OF TRANSACTION I N THE BALANCE AND BOOKS OF ACCOUNTS, IT CAN BE CONCLUDED THAT INTENTION OF ASSESSEE WAS TO KEEP INVESTMENT IN SHARES AS INVESTMENTS AND NOT AS STOC K IN TRADE. THE ASSESSEE THOUGH AT PAGE 18 OF ANNUAL REPORT HAS DISCL OSED CERTAIN AMOUNT OF QUANTITY OF SALE OF SHARES WHICH WERE PURCHA SED IN THE YEAR ITSELF BUT THERE TO THE TERM HAS BEEN USED AS INVESTMENT S AND LD AR COULD NOT DEMONSTRATE AS TO WHICH SHARES WERE PURCHASED ON WHICH DATE AND FOR HOW MANY DAYS OR MONTHS, THESE SHARES WERE HELD BEFORE SELLING AND HOW MUCH GAIN OR LOSS WAS EARNED ON THESE SHA RES. 15. THE CASE LAWS RELIED UPON BY LD AR IN THE CASE OF JAI SHREE PRADEEP SHAH V. ACIT 131 ITD 326 WHERE IT WAS HELD T HAT TRANSACTIONS OF SALE AND PURCHASE OF SHARE WAS IN THE NATURE OF BUSIN ESS IS NOT SIMILAR TO THE FACTS AND CIRCUMSTANCES OF THE PRESENT CA SE BECAUSE IN THAT CASE THE VOLUME OF PURCHASE AND SALE WAS QUITE LAR GE AS COMPARED TO VALUE OF INVESTMENT AS ON THE CLOSE OF THE YEAR AND MOREOVER THE HOLDING PERIOD WAS VERY SHORT AND TRANSAC TIONS WERE CONTINUES AND REGULAR AND BORROWED FUNDS WERE USED FOR PURCHASE OF SHARES WHEREAS IN THE PRESENT CASE, THE VOLUME OF PURCHA SE AND SALES THOUGH WERE SUBSTANTIAL BUT THE VALUE OF SHARES AS ON 31 .3.2005 AND AS ON 31.3.206 WAS QUITE SUBSTANTIAL AND WAS MORE THAN TURNOVER AND SECONDLY THE PERIOD OF HOLDING OF SHARES WAS QUITE LONG AS CAN BE SEEN FROM THE BALANCE SHEETS AND MOREOVER NO BORROWED FUND S WERE USED IN THE PRESENT CASE AND THERE WAS NO REGULARITY AND CONTI NUITY OF THE PURCHASES AND SALES. SIMILARLY, THE CASE LAWS RELIED UPON BY LD AR RELATING TO CIT V. DAIRUS PANDOLE 330 ITR 485 ALSO DO ES NOT MATCH WITH THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE AS IN THA T CASE THE ITA NO4224/DEL/10 13 ASSESSING OFFICER HAD INTENDED TO TREAT LOSS UNDER THE HE AD INCOME FROM CAPITAL GAIN AS BUSINESS LOSS ON ACCOUNT OF THE FA CT THAT STOCK OF SHARES HAD BEEN SHOWN UNDER HEAD INVESTMENT IN THE BALA NCE SHEET. THE ASSESSEE IN THAT CASE HAD SUBMITTED THAT DURING EARLI ER YEAR SAME QUERY WAS RAISED BY THE ASSESSING OFFICER TO WHICH THE ASSE SSEE HAD REPLIED AND THE ASSESSING OFFICER HAD ACCEPTED THE CONT ENTION OF THE ASSESSEE. THEREFORE, IN THE YEAR UNDER CONSIDERATION, TH E ASSESSING OFFICER WAS NOT JUSTIFIED TO DEVIATE FROM THE FINDING IN THE EARLIER YEAR WHEREAS IN THE PRESENT CASE, THE ASSESSMENT OF THE ASSESSEE IN THE PRECEDING YEAR THOUGH WAS COMPLETED U/S 143(3) OF THE ACT TREATING THE HEAD OF INCOME DECLARED BY THE ASSESSEE AS BUSINESS PRO FITS INSTEAD OF CAPITAL GAIN BUT THE ASSESSING OFFICER HAD NO T RAISED ANY QUERY NOR DISCUSSED THE TREATMENT OF HEAD OF INCOME IN ASSESSMENT ORDER. MOREOVER, EVERY YEAR IS A SEPARATE YEAR. THOU GH CONTINUITY IN APPROACH IN THE ASSESSMENT YEARS PERTAINING TO SAME ASSESSEE ARE DESIRABLE BUT RULE OF RES JUDICATA DOES NOT APPLY TO I NCOME TAX PROCEEDINGS. MOREOVER IF ASSESSING OFFICER HAD OVERLOOKE D ONE FACTOR IN ONE YEAR THAT DOES NOT PRECLUDE HIM TO LOOK INTO THE SAME IN NEXT YEAR. THE WRONG IN ONE YEAR CANNOT BE ALLOWED TO BE CONTINUED. SIMILARLY, THE OTHER CASE LAW RELIED UPON BY THE LD AR ARE DIFFERENT FROM THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE. T HEREFORE, KEEPING IN VIEW THE FACTS AND CIRCUMSTANCES OF THE PRE SENT CASE WE HOLD THAT ASSESSEE WAS NOT ENGAGED IN BUSINESS OF SHARES AND RATHER ITS INCOME WAS FROM CAPITAL GAIN. THEREFORE, GROUND N O.1 & 3 ARE DISMISSED. 16. AS REGARDS GROUND NO.2 RELATING TO DISALLOWING OF COMMISSION OF ` .20,61,266/- TO WHOLE TIME DIRECTOR, WE ARE OF THE VIEW THAT THOUGH SUFFICIENT BUSINESS PROFITS WERE NOT AVAILABLE BUT STILL THE TOTAL INCOME ITA NO4224/DEL/10 14 OF THE ASSESSEE WAS AVAILABLE FOR PAYMENT OF COMMISSION. M OREOVER THE ASSESSEE HAD DEDUCTED TAX AT SOURCE. MOREOVER, THER E IS NO SIGNIFICANT LOSS TO REVENUE AS THE DIRECTOR TO WHOM TH E COMMISSION WAS PAID IS MORE OR SO IN THE SAME BRACKET OF TAX AS THA T OF ASSESSEE. IT DOES NOT MATTER WHETHER SUFFICIENT PROFITS ARE AVAILAB LE OR NOT, THE ONLY POINT TO BE CONSIDERED WHILE ALLOWING AN EXPENDITURE IS TO SEE WHETHER THE EXPENDITURE WAS WHOLLY AND EXCLUSIVELY INCURRED F OR THE PURPOSE OF PROFESSION OR BUSINESS OF THE ASSESSEE. IN THE PRESENT CASE, THE PAYMENT OF COMMISSION WAS LINKED WITH PROFITS OF THE C OMPANY WHICH IN OUR OPINION CAN BE FROM ANY SOURCE OF INCOME I.E. FROM BUSINESS OR CAPITAL GAIN. THE ONLY CONDITION IS THAT EXPENDITURE SHOULD BE FOR THE PURPOSE OF BUSINESS OR PROFESSION. THEREFORE, WE HOLD THA T DISALLOWANCE OF PAYMENT OF COMMISSION WAS NOT JUSTIFIED THOUGH IT WILL BE DEDUCTIBLE FROM THE BUSINESS INCOME OF THE COMPANY AND NOT FROM THE SHORT TERM CAPITAL GAIN. THE ASSESSING OFFICER SHALL RECOMPUTED THE INCOME OF ASSESSEE AFTER GIVING EFFECT TO THIS ORDER AS A BOVE AND WILL ALLOW THE COMMISSION EXPENDITURE OF ` .20,61,266/- FROM BUSINESS INCOME. HENCE, GROUND NO.2 OF THE ASSESSEES APPEAL IS ALLOWED. 17. AS REGARDS DISALLOWANCE OF ` .1,81,430/- ON ACCOUNT OF 1/10 TH OF EXPENSES, WE ARE OF THE OPINION THAT SINCE THE ASSESSING OFFICER HAS DISALLOWED THE AMOUNT MERELY ON ESTIMATE BASIS AND RELY ING UPON THE CONTENTION OF THE ASSESSEE THAT MOST OF THE STAFF WAS ENGA GED IN SALE AND PURCHASE OF SHARES IS NOT JUSTIFIED. SPECIFICALLY KE EPING IN VIEW THE FACT THAT WE HAVE HELD THE INCOME FROM CAPITAL GAIN AND NOT FROM BUSINESS. IN VIEW OF THE ABOVE, GROUND NO.4 IS ALSO ALLO WED. 18. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PA RTLY ALLOWED. ITA NO4224/DEL/10 15 19. ORDER PRONOUNCED IN THE OPEN COURT ON 14TH DAY OF DECEMBER, 2012. SD/- SD/- (DIVA SINGH) (T.S. KAPOOR) JUDICIAL MEMBER ACCOUNTANT MEMBER DT. 14.12.2012. HMS COPY FORWARDED TO:- 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT (A)-, NEW DELHI. 5. THE DR, ITAT, LOKNAYAK BHAWAN, KHAN MARKET, NEW DEL HI. TRUE COPY. BY ORDER (ITAT, NEW DELHI). DATE OF HEARING 15.10.2012 DATE OF DICTATION 3.12.2012 DATE OF TYPING 4.12.2012 DATE OF ORDER SIGNED BY 14.12.2012 BOTH THE MEMBERS & PRONOUNCEMENT. DATE OF ORDER UPLOADED ON NET 17.12.2012 & SENT TO THE BENCH CONCERNED.