A.C.I.T. CENTRAL CIRCLE 22, MUMBAI V. PASSIONATE INVESTMENTS MANAGEMENT PVT. LTD., MUMBAI

ITA 4578/MUM/2012

• Counselvise Citation: 457819914 RSA 2012
• Duration Of Justice: 1 year(s) 11 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-06-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 20-02-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 06-07-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJESH RANJAN PRAS
• Assessee Lawyers: VIJAY MEHTA
• Keywords: Business income; Depreciation; Rule of consistency; Earning of tax free income
• Section: 143(3); 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, MUMBAI . , , , BEFORE SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA , JUD ICIAL MEMBER . / ITA NO. 4578 /MUM./ 2012 ( / ASSESSMENT YEAR : 2 0 09 10 ) ASSTT . COMMISSIONER OF INCOME TAX CENTRAL CIRCLE 22, AAYAKAR BHAVAN 101, M.K. ROAD, MUMBAI 400 020 .. / APPELLANT V/S M/S. PASSIONATE INVESTMENTS MANAGEMENT PVT. LTD. , 81/82, BAJAJ BHAVAN NARIMAN POINT, MUMBAI 400 021 .... / RESPONDENT ./ PERMANENT ACCOUNT NUMBER AAACM7085N / REVENUE BY : MR. RAJESH RANJAN PRAS AD / ASSESSEE BY : MR. VIJAY MEHTA / DATE OF HEARING 18.06.2014 / DATE OF ORDE R 25.06.2014 / ORDER , / PER AMIT SHUKLA , J.M. THE PRESENT APPEAL HA S BEEN PREFERRED BY THE REVENUE , CHALLENGING THE IMPUGNED ORDER DATED 4 TH APRIL 2012 , PASSED BY THE LEARNED COMMISSIONER (APPEALS ) X XX I X , MUMBAI , FOR THE QUANTUM OF ASSESSMENT PASSED UNDER SECTION 1 43 ( 3 ) OF THE INCOME TAX ACT, 1961 M/S. PASSIONATE INVESTMENTS MANAGEMENT PVT. LTD. 2 (FOR SHORT 'THE ACT' ) FOR THE ASSESSMENT YEAR 20 09 10 . GROUNDS RAISED BY THE REVENUE, READ AS UNDER: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(A) ERRED IN TREATING THE INCOME OF ` 50,25,48,525, AS CAPITAL GAIN INSTEAD OF BUSINESS INCOME AS T HE ASSESSEE IS TRADER IN SHARES AND NOT AN INVESTOR. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(A) ERRED IN RESTRICTING THE DISALLOWANCE U/S 14A UPTO ADMINISTRATIVE EXPENSES ONLY, WHEREAS THE DISALLOWANCE AS PER RULE 8 D OF THE RULES R/W SECTION 14A IN VIEW OF THE DECISION IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. V/S DCIT, WORKS OUT TO ` 87,16,813. 2 . BEFORE US, THE LEARNED COUNSEL, MR. VIJAY MEHTA, ON BEHALF OF THE ASSESSEE, SUBMITTED THAT INSOFAR AS THE ISSUE RAISED IN GROUND NO.1, BY THE DEPARTMENT, THE SAME IS SQUARELY COVERED BY THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2007 08 AND 2008 09, WHEREIN ON SIMILAR FACTS, THE TRIBUNAL HAS DECIDED THAT THE SURPLUS ARISING OUT OF SALE OF S HARES IS TO BE TAXED UNDER THE HEAD CAPITAL GAIN AND NOT UNDER THE HEAD INCOME FROM BUSINESS . 3 . FACTS IN BRIEF : THE ASSESSEE IS A NON BANKING FINANCIAL COMPANY DERIVING INTEREST INCOME FROM MONEY LENDING AND INCOME FROM INVESTMENT. THE ASSESSEE HAD SHO WN SHORT TERM CAPITAL GAIN OF ` 26,33,704, AND LONG TERM CAPITAL GAIN OF ` 4,49,38,696, FROM THE SALE OF SHARES. THE ASSESSEE, DURING HE COURSE OF ASSESSMENT PROCEEDINGS, IN RESPONSE TO THE SHOW CAUSE NOTICE, FILED DETAILS SUBM ISSIONS WITH REGARD TO THE OV ER ALL TRANSACTIONS OF SHARES, HOLDING PERIOD, TREATMENT GIVEN IN THE BOOKS, NUMBER OF TRANSACTIONS UNDERTAKEN AND THE HISTORY OF THE ASSESSEES CASE IN THE EARLIER YEARS. RELIANCE WAS ALSO PLACED ON CATENA OF DECISIONS WHICH HAS BEEN NOTED BY THE ASSESSING OFFICER AT PAGE 3 OF THE ASSESSMENT ORDER. HOWEVER, THE ASSESSING OFFICER HAS REJECTED THE ASSESSEES CONTENTION ON THE FOLLOWING GROUNDS: M/S. PASSIONATE INVESTMENTS MANAGEMENT PVT. LTD. 3 A) THE PURCHASE AND SALE OF SHARES IS NOT AN UNRELATED ACTIVITY BUT INCIDENTAL TO THE BUSINESS OF THE ASSESSEE. B) IT IS A WELL SETTLED LAW THAT EVEN A SINGULAR TRANSACTION 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 C) TH E ASSESSEE HAS BORROWED FUNDS TO FUND HIS ACTIVITY FOR PURCHASE AND SALE OF SHARES. THE PRESENCE OF BORROWED FUNDS IMPARTS THE ACTIVITY THE COLOR OF TRADE RATHER THAN INVESTMENT. D) THE ASSESSEE HAS NOT FURNISHED ANY REASON FOR PURCHASE NEITHER HAS HE F URNISHED THE REASON FOR SALE. IN THE ABSENCE OF A DEFINITIVE REASON ON THE PART OF ASSESSEE WHAT CAN BE GAUGED FROM THE FACTS IS THAT THE ASSESSEE HAS BOUGHT AND SOLD DEPENDING ON THE VOLATILITY OF THE MARKET. THIS BEHAVIOUR RESEMBLES THAT OF THE TRADER. E) THE ASSESSEE HAS ARGUED THAT IT HAS RECORDED THE ABOVE PURCHASES AS INVESTMENTS THEREFORE THE INCOME FROM THE SAME SHOULD BE TREATED AS CAPITAL GAINS F) THE RECORDING IN THE BOOKS OF ACCOUNTS IS ILLUMINATORY BUT IT IS NOT SACROSANCT. THE INCOME FROM THE SAME CAN BE ASSESSED AS BUSINESS INCOME DEPENDING ON THE FACTS AND CIRCUMSTANCES OF THE CASE. G) COMMODITIES AND SCRIPS. AS HELD BY ROYAL COMMISSION OF ENGLAND ARE NORMALLY TILE SUBJECT MATTER OF TRADING AND VERY EXCEPTIONALLY THE SUBJECT OF INVESTM ENT . H) USUALLY THE PROFITS ON THIS PROPERTY HAVE BEEN REALIZED IN A VERY SHORT DURATION I) RECORDING IN THE BOOKS OF ACCOUNTS ARE ILLUMINATORY AND NOT SACROSANCT . J) INVESTMENT IN LISTED SHARES THROUGH SECONDARY MARKET IS DEFINITELY A PROOF OF INT ENTION TO TRADE. K) NO INVESTMENT IN SISTER CONCERN OR PURCHASE FROM PRIMARY MARKET DEFINITELY PROVES THAT THERE WAS NO INTENTION TO HOLD OR HAVE CONTROLLING INTEREST THUS THERE WAS NO REASON TO PURCHASE AND NO REASON TO SALE. M/S. PASSIONATE INVESTMENTS MANAGEMENT PVT. LTD. 4 L) THE FACT THAT IN THE EARLIER YEARS, PROFIT ON SALE OF SHARES WAS TREATED AS CAPITAL GAIN IS IMMATERIAL WHILE DECIDING THE ISSUE IN THE INSTANT ASSESSMENT . M) IN THE A.Y. 1997 98, THE ASSESSEE HAS TREATED PROFIT ON SALE OF SHARES AS BUSINESS INCOME. N) THE ASSESSEE HAS CONTE NDED THAT ITS MAIN ACTIVITY IS THAT OF ADVANCING LOANS. HOWEVER, AS ANALYSED EARLIER, THE MAIN ACTIVITY TURNS OUT TO BE THAT OF TRADING IN SHARES. O) THESE FACTS CLEARLY INDICATE THAT THE ASSESSEE HAS SHOWN ALL THE CHARACTERISTICS OF A TRADER RATHER THAN AN INVESTOR. THE PROFIT OF ` 4,75,72,399, BEING CLAIMED AS CAPITAL GAIN, IS ACCORDINGLY TAXED AS BUSINESS INCOME. 4 . THE LEARNED COMMISSIONER (APPEALS) NOTED DOWN THE REASON S GIVEN BY THE ASSESSING OFFICER AND OBSERVED THAT THEY ARE PARIMATERIA WITH THE ASS ESSMENT ORDER PASSED FOR THE ASSESSMENT YEAR 2007 08 AND 2008 09. IN THOSE YEARS, THE LEARNED COMMISSIONER (APPEALS) HAS REJECTED THE REASONING OF THE ASSESSING OFFICER AND HAS UPHELD THE CONTENTION OF THE ASSESSEE. THE COMPARATIVE DETAILS OF NUMBER OF TRA NSACTIONS IN THE SCRIPS UNDERTAKEN, NET GAIN, AVERAGE PERIOD OF HOLDING, DIVIDEND RECEIVED, ETC., AS COMPARED TO THE ASSESSMENT YEAR 2008 09, HAS BEEN NOTED BY THE LEARNED COMMISSIONER (APPEALS) IN THE FOLLOWING MANNER: PARAMETERS LONG TERM SHORT TERM CL OSE OUT I.E. NOT SALE BUT COMPULSORY AUCTION A.Y. 09 10 A.Y. 08 09 A.Y. 09 10 A.Y. 08 09 A.Y. 09 10 A.Y. 08 09 NUMBER OF TRANSACTIONS 32 11 23 29 16 16 SCRIPS 6 23 5 8 10 9 NET GAIN / (LOSS) ( ` ) 4,49,38,696 35,26,56,629 26,21,211 15,06,07,949 40,223 2 3,924 M/S. PASSIONATE INVESTMENTS MANAGEMENT PVT. LTD. 5 AVERAGE HOLDING PERIOD 15 MONTHS TO 60 MONTHS 13 MONTHS TO 68 MONTHS 281 DAYS 167 DAYS 4 8 DAYS 3 5 DAYS DIVIDEND RECD. RECD IN FY 08 09; ` 30.42 LACS RECD IN FY 07 08; ` 1.50 CRORES RECD IN FY 08 09 ` 12.96 LACS RECD IN FY 07 08; ` 90.02 LACS N. A. N.A. RECD IN FY 07 08 ` 1.50 CRORES RECD IN FY 06 07 ` 29.27 LACS RECD IN FY 07 08 ` 90.02 LACS RECD IN FY 06 07 ` 74,002 5 . AFTER INCORPORATING THE DETAIL SUBMISSIONS OF THE ASSESSEE AS WELL AS THE REASONING OF THE ASSESSING OFFICER, THE LEARNED COM MISSIONER (APPEALS) REFERRED TO THE DISCUSSIONS MADE IN THE APPELLATE ORDER FOR THE ASSESSMENT YEAR 2008 09 AND HELD THAT THE FACTS PREVAILING IN THE PRESENT ASSESSMENT YEAR ARE IDENTICAL AND, THEREFORE, ON SIMILAR GROUNDS AND CONCLUSION, THE INCOME SHOWN FROM THE SALE OF SHARES BY THE ASSESSEE IN THIS YEAR ALSO SHOULD BE TAXED AS CAPITAL GAIN AND NOT AS BUSINESS INCOME. 6 . BEFORE US, THE LEARNED DEPARTMENTAL REPRESENTATIVE STRONGLY RELIED UPON THE REASON GIVEN BY THE ASSESSING OFFICER WHICH HAS BEEN SUMMARIS ED IN PARA 9.10 OF THE ASSESSMENT ORDER (AS INCORPORATED IN PARA 3 ABOVE) AND SUBMITTED THAT, FIRSTLY, EVERY YEAR IS INDEPENDENT AND TRANSACTION HAS TO BE SEEN FOR THIS YEAR AND SECONDLY, THERE IS AN ELEMENT OF BORROWED FUNDS, WHICH CANNOT BE SEGREGATED FR OM THE DEALING OF SHARES. 7 . WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE RELEVANT FINDINGS OF THE AUTHORITIES BELOW AND THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT THE SIMILAR NATURE OF ISSUE HAS COME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN ASSE SSEES OWN CASE IN THE ASSESSMENT YEAR 2007 08 AND 2008 09, WHEREIN THE TRIBUNAL, IN REVENUES APPEAL, HAS UPHELD THE ORDER OF THE LEARNED COMMISSIONER (APPEALS) AFTER OBSERVING AND HOLDING AS UNDER: M/S. PASSIONATE INVESTMENTS MANAGEMENT PVT. LTD. 6 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER US ED THE ORDERS OF AUTHORITIES BELOW. THE DISPUTE IS REGARDING THE NATURE OF INCOME FROM SALE AND PURCHASE OF SHARES BY THE ASSESSEE. THE ISSUE WHETHER THE INCOME FROM SALE AND PURCHASE IN A PARTICULAR CASE SHOULD BE TREATED AS CAPITAL GAIN OR AS BUSINESS IN COME IS A DEBATABLE ISSUE AND THERE ARE CONFLICTING DECISIONS OF THE TRIBUNAL ON THIS ISSUE. EACH CASE IS, THEREFORE, TO BE BASED ON ITS FACTUAL SITUATION. IN THE PRESENT CASE, THE TOTAL NUMBER OF TRANSACTION IS 68 OUT OF WHICH 40 TRANSACTIONS RELATE TO LT CG. 15 TRANSACTIONS RELATE TO STCG AND 30 TRANSACTIONS RELATE TO CLOSE OUT TRANSACTION OF STCG. THE TOTAL NUMBER OF SCRIPS DEALT BY THE ASSESSEE IS 26. FURTHER AVERAGE HOLDING PERIOD FOR CAPITAL GAINS IS 37 DAYS OR 1.75 YEARS. THE AVERAGE HOLDING PERIOD FO R STCG IS 217 DAYS. THESE FACTS SPEAK FOR THEMSELVES. IN A STOCK MARKET WHERE MORE THAN 5000 COMPANYS SHARES ARE TRADED EVERY DAY, THE TRANSACTION OF THE ASSESSEE CANNOT BE HELD AS IN THE NATURE OF TRADING. THE PAST HISTORY OF THE ASSESSEE ALSO SHOWS THAT RIGHT FROM ASSESSMENT YEARS 2001 - 02 TO 2006 - 07, WHEN THE ASSESSMENTS HAS BEEN MADE AFTER THOROUGH SCRUTINY U/S 143(3) OF THE ACT, THE DEPARTMENT HAS ACCEPTED THE PROFIT UNDER THE HE AD CAPITAL GAIN. EVEN FOR THE SAKE OF ARGUMENT, IT IS ACCEPTED THAT RESJU DICATA DOES NOT APPLY TO THE INCOME TAX PROCEEDINGS, BUT RULE OF CONSISTENCY IS TO BE FOLLOWED. WHEN THE FACTS ARE SAME AND THE LAW HAS NOT CHANGED, WE DO NOT FIND ANY REASON TO TAKE A DIFFERENT VIEW AS FROM THE PAST ASSESSMENT OF THE ASSESSEE. WE, THEREF ORE, DO NOT FIND ANY MERIT IN REVENUES APPEAL AND ACCORDINGLY THE FINDING OF THE LD. CIT(A) IS CONFIRMED. GROUND NO.1 OF REVENUES APPEAL IS DISMISSED. 8 . IN THIS YEAR ALSO, IT IS AN ADMITTED FACT THAT THE REASONING GIVEN BY THE ASSESSING OFFICER AND THE L EARNED COMMISSIONER (APPEALS) ARE AKIN TO THAT OF T HE EARLIER YEARS AND, THEREFORE, CONSISTENT WITH THE VIEW TAKEN BY THE TRIBUNAL IN EARLIER YEARS, WE UPHOLD THE FINDING OF THE LEARNED COMMISSIONER (APPEALS) THAT THE INCOME DERIVED BY THE ASSESSEE FROM TH E TRANSACTIONS OF THE SHARES IS TO BE TAXED UNDER THE HEAD CAPITAL GAIN AND NOT INCOME FROM BUSINESS . ACCORDINGLY, GROUND NO.1, RAISED BY THE REVENUE STANDS DISMISSED. 9 . G ROUND NO.2, RELATES TO RESTRICTION OF DISALLOWANCE UNDER SECTION 14A, MADE BY THE LEARNED COMMISSIONER (APPEALS). M/S. PASSIONATE INVESTMENTS MANAGEMENT PVT. LTD. 7 10 . THE ASSESSEE HAS EARNED LONG TERM CAPITAL GAIN OF ` 4,49,38,696, AND DIVIDEND INCOME OF ` 8,04,32,399, WHICH HAS BEEN CLAIMED AS EXEMPT. AS REGARDS THE DIRECT EXPENDITURE INCURRED IN RELATION TO THE INVESTMENT, THE ASSESSEE HAD ALREADY DISALLOWED FOLLOWING EXPENDITURE IN THE RETURN OF INCOME AS RELATABLE TO THE INVESTMENT ACTIVITIES: SR. NO. NATURE OF CLAIM AMOUNT DISALLOWED REMARKS (I) DEPRECIATION AS PER IT RULES ` 11,39,936 75% CONSIDERED AS TOWARDS INVESTMENT ACTIVIT Y (II) AUDIT FEES ` 33,090 75% CONSIDERED AS TOWARDS INVESTMENT ACTIVITY TOTAL ` 11,73,026 BESIDES THIS, THE ASSESSEE HAS ALSO SUBMITTED THAT THE AMOUNT PAID IN RESPECT OF STT (SECURITY TRANSACTION TAX) OF ` 9,69,625, AND DONATION OF ` 1.21 CRORES, H AVE ALREADY BEEN DISALLOWED IN THE RETURN OF INCOME. THE BALANCE EXPENDITURE DEBITED TO THE PROFIT & LOSS ACCOUNT ARE GENERAL ADMINISTRATIVE EXPENDITURE WHICH ARE NOT SPECIFICALLY RELATED TO EARNING OF TAX FREE INCOME. THE DETAILS OF THESE EXPENSES HAVE BE EN GIVEN AT PARA 7.2 OF THE LEARNED COMMISSIONER (APPEALS)S ORDER WHICH AGGREGATED TO ` 92,798 AND ALSO THE OTHER EXPENDITURE S AGGREGATED TO ` 48,678. THE ASSESSING OFFICER REJECTED THE ASSESSEES WORKING AND HELD THAT THE DISALLOWANCE HAS TO BE MADE AS P ER THE FORMULA PRESCRIBED IN RULE 8D AND, ACCORDINGLY, HE MADE THE DISALLOWANCE OF ` 87,16,813, AFTER COMPUTING THE ADMINISTRATIVE EXPENDITURE @ 0.5% OF AVERAGE INVESTMENTS. 11 . BEFORE THE LEARNED COMMISSIONER (APPEALS) ALSO, THE ASSESSEE SUBMITTED THAT THE W ORKING OF COMPUTATION OF DISALLOWANCE AND ALSO THE EXPENSES WHICH CAN BE SAID TO BE DIRECTLY ATTRIBUTABLE TO THE OTHER BUSINESS ACTIVITIES. THE LEARNED COMMISSIONER (APPEALS), FOLLOWING THE M/S. PASSIONATE INVESTMENTS MANAGEMENT PVT. LTD. 8 EARLIER YEARS ORDER PASSED BY THE COMMISSIONER (APPEALS), HELD TH AT THE ASSESSING OFFICER SHOULD DISALLOW THE ADMINISTRATIVE EXPENDITURE AS PER RULE 8D(2)(III) , HOWEVER, THE DISALLOWANCE SHOULD NOT EXCEED THE TOTAL ADMINISTRATIVE EXPENDITURE INCURRED. 12 . AFTER HEARING BOTH THE PARTIES AND CONSIDERING THE ORDER OF THE LEAR NED COMMISSIONER (APPEALS), WE FIND NO INFIRMITY IN THE ORDER PASSED BY THE LEARNED COMMISSIONER (APPEALS) AS THE DISALLOWANCE UNDER SECTION 14A, CANNOT EXCEED THE TOTAL ADMINISTRATIVE EXPENDITURE DEBITED BY THE ASSESSEE IN THE PROFIT & LOSS ACCOUNT. EVEN UNDER THE FORMULA GIVEN IN RULE 8D , THE DISALLOWANCE CANNOT EXCEED THE OVERALL EXPENDITURE CLAIMED IN THE PROFIT & LOSS ACCOUNT. THUS, WE DO NOT FIND ANY MERIT IN THE GROUND RAISED BY THE REVENUE AND THE SAME STANDS DISMISSED. 13 . 1 3 . IN THE RESULT, REVENUES APPEAL IS DISMISSED. 25 TH JUNE 2014 ORDER PRONOUNCED IN THE OPEN COURT O N 25 TH JUNE 2014 SD/ - . D. KARUNAKARA RAO ACC OUNTANT MEMBER SD/ - AMIT SHUKLA JUDICIAL MEMBER MUMBAI, DATED : 25 TH JUNE 2014 M/S. PASSIONATE INVESTMENTS MANAGEMENT PVT. LTD. 9 / COPY OF THE ORDER FORWARDED TO : ( 1 ) / THE ASSESSEE ; ( 2 ) / THE REVENUE; ( 3 ) ( ) / THE CIT(A ) ; ( 4 ) / THE CIT, MUMBAI CITY CONCERNED ; ( 5 ) , , / THE DR, ITAT, MUMBAI ; ( 6 ) / GUARD FILE . / TRUE COPY / BY ORDER . / PRADEEP J. CHOWDHURY / SR. PRIVATE SECRETARY / / (DY./ASSTT. REGISTRAR) , / ITAT , MUMBAI .