CHANAKYA INTERNATIONAL P.LTD, MUMBAI V. DCIT CIR 5(1), MUMBAI

ITA 510/MUM/2015

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 0228 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 6 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-08-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 22-05-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 22-01-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RAJAT MITTAL
• Keywords: Business income; Earning of tax free income; Cost of acquisition
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH C MUMBAI BEFORE SHRI MAHAVIR SINGH (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA NO. 510/MUM/2015 ASSESSMENT YEAR: 2010 - 11 M/S. CHANAKYA INTERNATIONAL VS. DCIT CIRCLE 5(1), PVT. LTD. 218/219 JASWANT INDUSTRIAL MUMBAI ESTATE 63 TARDEO RD. MUMBAI 400034 PAN NO. AAACC4592Q (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI PARESH SHAPARIA, AR REVENUE BY: SHRI RAJAT MITTAL, DR DATE OF HEARING : 22/05/2017 DATE OF PRONOUNCEMENT: 18/08/2017 ORDER PER N.K. PRADHAN, AM THIS IS AN APPEAL FILED BY THE ASSESSEE. THE RELEVANT ASSESSMENT YEAR IS 2010 - 11. THE APPEAL IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) - 9, MUMBAI AND ARISES OUT OF ORDER U/S 143(3) OF THE INCOME TAX ACT, 1961 (THE ACT). 2. THE GROUNDS OF APPEAL FILED BY THE ASSESSEE READ AS UNDER: - I. DISALLOWANCE U/S 14A R.W.R 8D OF RS.31,38,078/ - : - 1. THE LD . CIT(A) ERRED IN CONFIRMING DISALLOWANCE OF RS.31,38,078/ - U/S 14A R.W. RULE 8D OVER AND ABOVE ITA NO. 510/MUM/2015 2 DISALLOWANCE ALREADY MADE BY THE APPELLANT OF RS.16,32,542/ - . 2. THE LD. CIT(A) OUGHT NOT TO HAVE CONFIRMED DISALLOWANCE OF RS.31,38,078/ - U/S 14A R.W. RULE 8D. 3. TH E DISALLOWANCE OF RS.31,38,078/ - U/S 14A R.W. RULE 8D REQUIRES TO BE DELETED. II. TREATING SHORT TERM CAPITAL GAIN OF RS.1,49,72,131/ - AS BUSINESS INCOME : - 1. THE LD. CIT(A) ERRED IN CONFIRMING SHORT TERM CAPITAL GAINS OF RS.1,49,72,131/ - ON SALE OF SHARES & MUTUAL FUNDS AS BUSINESS INCOME. 2. THE SHORT TERM CAPITAL GAINS OF RS.1,49,72,131/ - ON SALE OF SHARES AND MUTUAL FUNDS REQUIRES TO BE TAXED UNDER THE HEAD CA PITAL GAINS AND NOT AS BUSINESS LOSS. 3. WITHOUT PREJUDICE TO THE ABOVE , THE LD. CIT(A) DID NOT DIRECT TO REDUCE DEMAT CHARGES AND SECURITY TRANSACTION TAX (STT) WHILE DETERMINING THE BUSINESS INCOME ON ACCOUNT OF SALE OF SHARES. 3. WE BEGIN WITH THE 1 ST GRO UND OF APPEAL. THE ASSESSING OFFICER (AO) FOUND DURING THE COURSE OF ASSESSMENT PROCEEDINGS THAT THE ASSESSEE HAD SHOWN DIVIDEND (EXEMPT) INCOME OF RS.80,10,029/ - . IN RESPONSE TO A QUERY RAISED BY THE AO, THE ASSESSEE FILED ON 06.11.2012 THE FOLLOWING COMP UTATION: PARTICULARS AMOUNT (RS.) AMOUNT (RS.) A. DIRECT EXPENSES DEMAT CHARGES 2,28,152 STT 12,26,541 14,54,693 B. INTEREST EXPENSES NIL C. 0.5% OF INVESTMENT OP. ASSETS 72,42,78,533 CL. ASSETS 60,20,92,518 1,32,63,71,051 ITA NO. 510/MUM/2015 3 AVERAGE INVESTMENT 66,31,85,526 0.5% THEREOF 33,15,928 THEREFORE, DISALLOWANCE AS PER RULE 8 D A+B+C 47,70,621 THE ASSESSEE FURTHER SUBMITTED BEFORE THE AO THAT OUT OF THE ABOVE AMOUNT OF RS.47,70,620/ - THE ASSESSEE HAS ALREADY OFFERED AN AMOUNT OF RS.16,32,542/ - FOR DISALLOWANCE IN ITS COMPUTATION OF INCOME. ALSO THE ASSESSEE SUBMITTED BEFORE THE AO ON 11.03.2013 THAT THE TOTAL EXPENDITURE RELATING TO EARNING TAX FREE INCOME WAS RS.1,77,849/ - . FURTHER IT WAS STATED BY HIM THAT THE DISALLOWANCE OF RS.16,32,542/ - MADE IN THE COMPUTATION OF INCOME IS INCLUSIVE OF THE ABOVE AMOUNT OF RS.1,77,849/ - . HOWEVER, THE AO WAS NOT CONVINCED WITH THE ABOVE EXPLANATION OF THE ASSESSEE AND MADE A DISALLOWANCE OF THE BALANCE AMOUNT OF RS.31,38,078/ - . 3.1 AGGRIEVED BY THE ORDER OF THE AO THE ASSESSEE FILED AN APPEAL BEFORE THE LD. CIT(A). WE FIND THAT THE LD. CIT(A) AGREED WITH THE DISALLOWANCE MADE BY THE AO ON THE GROUND THAT FROM AY 2008 - 09, THE PROVISIONS OF RULE 8D ARE ALSO APPLICABLE IN SUCH CASES WHERE IT IS NOT PRACTICALLY POSSIBLE TO EXACTLY SEGREGATE THE EXPENSES INCURRED IN RELATION TO EARNING OF EXEMPT INCOME, LIKE THE CA SE OF THE ASSESSEE. 3.2 BEFORE US, THE LD. COUNSEL OF THE ASSESSEE RELIES ON THE ORDER OF THE ITAT IN ASSESSEES OWN CASE FOR THE AY 2008 - 09 (ITA NO. 7376/MUM/2014 & ITA NO. 6285/MUM/2011) AND AY 2009 - 10 (ITA NO. 2244/MUM/2012). ITA NO. 510/MUM/2015 4 3.3 ON THE OTHER HAND, TH E LD. DR SUPPORTS THE ORDER PASSED BY THE LD. CIT(A) AND SUBMITS THAT FROM AY 2008 - 09 PROVISIONS OF RULE 8D ARE APPLICABLE IN SUCH CASES WHERE IT IS NOT POSSIBLE TO SEGREGATE THE EXPENSES INCURRED IN RELATION TO EARNING OF EXEMPT INCOME, LIKE THE PRESENT C ASE OF THE ASSESSEE. 3.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIALS ON RECORD. WE BEGIN WITH THE ORDERS RELIED ON BY THE LD. COUNSEL OF THE ASSESSEE. IN ITA NO. 6285/MUM/2012 FOR THE AY 2008 - 09, IN ASSESSEES OWN CASE , THE TRIB UNAL SET ASIDE THE ORDER OF THE LD. CIT(A) AND DIRECTED THE AO TO COMPUTE THE DISALLOWANCE, NOT ONLY BY APPLYING THE PRESCRIBED RULE 8D BUT ALSO FOLLOWING THE SPIRIT OF THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GOD R EJ & BOYCE MFG. CO. L TD. 328 ITR 81 . IN ITA NO. 2244/MUM/2012 IN ASSESSEES OWN CASE FOR THE AY 2009 - 10, THE ITAT GAVE DIRECTION TO THE AO ON THE SAME LINE AS IN AY 2008 - 09. IN ITA NO. 7376/MUM/2014 FOR THE AY 2008 - 09 IN ASSESSEES OWN CASE, THE TRIBUNAL DIRECTED THE AO TO RESTRICT THE DISALLOWANCE U/S 14A TO THE AMOUNT ALREADY WORKED OUT BY THE ASSESSEE. 3.5 AS MENTIONED HERE - IN - ABOVE, THE CO - ORDINATE BENCH IN ASSESSEES OWN CASE IN ITA NO. 6285/MUM/2010 FOR THE AY 2008 - 09 AND ITA NO. 2244/MUM/2012 FOR THE AY 2009 - 10 HAS DIRECTED THE AO TO COMPUTE THE DISALLOWANCE NOT ONLY BY APPLYING RULE 8D BUT ALSO FOLLOWING THE JUDGMENT IN GODREJ & BOYCE MFG. CO. LTD. ITA NO. 510/MUM/2015 5 IN GODREJ & BOYCE M FG. CO. LTD . (SUPRA), THE HON'BLE BOMBAY HIGH COURT HAS EXPLAINED 8D(2)(III) AS UNDER : AS REGARD RULE 8D(2)(III), IT HAD BEEN SUBMITTED THAT SOME MECHANISM OR FORMULA HAD TO BE ADOPTED FOR ATTRIBUTING PART OF THE ADMINISTRATIVE / MANAGERIAL EXPENSES TO TAX - EXEMPT INVESTMENT INCOME. THE ADMINISTRATIVE EXPENSES ATTRIBUTABLE TO TAX - FREE INVESTMENT INCOME HAVE A FIXED COMPONENT AND A VARIABLE COMPONENT. A VIEW WAS TAKEN THAT THE DISALLOWANCE SHOULD ALSO BE LINKED TO THE VALUE OF THE INVESTMENT RATHER THAN THE AMOUNT OF EXEMPT INCOME. UNDER PORTFOLIO MANAGEMENT SCHEMES (PMS), THE FEE CHARGED RANGES BETWEEN 2 AND 2.5 PER CENT OF THE PORTFOLIO VALUE WHICH WOULD BE INCLUSIVE OF A PROFIT ELEMENT FOR THE PORTFOLIO MANAGER. WHILE THE FIXED ADMINISTRATIVE EXPEN SES WERE EXCLUDED ON THE GROUND THAT IN THE CASE OF A LARGE CORPORATE TAXPAYER THEY WOULD BE SPREAD OVER A LARGE NUMBER OF VOLUMINOUS ACTIVITIES, THE VARIABLE EXPENSES WERE COMPUTED AT ONE - HALF PER CENT OF THE VALUE OF THE INVESTMENT. RESPECTFULLY FOLLO WING THE ABOVE JUDGMENT, WE CONFIRM THE DISALLOWANCE OF RS.31,38,078/ - MADE BY THE AO. THUS THE 1 ST GROUND OF APPEAL IS DISMISSED. 4. WE NOW TURN TO THE 2 ND AND 3 RD GROUND S OF APPEAL. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE AO OBSERVED THAT THE ASSESSEE HAD SHOWN SHORT TERM CAPITAL GAINS (STCG) OF RS.1,49,72,131/ - . AS PER THE AO, THE ASSESSEE WAS ENGAGED IN FREQUENT TRANSACTION OF PURCHASE AND SALE OF SHARES ON LA RGE SCALE. IN RESPONSE TO A QUERY RAISED BY THE AO, THE ASSESSEE FILED A REPLY ON 28.02.2013 WHICH HAS BEEN EXTRACTED AT PARA 5.2 (PAGE 6 - 7) OF THE ASSESSMENT ORDER. HOWEVER, THE AO WAS NOT CONVINCED WITH SAID REPLY OF THE ASSESSEE AND TREATED THE AMOUNT O F RS.1,49,72,131/ - AS BUSINESS INCOME INSTEAD OF STCG. ITA NO. 510/MUM/2015 6 4.1 AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE FILED AN APPEAL BEFORE THE LD. CIT(A). THE LD. CIT(A) HELD AS UNDER: IN THE INSTANT CASE IT IS NOTICED THAT DURING THE YEAR UNDER CONSIDERATION, TH E APPELLANT HAS DEALT IN AS MUCH AS 57 SCRIPS AT A PURCHASE COST OF MORE THAN RS.56 CRORES AND IT HAS ALSO SOLD EQUALLY LARGE NUMBER OF SHARES, MAJORITY OF WHICH WERE SOLD W I THIN 6 MONTH OF THE PURCHASE. IT IS FURTHER NOTICED THAT IN 19 SCRIPS , SHARES WERE SOLD WITHIN ON E MONTH OF PURCHASE OF SHARES AND IN CASE OF MAXIMUM NUMBER OF SCRIPS (38 SCRIPS) , MAXIMUM CAPITAL GAINS OF RS.1.02 CRORES WAS EARNED AFTER SELLING THE S HARES BETWEEN ONE MO NTH TO THREE MONTHS OF PURCHASE OF SHARES. ALL THESE FACTORS CUMULAT IVELY INDICATE THAT THE APPELLANT WAS INDULGIN G IN FREQUENT LARGE SCALE TRANSACTIONS OF PURCHASE AND SALE OF SHARES, THEREFORE, THE INTENTION APPEARS TO BE EARNING OF EARLY PROFIT ON TRADING OF SHARES AS THE APPELLANT HAS NOT H E LD THESE SHARES FOR SUFFICIE NTLY LONG PERIOD WHICH IS A PRIMARY CRITERIA FOR HOLDING IT AS INVESTMENT. ACCORDINGLY, THE AO HAS CORRECTLY TAXED INCOME FROM SALE OF SHARES AS BUSINESS INCOME. 4.2 BEFORE US, THE LD. COUNSEL OF THE ASSESSEE SUBMITS THAT (I) THE ASSESSEE EARNS SUBSTANTIA L AMOUNT OF DIVIDEND, (II) THERE IS NO INTRADAY TRADING EVER DONE, (III) THE ASSESSEE HAS NOT BORROWED ANY MONEY FOR THIS ACTIVITY, IT HAS USED ITS OWN FUNDS FOR INVESTMENT IN SHARES. IT IS FURTHER SUBMITTED THAT THE AO HAS ACCEPTED IN THE ASSESSMENT MAD E U/S 143(3), THE TREATMENT GIVEN BY THE ASSESSEE IN THE RETURN OF INCOME FOR THE AY 2004 - 05, 2006 - 07, 2007 - 08, 2008 - 09, 2009 - 10, 2011 - 12 AND 2013 - 14. RELIANCE IS PLACED BY HIM ON THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. GOPAL P UROHIT (2010) 228 CTR 582 (BOM) STATING THAT THE UNIFORMITY IN TREATMENT AND CONSISTENCY SHOULD BE MAINTAINED WHEN FACTS AND CIRCUMSTANCES ARE IDENTICAL. ITA NO. 510/MUM/2015 7 4.3 PER CONTRA THE LD. DR SUPPORTS THE ORDER PASSED BY THE LD. CIT(A). 4.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIALS ON RECORD. WE MENTION BELOW THE STCG AND LTCG SHOWN BY THE ASSESSEE IN THE RETURN OF INCOME AND ASSESSED BY THE AO FROM AY 2004 - 05 TO 2013 - 14 . ASS. YR. SHORT TERM CAPITAL GAIN (RS.) LONG TERMCAPITAL GAIN (RS.) A SSESSED 2004 - 2005 2,70,17,705 1,50,35,678 U/S 143(3) DATED 27.12.2006 2005 - 2006 4,05,53,409 6,10,19,899 U/S 143(1) 2006 - 2007 6,13,82,284 7,43,84,873 U/S 143(3) DATED 02.06.2008 2007 - 2008 56,45,632 20,62,63,797 U/S 143(3) DATED 30.11.2009 2008 - 2009 1,83,62,475 4,15,61,157 U/S 143(3) DATED 20.12.2010 2009 - 2010 (71,27,509) 46,766 U/S 143(3) DATED 21.11.2011 2010 - 2011 1,49,72,129 (8,44,51,597) U/S 143(3) DATED 22.03.2013 2011 - 2012 (1,90,75,295) 69,84,431 U/S 143(3) DATED 03.03.2014 2012 - 2013 (1,76,57,749) 8,65,90,881 U/S 143(3) DATED 25.03.2015 2013 - 2014 4,23,234 1,06,26,484 U/S 143(3) DATED 30.12.2015 4.5 IN RADHASOAMI SATSANG VS. CIT (1992) 193 ITR 321, 329 (SC) , THE HONBLE SUPREME COURT HAS HELD: STRICTLY SPEAKING, RES JUDICATA DOES NOT APPLY TO INCOME - TAX PROCEEDINGS. AGAIN, EACH ASSESSMENT YEAR BEING A UNIT, WHAT IS DECIDED IN ONE YEAR MAY NOT APPLY IN THE FOLLOWING YEAR BUT WHERE A FUNDAMENTAL ASPECT PERMEATING ITA NO. 510/MUM/2015 8 THROUGH THE DIFFERENT ASSESSMENT YEARS HAS BEEN FOUND AS A FACT O NE WAY OR THE OTHER AND PARTIES HAVE ALLOWED THAT POSITION TO BE SUSTAINED BY NO T CHALLENGING THE ORDER, IT WOULD NOT BE AT ALL APPROPRIATE TO ALLOW THE POSITION TO BE CHANGED IN SUBSEQUENT YEAR. 4.6 SIMILAR VIEW HAS BEEN EXPRESSED IN GOPAL PUROHIT (SUPR A) . 4.7 RESPECTFULLY FOLLOWING THE ABOVE DECISIONS, WE SET ASIDE THE ORDER OF THE LD. CIT(A) ON THE ABOVE ISSUE AND DIRECT THE AO TO ACCEPT THE TREATMENT GIVEN BY THE ASSESSEE OF RS.1,49,72,131/ - AS STCG. THUS THE 2 ND AND 3 RD GROUNDS OF APPEAL ARE ALLOWED. 5. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN C OURT ON 18/08/2017 . SD/ - SD/ - ( MAHAVIR SINGH ) (N.K. PRADHAN) JUDI CIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED : 18/08/2017 RAHUL SHARMA, SR. P.S. COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A) - 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE . BY ORDER, //TRUE COPY// (DY./ASSTT. REGISTRAR) ITAT, MUMBAI