DHANLAXMI COTEX LTD, MUMBAI V. DICT RG 4(1), MUMBAI

ITA 4579/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 56149 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 6 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-12-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 13-12-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 03-06-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: C G K NAIR
• Keywords: Business income; Bad and doubtful debts
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH D, MUMBAI BEFORE SHRI J. SUDHAKAR REDDY, A.M. AND SHRI V. DU RGA RAO, J.M. ITA NO. 4579/MUM/2010 ASSESSMENT YEAR: 2005-06 DHANLAXMI COTEX LTD., APPELLANT CHATURBHUJ JIVANDAS HOUSE, 2 ND FLOOR, 285, PRINCESS STREET, MUMBAI 400 002. (PAN AAACD2387H) VS. DY. COMMISSIONER OF INCOME-TAX, RESPONDENT RANGE 4(1), MUMBAI. APPELLANT BY : MR. VIJAY MEHTA RESPONDENT BY : MR. C.G.K. NAIR DATE OF HEARING : 13/12/2011 DATE OF PRONOUNCEMENT : /12/2011 ORDER PER V. DURGA RAO, J.M.: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER OF CIT(A)-8, MUMBAI, PASSED ON 22 ND APRIL, 2010 FOR THE ASSESSMENT YEAR 2005-06. 2. GROUND NOS. 1 & 2 READ AS UNDER:- 1. THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FACTS IN CONFIRMING THE DISALLOWANCE OF THE CLAIM FOR BAD DEBTS RELATIN G TO M/S MIKKA STOCK BROKERS PVT. LTD. AMOUNTING TO RS. 50,00,000/ -. 2. THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FACTS IN DIRECTING THE AO TO ALLOW THE CLAIM FOR BAD DEBT RELATING TO M/S JAYANTILAL KHANDWALA & SONS LTD. ONLY TO THE AMOUNT OF BROKERA GE RECEIVED ITA NO. 4579/MUM/10 DHANLAXMI COTEX LTD. 2 FROM THEM. THE LEARNED CCIT(A) OUGHT TO HAVE DELETE D THE ADDITION OF RS. 2,15,569/- IN ENTIRETY. 3. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO HAD OBSERVED THAT THE ASSESSEE HAD GIVEN ADVANCE FOR S HARE TRADING WHICH COULD NOT BE RECEIVED BACK AS THE AMOUNTS WERE NOT TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF THE ASSESSEE IN ANY PREVIOUS YEAR AND THE COMPANY HAD NEITHER ENGAGED IN THE BUSINESS OF BANKING NOR ENGAGED IN THE BUSINESS OF MONEY LENDING OR THE COM PANY IS NOT EVEN A NON-BANKING FINANCIAL CORPORATION, THE LOAN GIVEN OR ADVANCE GIVEN COULD NOT BE ALLOWED AS THE CONDITIONS OF SECTION 3 6(2) ARE NOT SATISFIED. ON APPEAL, THE CIT(A) CONFIRMED THE ACTI ON OF THE AO. 4. AT THE TIME OF HEARING, THE LEARNED COUNSEL INVI TED OUR ATTENTION TO THE PAPER BOOK AT PAGES 92 & 93, WHICH ARE THE W RITTEN SUBMISSIONS FILED BEFORE THE CIT(A) AND SUBMITTED T HAT THE ASSESSEE HAS TAKEN A SPECIFIC GROUND BEFORE THE CIT(A) I.E. THE AO HAS ERRED IN LAW AND IN FACTS IN DISALLOWING THE CLAIM FOR BAD D EBTS/TRADING LOSS AMOUNTING TO RS. 52,15,569/- THE LEARNED COUNSEL CONTENDED THAT THE CIT(A) HAD CONFIRMED THE ORDER OF THE AO ON THE GRO UND THAT THE ASSESSEE HAS FAILED TO SATISFY THE CONDITIONS AS LA ID DOWN U/S 32(2) OF THE ACT. HE FURTHER SUBMITTED THAT THE CIT(A) OUGHT TO HAVE EXAMINED THE GROUND RAISED BY THE ASSESSEE IN RESPECT OF TRA DING LOSS. HE, THEREFORE, REQUESTED THAT THE MATTER MAY BE RESTORE D TO THE FILE OF THE CIT(A) TO EXAMINE THE ISSUE AFRESH. 5. ON THE OTHER HAND, THE LEARNED DR HAS NOT OBJECT ED THE SUBMISSIONS MADE BY THE LEARNED COUNSEL FOR THE ASS ESSEE. 6. AFTER HEARING THE SUBMISSIONS OF BOTH THE PARTIE S AND PERUSING THE MATERIAL ON RECORD, WE SET ASIDE THE ORDER OF T HE CIT(A) AND REMIT THE MATTER BACK TO THE FILE OF THE AO WITH A DIRECT ION TO DECIDE THE ITA NO. 4579/MUM/10 DHANLAXMI COTEX LTD. 3 ISSUE DE-NOVO AFTER PROVIDING REASONABLE OPPORTUNIT Y OF BEING HEARD TO THE ASSESSEE. THUS, THE GROUND NOS. 1 & 2 ARE TREAT ED AS ALLOWED FOR STATISTICAL PURPOSES. 7. GROUND NO. 4 READS AS UNDER:- THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FACTS IN UPHOLDING THE ASSESSMENT OF SHORT-TERM CAPITAL GAINS OF RS. 8 ,72,615/- UNDER THE HEAD BUSINESS INCOME. THE LEARNED CIT(A ) OUGHT TO HAVE DIRECTED THE AO TO ASSESS THIS INCOME UNDER TH E HEAD SHORT TERM CAPITAL GAIN. 8. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO OBSERVED THAT THE ASSESSEE HAD CARRIED OUT HUGE TRANSACTION IN SHARES AS SHARE TRADING IS ONLY BUSINESS ACTIVITY OF THE ASSESSEE. THEREFORE, THE ASSESSEE WAS ASKED TO SUBMIT DETAILS OF BAD DEBTS A ND DETAILS AS TO WHY THE ENTIRE INCOME OFFERED BY THE ASSESSEE AS CA PITAL GAIN SHOULD NOT BE TREATED AS INCOME FROM BUSINESS. IN REPLY, T HE ASSESSEE HAD SUBMITTED ITS EXPLANATION VIDE ITS LETTER DATED 27/ 12/07. THE EXPLANATION OFFERED BY THE ASSESSEE WAS NOT FOUND T O BE ACCEPTABLE BY THE AO AND THE AO NOTED THAT THE ASSESSEE IS A TRAD ER OR INVESTOR, IT IS ALWAYS A MIXED QUESTION OF FACTS AND LAW. AFTER REF ERRING THE CBDTS CIRCULAR NO. 1827 WHEREIN CERTAIN GUIDELINES ISSUED BY THE CBDT TO EXAMINE WHETHER A PARTICULAR PERSON IS A TRADER OR INVESTOR IN STOCK, THE AO HELD THAT IN THE INSTANT CASE IT CAN DEFINIT ELY BE CLASSIFIED THAT THERE WERE REPEATED TRANSACTIONS OF PURCHASE AND SA LES AND TRANSACTIONS ARE CARRIED OUT IN HUGE QUANTITIES. HE NCE, THE ASSESSEE IS REQUIRED TO BE CLASSIFIED AS TRADER ONLY. SIMILAR V IEWS WERE ALSO EXPRESSED IN OTHER COURT JUDGMENTS. THEREFORE, IT C AN BE SAFELY CONCLUDED THAT THE ASSESSEE IS A TRADER AND HENCE, THE ENTIRE INCOME OFFERED BY THE ASSESSEE AS INVESTMENT INCOME IS TO BE TAXED AS ONLY FROM SHARE TRADING. ON APPEAL, THE CIT(A) CONFIRMED THE ACTION OF THE AO. ITA NO. 4579/MUM/10 DHANLAXMI COTEX LTD. 4 9. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT MAXIMUM HOLDING PERIOD IS 159 DAYS IN REPETITIVE TR ANSACTIONS AND THE ASESSEE IS MAINTAINING TWO SEPARATE PORTFOLIOS IN EARLIER AND THE AO HAS ACCEPTED THE INCOME SHOWN BY THE ASSESSEE AS SHORT-TERM CAPITAL GAIN. THEREFORE, HE CONTENDED THAT THERE CA NNOT BE TWO STANDS PERMITTED IN THE CASE OF THE SAME ASSESSEE AND IT I S NOT OPEN TO THE ASESSEE TO TAKE A DIFFERENT STAND IN THE SUBSEQUENT YEAR. 10. ON THE OTHER HAND, THE LEARNED DR SUBMITTED THA T THE ASESSEE HAS PURCHASED 19 SCRIPS AND SOLD 96, THEREFORE, THE ASESSSEE IS IN THE SHARE TRADING BUSINESS AND THE INCOME OF THE ASSESS EE HAS TO BE ASSESSED AS BUSINESS INCOME. 11. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. THE ISSUE AS TO WHETHER THE PROFIT ON SALE OF SHARES CONSTITUTES BUSINESS INCOM E OF THE ASSESSEE OR CAPITAL GAINS DEPENDS ON WHETHER THE SAID SHARES WE RE PURCHASED AND HELD BY THE ASSESSEE AS INVESTMENT OR STOCK IN TRAD E. IN ORDER TO ASCERTAIN AS TO WHETHER THE SHARES WERE PURCHASED B Y THE ASSESSEE AS INVESTMENT OR STOCK IN TRADE, THE MOST RELEVANT ASP ECT THAT IS TO BE SEEN IS THE INTENTION OF THE ASSESSEE BEHIND PURCHA SING AND HOLDING THE SHARES AND SUCH INTENTION HAS TO BE GATHERED FR OM THE FACTS OF THE CASE INCLUDING THE CONDUCT OF THE ASSESSEE. THE TRE ATMENT GIVEN BY THE ASSESSEE TO THE SHARES IN ITS BOOKS OF ACCOUNT AND ACCEPTANCE OF THE SAME BY THE REVENUE IN THE EARLIER YEARS IS ONL Y ONE OF SUCH ASPECTS WHICH IS ALSO TO BE TAKEN INTO CONSIDERATIO N FOR DECIDING THIS ISSUE. HOWEVER, THAT IS NOT THE ONLY CRITERIA WHICH CAN BE ADOPTED AS A CONCLUSIVE TEST AND IT HAS TO BE TAKEN INTO CONSIDE RATION ALONG WITH OTHER CRITERIAS TO ASCERTAIN THE EXACT INTENTION OF THE ASSESSEE TO PURCHASE AND HOLD THE SHARES. IN THE CASE OF SARNAT H INFRASTRUCTURE (P).LTD. VS. ACIT REPORTED IN 120 TTJ (LUCKNOW) 216 , THE COORDINATE ITA NO. 4579/MUM/10 DHANLAXMI COTEX LTD. 5 BENCH OF THIS TRIBUNAL AFTER TAKING INTO CONSIDERAT ION THE VARIOUS JUDICIAL PRONOUNCEMENTS ON THIS ISSUE AS WELL AS TH E RELEVANT CIRCULAR ISSUED BY THE BOARD, HAS LAID DOWN THE FOLLOWING PR INCIPLES/CRITERIAS WHICH CAN BE APPLIED TO THE FACTS OF THE CASE TO FI ND OUT WHETHER THE TRANSACTIONS IN SHARES ARE IN THE NATURE OF TRADE O R ARE MERELY FOR THE INVESTMENT PURPOSES : (1) WHAT IS THE INTENTION OF THE ASSESSEE AT THE T IME OF PURCHASE OF THE SHARES (OR ANY OTHER ITEM). THIS CA N BE FOUND OUT FROM THE TREATMENT IT GIVES TO SUCH PURCHASE IN ITS BOOKS OF ACCOUNT. WHETHER IT IS TREATED AS STOCK-IN-TRADE OR INVESTMENT? WHETHER SHOWN IN OPENING/CLOSING STOCK OR SHOWN SEP ARATELY AS INVESTMENT OR NON-TRADING ASSET? (2) WHETHER ASSESS EE HAS BORROWED MONEY TO PURCHASE AND PAID INTEREST THEREO N. NORMALLY, MONEY IS BORROWED TO PURCHASE GOODS FOR T HE PURPOSE OF TRADE AND NOT FOR INVESTING IN AN ASSET FOR RETA INING. (3) WHAT IS THE FREQUENCY OF SUCH PURCHASES AND DISPOSAL IN THAT PARTICULAR ITEM? IF PURCHASE AND SALE ARE FREQUENT, OR THERE ARE SUBSTANTIAL TRANSACTIONS IN THAT ITEM, IT WOULD IND ICATE TRADE. HABITUAL DEALING IN THAT PARTICULAR ITEM IS INDICAT IVE OF INTENTION OF TRADE. SIMILARLY, RATIO BETWEEN THE PURCHASES AN D SALES AND THE HOLDINGS MAY SHOW WHETHER THE ASSESSEE IS TRADI NG OR INVESTING (HIGH TRANSACTIONS AND LOW HOLDINGS INDIC ATE TRADE WHEREAS LOW TRANSACTIONS AND HIGH HOLDINGS INDICATE INVESTMENT): (4) WHETHER PURCHASE AND SALE IS FOR R EALIZING PROFIT OR PURCHASES ARE MADE FOR RETENTION AND APPRECIATIO N IN ITS VALUE. FORMER WILL INDICATE INTENTION OF TRADE AND LATTER, AN INVESTMENT. IN THE CASE OF SHARES WHETHER INTENTION WAS TO ENJOY DIVIDEND AND NOT MERELY EARN PROFIT ON SALE AND PUR CHASE OF SHARES. A COMMERCIAL MOTIVE IS AN ESSENTIAL INGREDI ENT OF TRADE. (5) HOW THE VALUE OF THE ITEMS HAS BEEN TAKEN IN TH E BALANCE SHEET? IF THE ITEMS IN QUESTION ARE VALUED AT COST, IT WOULD INDICATE THAT THEY ARE INVESTMENTS OR WHERE THEY AR E VALUED AT COST OR MARKET VALUE OR NET REALIZABLE VALUE (WHICH EVER IS LESS), IT WILL INDICATE THAT ITEMS IN QUESTION ARE TREATED AS STOCK-IN- TRADE. (6) HOW THE COMPANY (ASSESSEE) IS AUTHORIZED IN MEMORANDUM OF ASSOCIATION/ARTICLE OF ASSOCIATION? W HETHER FOR TRADE OR FOR INVESTMENT? IF AUTHORIZED ONLY FOR TRA DE, THEN WHETHER THERE ARE SEPARATE RESOLUTIONS OF THE BOARD OF DIRECTORS TO CARRY OUT INVESTMENTS IN THAT COMMODITY? AND VIC E VERSA. (7) IT IS FOR THE ASSESSEE TO ADDUCE EVIDENCE TO SHOW T HAT HIS HOLDING IS FOR INVESTMENT OR FOR TRADING AND WHAT D ISTINCTION HE HAS KEPT IN THE RECORDS OR OTHERWISE, BETWEEN TWO T YPES OF ITA NO. 4579/MUM/10 DHANLAXMI COTEX LTD. 6 HOLDINGS. IF THE ASSESSEE IS ABLE TO DISCHARGE THE PRIMARY ONUS AND COULD PRIMA FACIE SHOW THAT PARTICULAR ITEM IS HELD AS INVESTMENT FOR SAY, STOCK-IN-TRADE), THEN ONUS WOUL D SHIFT TO REVENUE TO PROVE THAT APPARENT IS NOT REAL. (8) THE MERE FACT OF CREDIT OF SALE PROCEEDS OF SHARES (OR FOR THAT MATT ER ANY OTHER ITEM IN QUESTION) IN A PARTICULAR ACCOUNT OR NOT SO MUCH FREQUENCY OF SALE AND PURCHASE WILL ALONE WILL NOT BE SUFFICIENT TO SAY THAT ASSESSEE WAS HOLDING THE SHARES FOR THE ITEMS IN QUESTION) FOR INVESTMENT. (9) ONE HAS TO FIND OUT W HAT ARE THE LEGAL REQUISITES FOR DEALING AS A TRADER IN THE ITE MS IN QUESTION AND WHETHER THE ASSESSEE IS COMPLYING WITH THEM. WH ETHER IT IS THE ARGUMENT OF THE ASSESSEE THAT IT IS VIOLATING T HOSE LEGAL REQUIREMENTS, IF IT IS CLAIMED THAT IT IS DEALING A S A TRADER IN THAT ITEM? WHETHER IT HAD SUCH AN INTENTION (TO CAR RY ON ILLEGAL BUSINESS IN THAT ITEM SINCE BEGINNING OR WHEN PURC HASES WERE MADE? (10) IT IS PERMISSIBLE AS PER CBDTS CIRCULAR NO. 4 OF 2007 OF 15 TH JUNE, 2007 THAT AN ASSESSEE CAN HAVE BOTH PORTFOLIOS, ONE FOR TRADING AND OTHER FOR INVESTMEN T PROVIDED IT MAINTAINING SEPARATE ACCOUNT FOR EACH TYPE, THERE A RE DISTINCTIVE FEATURES FOR BOTH AND THERE IS NO INTER MINGLING OF HOLDINGS IN THE TWO PORTFOLIOS. (11) NOT ONE OR TWO FACTORS OUT OF ABOVE ALONE WILL BE SUFFICIENT TO COME TO A DEFINIT E CONCLUSION BUT THE CUMULATIVE EFFECT OF SEVERAL FACTORS HAS TO BE SEEN. 12. A PERUSAL OF THE ORDERS PASSED BY THE LOWER AUT HORITIES IN THE PRESENT CASE SHOWS THAT NEITHER THE AO NOR THE LEAR NED CIT(APPEALS) HAS DONE THE EXERCISE TO FIND OUT THE EXACT NATURE OF SHARE TRANSACTIONS CARRIED ON BY THE ASSESSEE IN A PROPER MANNER BY APPLYING THE RELEVANT CRITERIAS/PRINCIPLES TO THE F ACTS OF THE CASE. WE, THEREFORE, DEEM IT FIT AND PROPER AND IN THE INTERE ST OF JUSTICE TO SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW ON THIS I SSUE AND RESTORE THE MATTER TO THE FILE OF THE AO WITH A DIRECTION TO DE CIDE THE SAME AFRESH AFTER APPLYING THE PRINCIPLES/CRITERIAS LAID DOWN B Y THE LUCKNOW BENCH OF THE TRIBUNAL IN THE CASE OF SARNATH INFRAS TRUCTURE (SUPRA) TO THE FACTS OF THE CASE. NEEDLESS TO OBSERVE THAT THE AO SHALL AFFORD PROPER AND SUFFICIENT OPPORTUNITY TO THE ASSESSEE O F BEING HEARD. THUS, THIS GROUND IS TREATED AS ALLOWED FOR STATIST ICAL PURPOSES. ITA NO. 4579/MUM/10 DHANLAXMI COTEX LTD. 7 13. GROUND NO. 3 PERTAINING TO DISALLOWANCE U/S 14A OF THE ACT, GROUND NO. 5 PERTAINING TO THE DISALLOWANCE OF RS. 3,59,904/-, AND GROUND NO. 6 PERTAINING TO DISALLOWANCE OF RS. 1,08 ,061/- HAVE NOT PRESSED BY THE LEARNED COUNSEL FOR THE ASSESSEE AT THE TIME OF HEARING BEFORE US, THEREFORE, THE SAME ARE DISMISSED AS NOT PRESSED. 14. GROUND NO. 7 REGARDING LEVY OF INTEREST U/S 234 B, 234C AND 234D. CHARGING INTEREST UNDER THE SAID SECTIONS ARE CONSEQUENTIAL IN NATURE, THEREFORE, THE AO IS DIRECTED ACCORDINGLY. 15. IN THE RESULT, APPEAL OF THE ASSESSEE IS TREATE D AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 23 RD DAY OF DECEMBER, 2011. SD/- SD/- (J. SUDHAKAR REDDY) (V. DURGA RAO) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 23 RD DECEMBER, 2011. COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A) CONCERNED. 4) THE CIT CONCERNED. 5) THE DEPARTMENTAL REPRESENTATIVE, D BENCH, I.T .A.T., MUMBAI. BY ORDER //TRUE COPY// ASST. REGISTRAR, I.T.A.T., MUMBAI. KV ITA NO. 4579/MUM/10 DHANLAXMI COTEX LTD. 8