DCIT, Circle - 10, Kolkata, Kolkata V. M/s. Bhoruka Investment Ltd., Kolkata

ITA 517/KOL/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 54573 (ITAT-KOLKATA)
• Duration Of Justice: 1 year(s) 6 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-09-2011
• Appeal Filed By: Department
• Bench Allotted: C
• Assessment Year: 2006-2007
• Appeal Filed On: 12-03-2010
• Court: TRIBUNAL
• Department Lawyers: B R PURKAYASTHA
• Assessee Lawyers: N K PODDA R
• Keywords: Capital asset; Business income; Earning of tax free income; Capital receipt
• Section: 143(3); 142(1); 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH: KOL KATA () BEFORE . . , ! '# '# '# '# /AND ' # , ! ) [BEFORE HONBLE SHRI S. V. MEHROTRA, AM & HONBLE S RI MAHAVIR SINGH, JM] #$ #$ #$ #$ / I.T.A NO. 517/KOL/2010 %& ''( %& ''( %& ''( %& ''(/ // / ASSESSMENT YEAR: 2006-07 DEPUTY COMMISSIONER OF INCOME-TAX, VS. M/S. BHORUKA INVESTMENT LTD. CIRCLE-10, KOLKATA. (PAN-AABCB 9008 R) (*+ /APPELLANT ) (,-*+/ RESPONDENT ) & #$ #$ #$ #$ / I.T.A NO. 627/KOL/2010 %& ''( %& ''( %& ''( %& ''(/ // / ASSESSMENT YEAR: 2006-07 M/S. BHORUKA INVESTMENT LTD. VS. DEPUTY COMMISSIO NER OF INCOME-TAX CIRCLE-10, KOLKATA. (*+ /APPELLANT ) (,-*+/ RESPONDENT ) FOR THE REVENUE: SHRI B. R. PURKAYASTHA FOR THE ASSESSEE: SHRI N. K. PODDAR . / ORDER PER MAHAVIR SINGH, JM ( ' # ' # ' # ' #, , , , ! ! ! ! ) THESE CROSS-APPEALS BY REVENUE AND ASSESSEE ARE ARI SING OUT OF THE ORDER OF CIT(A)-XII, KOLKATA IN APPEAL NO.346/XII/CIR-10/08-09 DATED 25. 11.2009. ASSESSMENT WAS FRAMED BY DCIT, CIRCLE-10, KOLKATA U/S.143(3) OF THE INCOME T AX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) FOR ASSESSMENT YEAR 2006-07 VIDE HIS ORD ER DATED 26.12.2008. 2. FIRST WE TAKE UP REVENUES APPEAL. THE FIRST IS SUE IN THIS APPEAL OF REVENUE IS AGAINST ORDER OF CIT(A) IN HOLDING ASSESSEES INCOME AS UND ER THE HEAD CAPITAL GAINS AND NOT UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSI ON AS HELD BY ASSESSING OFFICER. FOR THIS, REVENUE RAISED FOLLOWING GROUND NOS. 1 AND 2: 1) THAT UNDER THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE, LD. CIT(A) HAS ERRED IN TREATING BUSINESS INCOME HELD BY THE A.O. AS CAPITA L GAIN. 2)THAT UNDER THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, LD. CIT(A) HAS ERRED IN TREATING THE TRANSACTIONS OF BUYING AND SELLING OF SHARES AND SECURITIES AS CAPITAL GAIN WHEREAS THOSE WERE UNDERTAKEN WITH A PROFIT MOTIVE AND AT REGULAR INTERVALS. RELIANCE IS PLACED IN THE CASE OF CIT VS. DISTRIBUTORS BARODA R EPORTED IN 83 ITR 377 WHERE HONBLE SUPREME COURT HELD THAT THE REAL, SUBSTANTIAL AND S YSTEMATIC OR ORGANIZED INVESTMENT WOULD CONSTITUTE BUSINESS. 2 ITA 517-627/K/2010 BHORUKA INV. LTD.. A.Y.06-07 3. THE BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE T HAT ASSESSEE HAVE BEEN FILED ITS RETURN OF INCOME ON 27.11.2006 FOR ASSESSMENT YEAR 2006-07 AN D ASSESSING OFFICER ISSUED NOTICE U/S. 143(2) R.W.S. 142(1) OF THE ACT AND ASSESSEE EXPLAI NED THE RETURN OF INCOME BY FILING DETAILS ALONG WITH BOOKS OF ACCOUNT. ASSESSEE HAS DISCLOSE D FOLLOWING CAPITAL GAINS IN HIS RETURN OF INCOME: I) SHORT TERM CAPITAL GAIN RS. 11,570 II) LONG TERM CAPITAL GAIN RS.55,59,979 RS.66,71,549 ASSESSING OFFICER VIDE ORDER SHEET ENTRY DATED 17.1 1.2008 REQUIRED THE ASSESSEE TO EXPLAIN AS TO WHY LONG TERM CAPITAL GAINS DECLARED SHOULD NOT BE TREATED AS BUSINESS INCOME. THE ASSESSEE STATED THAT OLD SHARES AND SECURITIES WERE HELD BY ASSESSEE AS INVESTMENT AND THERE IS NO STOCK- IN-TRADE AND IT DOES NOT DEAL IN SHARES AND SECURIT IES AND THIS FACT CAN BE VERIFIED FROM PAST RECORDS, WHICH WILL SHOW THAT IT HAD NEVER TRADED I N SHARES AND SECURITIES SINCE INCEPTION. THE ASSESSEE CONTENDED THAT SINCE INCEPTION IT HAS KEPT THESE SHARES AND SECURITIES AS INVESTMENT. EVEN ASSESSEE POINTED OUT FROM MEMORANDUM OF ASSOCI ATION, THAT MAIN OBJECTS OF THE COMPANY FOR WHICH THE COMPANY WAS INCORPORATED ARE TO INVES T, ACQUIRE, HOLD SHARES, STOCKS, DEBENTURES ETC. AND TO VARY AND OTHERWISE DISPOSE OF COMPANYS INVESTMENTS. IN VIEW OF THIS, IT WAS CONTENDED THAT ASSESSEE HAS RIGHTLY DECLARED INCOME EARNED FROM SALE OF SHARES AS LONG TERM AND SHORT TERM CAPITAL GAINS. THE ASSESSING OFFICE R HAS NOT ACCEPTED EXPLANATION OF THE ASSESSEE AND BY DISCUSSING VARIOUS CASE LAWS TREATE D THE ASSESSEES LONG TERM CAPITAL GAIN AS BUSINESS INCOME BY HOLDING IN PARA 8, 9 AND 10 AS U NDER: 8. IN THE CASE OF THE ASSESSEE ALSO, ONE OF THE MA IN OBJECTS AS PER THE MEMORANDUM IS TO UNDERTAKE THE BUSINESS OF SHARES AND SECURITIES. T HE ASSESSEE HAS ALSO ACQUIRED LARGE QUANTITY OF SHARES AND SUBSEQUENTLY DISPOSED THE SA ME IN A SYSTEMATIC MANNER TO EARN PROFITS. THESE ACTIVITIES ARE CARRIED OUT NOT ONLY IN THE CURRENT ASSESSMENT YEAR, BUT ALSO IN THE PRIOR YEARS AND SUBSEQUENT YEARS IN A SIMILA R SYSTEMATIC AND ORGANIZED MANNER. IT WILL ALSO BE NOTED THAT THESE ACTIVITIES HAVE YIELD ED HUGE PROFITS TO THE ASSESSEE. ACCORDINGLY, APPLYING THE PRINCIPLES LAID DOWN BY THE ABOVE MENT IONED DECISION TO THE FACTS OF THE ASSESSEE, IT CAN BE SAID THAT THE ASSE SSEE IS ENGAGED IN THE BUSINESS OF DEALING IN SHARES. 9. THE ABOVE VIEW IS ALSO SUPPORTED BY CIRCULAR NO. 4 OF THE 2007 WHERE IN PARA 8(II), 8(III) AND 9, IT IS CLEARLY MENTIONED THAT WHERE TH E OBJECT OF INVESTMENT IN SHARES OF COMPANY IS TO DERIVED INCOME BY WAY OF DIVIDEND ETC ., THEN THE PROFITS ACCRUING BY CHANGE IN SUCH INVESTMENT (BY SALE OF SHARES) WILL YIELD CAPITAL GAIN AND NOT REVENUE RECEIPTS. IN OTHER WORDS, IF THE INVESTMENT IS NOT MADE AS ABOVE TO DERIVE BENEFIT BY WAY OF DIVIDEND ETC. SUCH AS BONUS, RIGHT, ISSUE ALLOTM ENT, THEN IT WILL BE IN THE NATURE OF REVENUE RECEIPTS OR BUSINESS INCOME. IN PARA 9, IT IS ALSO MENTIONED THE SECOND PRINCIPLE FURNISHES A GUIDE FOR DETERMINING THE NATURE OF TRA NSACTION BY VERIFYING WHETHER THERE ARE SUBSTANTIAL TRANSACTION, THERE MAGNITUDE ETC. MAINT ENANCE OF BOOKS OF ACCOUNTS AND FINDING THE RATIO BETWEEN PURCHASES AND SALES. THE THIRD PRINCIPLE SUGGESTS THAT ORDINARILY PURCHASES AND SALES OF SHARES WITH THE M OTIVE OF REALIZING PROFIT WOULD LEAD TO INFERENCE OF TRADE/ADVENTURE IN THE NATURE OF TRADE , WHERE THE OBJECT OF THE INVESTMENT IN 3 ITA 517-627/K/2010 BHORUKA INV. LTD.. A.Y.06-07 SHARES AND COMPANIES IS TO DERIVED INCOME BY WAY OF DIVIDEND ETC. THE TRANSACTION OF PURCHASES AND SALES OF SHARES WOULD YIELD CAPITAL G AIN AND NOT BUSINESS PROFIT 10. IN THE LIGHT OF THE ABOVE DISCUSSIONS, CASE LAW S, FACTS AND CIRCUMSTANCES, NO OTHER CONCLUSION EXCEPT THAT THESE SHARES WERE PURCHASED AND SOLD BY THE ASSESSEE WITH THE MOTIVE OF EARNING OF PROFIT BY SUCH PURCHASE AND SA LES AND NOT WITH THE OBJECT OF INVESTING ITS CAPITAL IN THESE SHARES IN ORDER TO D ERIVE INCOME FROM THAT INVESTMENT. FURTHER, THE VOLUME OF TRANSACTIONS, THE FREQUENCY OF TRANSACTIONS, THE SYSTEMATIC AND ORGANIZED MANNER OF UNDERTAKING THE TRANSACTIONS ST RONGLY POINT TO THE CONCLUSION THAT THE SHARES COULD NOT HAVE BEEN PURCHASED AS AN INVE STMENT TO EARN INCOME FROM DIVIDENDS AND THAT THE PURCHASE OF THESE SHARES WER E WITH THE OBJECT OF SELLING THEM SUBSEQUENTLY AT AN PROFIT. THE SHARES WERE IN FACT SOLD AT CONSIDERABLE PROFITS SUBSEQUENTLY. THE EXPLANATION SOUGHT TO BE GIVEN BY THE ASSESSEE THAT THESE SHARES WERE HELD AS AN INVESTMENT TO EARN DIVIDENDS, IS ALSO NO T TRUE. AS THESE FACTS LEAD TO THE INFERENCE THAT THE ASSESSEES TRANSACTIONS IN BUYIN G AND SELLING UNITS/SHARES AMOUNT TO BUSINESS ACTIVITIES WITH THE MOTIVE BEHIND THE TRAN SACTIONS BEING TO EARN PROFITS. THIS CONCLUSION IS ALSO STRONGLY SUPPORTED BY THE SUPREM E COURT IN THE CASE OF DALHOUSIE INVESTMENT TRUST CO. LTD. VS. COMMISSIONER OF INCOM E-TAX [68 ITR 486] AND STRONG RELIANCE IS PLACED ON THIS DECISION. IN VIEW OF ABOVE DISCUSSION INCOME OF RS.66,71,549/ - IS BEING CONSIDERED AS BUSINESS INCOME INSTEAD OF CAPITAL GAIN AS CLAIMED BY THE AS SESSEE. 4. AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE CIT( A), WHO ALLOWED THE ISSUE IN FAVOUR OF ASSESSEE VIDE PARA 3.3.3 OF HIS APPELLATE ORDER AS UNDER: 3.3.3. I HAVE DULY CONSIDERED THE SUBMISSIONS OF THE APPELLANT. I HAVE ALSO CONSIDERED THE REASONS STATED AND CASE LAWS RELIED ON BY THE A .O. IN HIS ASSESSMENT ORDER. I HAVE DEALT A SIMILAR ISSUE IN EARLIER APPEALS (APPEAL NO . 501/XII/WD-12(4)/07-08 IN M/S. NUPUR CARPETS P. LTD. APPEAL NO. 645/XII/DCIT, CIR- 12/07-08 IN M/S. DIAMOND CO. LTD. AND OTHER CASES) IN GREAT DETAILS WITH REFERENCE TO SAME SET OF FEATURES AND CASE LAWS NOW STATED BY THE A.O. IN THESE CASES, I HAVE PLACED RE LIANCE PRIMARILY ON JURISDICTIONAL ITAT, B-BENCH, KOLKATA IN THE CASE OF DCIT VS. RELIANCE TRADING ENTERPRISES LTD. (ITAT NO. 944/KOL/2008 DT. 3.1.2008) AND HOST OF OTHER IMPORT ANT CASE LAWS MENTIONED AS UNDER: CIT V. H. HOLCK LARSEN (1986) 160 ITR 67 (SC) CIT V. REWASHANKARA. KOTHARI (2006) 201 CTR 510 (GU I) CIT V. RAMAMRITHANS (2008) 217 CTR 206 (MAD) CIT V. ASSOCIATED INDUSTRIAL DEVELOPMENT CO. LTD. ( SC) 82 ITR 586 JANAK S. RAN GWALLA V. ACIT (2007) 11 SOT 627 (MUM. TRIB.) CIT V. N.S.S. INVESTMENTS P. LTD. (2005) 277 ITR 14 9 (MAD) BOMBAY GYMKHANA LTD. V. ITO (220) 115 JTJ 639 (MUM. TRIB.) GOPAL PUROHIT V. JCIT, 25(3), MUMBAI (2009) 29 SOT 117 (MUM.TRIB.) SARNATH INFRASTRUCTURE P. LTD. V. ACIT (2009) 313 I TR (AT) 13 (LUCKNOW) DCIT V. REENA SAROGI (ITA NO. 1202/COL/98 & 332/CAI /2001) DCIT V. KAVITA PARASRAMKA (ITA NO. 1033/KOI/2008, D T. 20.3 .09) THE HONBLE KOLKATA ITAT, B BENCH IN ITS RECENT J UDGEMENT DATED 17.08.2009 VIDE ITA NO. 837/KOI/2009 UPHELD THE DECISION GIVEN BY ME IN THE CASE OF M/S. THE DIAMOND CO. LTD. KOLKATA. THE RELEVANT EXTRACT FROM THE TRIBUNA L ORDER IS REPRODUCED AS UNDER: - CONSIDERING THE CASES CITED (SUPRA) AND THE FACTS OF THE CASE BEFORE US, WE ARE OF THE CONSIDERED VIEW THAT THE LD. CIT(A) HAS RIGHTLY HELD THAT THE ASSESSEE HAS TREATED THE SHARES/UNITS AS INVESTMENT AND NOT STOCK-IN-TRADE, AS IS EVIDENT FROM THE ENTRIES MADE IN THE. BOOKS O F ACCOUNTS AND BALANCE SHEET. THE DEPARTMENT HAS ALSO ACCEPTED THE ABOVE C ONTENTION OF THE ASSESSEE EVEN IN EARLIER ASSESSMENT YEARS. THE DEPA RTMENT IN THE SCRUTINY 4 ITA 517-627/K/2010 BHORUKA INV. LTD.. A.Y.06-07 ASSESSMENTS UNDER SECTION 143(3) OF THE ACT FOR THE ASSESSMENT YEARS 1998- 99 AND 2004-05 HAS ACCEPTED THE NET SURPLUS ON SAL E/REDEMPTION OF SHARES/UNITS AS INCOME UNDER HEAD CAPITAL GAINS TH EREFORE, WE AGREE WITH THE LD. CIT(A) THAT THE VOLUME OF TRANSACTION, FREQ UENCY OF TRANSACTION, PERIOD OF HOLDING, ETC. WOULD NOT ALTER THE NATURE OF TRANSACTION FROM INVESTMENT TO TRADING, WHEN THE INITIAL INTENTION O F THE ASSESSEE WAS TO HOLD THE SHARES UNDER THE HEAD INVESTMENT AND ACCORDIN GLY SHOWN IN THE BOOKS. THEREFORE, WE UPHOLD THE ORDER OF THE LD. CIT(A) TH AT THE NET SURPLUS SHOWN BY THE ASSESSEE IS THE CAPITAL GAIN ON ACCOUNT OF T HE SALE/REDEMPTION OF THE ASSESSEES INVESTMENT AND THE SAME IS TAXABLE UNDER THE HEAD CAPITAL GAINS AND NOT AS BUSINESS INCOME. HENCE, WE CONFIRM THE O RDER OF THE LD. CIT(A) BY REJECTING THE GROUNDS OF APPEAL TAKEN BY THE DEP ARTMENT. THE RATIO LAID DOWN BY THE JUDICIAL FORUMS IN THE A BOVE CASES IS THAT ONE HAS TO SEE THE BASIC INTENTION OF THE ASSESSEE IN THE BOOKS TO D ISTINGUISH WHETHER THE ACTIVITY IS IN THE NATURE OF TRADING OR INVESTMENT. ONCE THIS IS ESTABLISHED THE OTHER FEATURES LIKE FREQUENCY, MAGNITUDE, VOLUME ETC. DO NOT ALTER THE CHARACTER OF TRANSACTION. IN THE PRESENT CASE, THE INTENTION OF THE APPELLANT TO H OLD THE SHARES UNDER INVESTMENT IS CLEAR FROM THE ENTRIES MADE IN BOOKS AND SHOWN AS INVESTMENT IN BALANCE SHEET. IN VIEW OF THE DISCUSSION AND RESPECTFULLY FOLLOWIN G THE KOLKATA TRIBUNAL DECISION IN THE DIAMOND CO. LTD (SUPRA), RELIANCE TRADING ENTERPRIS ES LTD. (SUPRA), RENA SAROGI (SUPRA) AND KAVITA PARSRAMKA (SUPRA) AND THE RATIO LAID DOWN BY THE COURTS INCLUDING SUPREME COURT IN THE ABOVE CITED CASES, I HOLD THE GAINS ON ACCOUNT OF SALE OF SHARES AND SECURITIES SHALL BE TREATED AS CAPITAL GAINS AS AGA INST BUSINESS INCOME ASSESSED BY THE A.O. THE APPELLANTS GROUND IS UPHELD ON THIS COUNT . AGGRIEVED REVENUE CAME IN APPEAL BEFORE US. 5. WE HAVE HEARD RIVAL CONTENTIONS AND GONE THROUGH FACTS AND CIRCUMSTANCES OF THE CASE. LD. COUNSEL FOR THE ASSESSEE SHRI N. K. PODDAR, FIR ST OF ALL, NEGATED THE FINDINGS OF ASSESSING OFFICER BY STATING THAT MAIN PREMISE OF ASSESSING O FFICER FOR TREATING THE CAPITAL GAINS DECLARED BY ASSESSEE AS BUSINESS INCOME IS THAT IT HAS CARRI ED ON TRANSACTIONS IN A SYSTEMATIC AND ORGANIZED MANNER AND THAT ALSO NUMEROUS TRANSACTION S OF BUYING AND SELLING OF SHARES AND UNITS. LD. COUNSEL FOR THE ASSESSEE, FIRST OF ALL, TOOK US TO DETAILS OF LONG TERM CAPITAL GAIN ON SALE OF INVESTMENTS WHICH WERE ACCEPTED BY ASSESSIN G OFFICER AS WELL AS CIT(A). THE RELEVANT DETAIL READS AS UNDER: NO. OF COMPANIES IN WHICH INVESTMENT HELD NO. OF SHARES YEAR OF ACQUISITION AMOUNT OF LONG TERM CAPITAL GAIN 10 01 02 13 3,660 4,100 11,324 19,084 1996-97 1997-98 & 1998-99 1999-2000 2,921,256 826,540 2,912,183 6,659,979 LD. COUNSEL STATED THAT THE ASSESSEE HAS NOT CARRIE D OUT ANY SINGLE TRANSACTION IN MUTUAL FUNDS DURING THE YEAR NOR ANY TRANSACTION HAS BEEN COMPLE TED WITHIN A SHORT PERIOD. HE STATED THAT ENTIRE SALE OF SHARES DISCLOSED AS LTCG WAS ASSESSE ES LONG TERM INVESTMENT, WHICH WERE INVESTED AS FAR AS BACK IN ASSESSMENT YEARS 1996-97 , 1997-98, 1998-99 AND 1999-2000. LD. 5 ITA 517-627/K/2010 BHORUKA INV. LTD.. A.Y.06-07 COUNSEL FOR THE ASSESSEE STATED THAT IT HAS TRADED ONLY IN 13 SCRIPS OUT OF WHICH EARNED LONG TERM CAPITAL GAINS. ACCORDINGLY, HE STATED THAT TH E OBSERVATIONS MADE BY ASSESSING OFFICER ARE AGAINST FACTS ON RECORD AND ARE PERVERSE. LD. COUN SEL FURTHER STATED THAT MAIN OBJECTS OF COMPANY FOR WHICH IT WAS INCORPORATED ARE TO INVEST , ACQUIRE AND HOLD SHARES, STOCKS, DEBENTURES ETC. AND TO VARY AND OTHERWISE DISPOSE O F COMPANYS INVESTMENTS. HE SPECIFICALLY ARGUED THAT OBJECTS DO NOT PERMIT TRADING IN SHARES AND SECURITIES AND ASSESSEE NEVER TRADED IN SHARES AND SHARES AND SECURITIES ARE HELD BY IT AS INVESTMENT, WHICH IS CLEARLY DEMONSTRABLE FROM THE DETAILS GIVEN. LD. COUNSEL FURTHER ARGUED THAT EVEN THOUGH THESE ARE NOT HELD AS STOCK IN TRADE AND KEPT AS INVESTMENT IT IS ALSO THE PRIN CIPLE THAT TREATMENT GIVEN TO A TRANSACTION IN THE BOOKS OF ACCOUNT AND IN THE BALANCE SHEET IS OF IMP ORTANCE AND PRACTICALLY ASSESSEES INVESTMENTS ARE OF LONG DURATION. ANOTHER ASPECT A RGUED BY LD. COUNSEL IS THAT ASSESSING OFFICER HAS ACCEPTED THE TREATMENT OF SHORT TERM CA PITAL GAIN BY THE ASSESSEE IN HIS ASSESSMENT ORDER AND ONCE THE ASSESSING OFFICER HAS ACCEPTED T HE SHORT TERM INVESTMENT AS SHORT TERM CAPITAL GAIN, THERE IS NO REASON FOR HIM TO DEVIATE FROM ACCEPTING THE LONG TERM CAPITAL GAIN AS BUSINESS INCOME. WE FIND THAT THE LD. SR. DR COULD NOT NEGATE THE ARGUMENTS OR FACTS STATED BY LD. COUNSEL FOR THE ASSESSEE. IT IS ALSO A FACT THA T THESE INVESTMENTS IN SHARES AS DECLARED BY ASSESSEE IN ALL THE PAST YEARS, SINCE INCEPTION, WE RE ALL ALONG ACCEPTED IN ASSESSMENTS MADE U/S. 143(3) OF THE ACT BY REVENUE. EVEN IN ALL EARLIER YEARS THE ASSESSEE HAS DECLARED LONG TERM CAPITAL GAINS ON SALE OF SHARES HELD BY ASSESSEE AS INVESTMENT HAS AS IT IS BEEN ACCEPTED AS LONG TERM CAPITAL GAIN WHILE FRAMING ASSESSMENT U/S. 143 (3) OR 143(1) OF THE ACT. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES, WE ARE OF THE VIEW T HAT THE PRINCIPLE APPLICABLE IN THE CASE OF SALE OF SHARES IS WELL SETTLED IN CASE THE SHARES A RE HELD AS INVESTMENTS, THE SALES WHICH PRODUCED THE SURPLUS CONNECTED WITH INVESTMENT IS T O BE HELD AS CAPITAL GAINS AND NOT PROFIT AND GAINS OF SUCH BUSINESS. HONBLE GUJARAT HIGH COURT IN THE CASE OF CHUNILAL KHUSHALDAS PATEL VS. CIT (1967) 66 ITR 522 (GUJ) HAS LAID DOWN THE P RINCIPLE IN RESPECT OF SALE OF SHARES WHETHER A CAPITAL RECEIPT OR BUSINESS/REVENUE RECEI PT, HONBLE COURT HELD THAT AS THERE WAS NOTHING TO INDICATE THAT THE ASSESSEE CONVERTED THI S RIGHT TO THE DEFERRED SHARES AS HIS STOCK IN TRADE, THE PROFIT ON ITS SALE MUST BE REGARDED ONLY AS CAPITAL RECEIPT NOT LIABLE TO BE TAXED. IN VIEW OF THE ABOVE PRINCIPLE AND FACTUAL POSITION IN THE PRESENT CASE, WE UPHOLD THE ORDER OF CIT(A) AND THIS ISSUE OF REVENUES APPEAL IS DISMIS SED. 6. NEXT COMMON ISSUE IS AS REGARDS TO THE ORDER OF CIT(A) RESTRICTING THE DISALLOWANCE U/S. 14A OF THE ACT R.W.S. RULE 8D OF I. T. RULES TO T HE EXTENT OF RS.14,77,571/- AS AGAINST THE DISALLOWANCE MADE BY ASSESSING OFFICER AT RS.18,02, 463/-. AGGRIEVED, REVENUE RAISED FOLLOWING GROUND NO.3: 6 ITA 517-627/K/2010 BHORUKA INV. LTD.. A.Y.06-07 THAT UNDER THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, LD. CIT(A) HAS ERRED IN RESTRICTING THE DISALLOWANCE TO RS.14,77,571/- WHER EAS THE A.O. STRICTLY FOLLOWED THE PRINCIPLES LAID DOWN IN RULE 8D AND QUANTIFIED THE SAME AT RS.18,02,463/-. ASSESSEE HAS RAISED FOLLOWING 8 GROUNDS: 1. THAT THE LEARNED COMMISSIONER OF INCOME TAX (AP PEALS) ERRED IN SUSTAINING THE DISALLOWANCE TO THE EXTENT OF RS. 14,77,57 1/- U/S 14A READ WITH RULE 8D. 2. THAT RULE 8D IS NOT APPLICABLE FOR ASSESSMENT YE AR 2006-07. 3. THAT NO BORROWED FUNDS HAVE BEEN USED FOR ACQUIR ING INVESTMENTS IN SHARES WHICH ARE THE ONLY ASSETS HELD BY THE ASSESSEE, INCOME FROM W HICH DOES NOT FORM PART OF THE TOTAL INCOME. 4. THAT THE ENTIRE BORROWED FUNDS ON WHICH INTEREST EXPENDITURE OF RS. 26,90,574/- WAS INCURRED HAVE BEEN USED FOR GIVING LOANS IN COURSE OF ASSESSEES FINANCING BUSINESS AND IS NOT ATTRIBUTABLE TO ANY INCOME WHICH DOES NOT FO RM PART OF THE TOTAL INCOME. 5. THAT INTEREST INCOME OF RS.39.46,696/- HAS BEEN EARNED ON THE LOANS GIVEN IN COURSE OF THE ASSESSEES FINANCING BUSINESS AGAINST INTEREST EXPENDITURE OF RS.26,90,574/-. THE LOANS GIVEN BEING FAR IN EXCESS OF THE LOANS TAKEN, THE ENTIRE INTEREST EXPENDITURE OF RS.26,90,574/- HAS BEEN INCURRED FOR BUSINESS PURPO SES OF GIVING LOANS AND NOT FOR EARNING ANY EXEMPT INCOME AND THEREFORE PROVISIONS OF RULE 8D(2)(II) ARE NOT APPLICABLE. 6. THAT WITHOUT PREJUDICE TO GROUNDS STATED ABOVE D ISALLOWANCE OF RS. 14,77,571/- SUSTAINED BY THE LEARNED COMMISSIONER (APPEALS) IS INCORRECT. 7. THAT IN ANY EVENT, THE DISALLOWANCE OF RS. 14,77 ,571 SUSTAINED BY THE LEARNED COMMISSIONER (APPEALS) IS EXCESSIVE. 8. THAT ON THE FACTS AND IN THE CIRCUMSTANCES THE D ISALLOWANCE OF RS. 14,77,571/- SUSTAINED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) SHOULD BE DELETED. 7. WE HAVE HEARD RIVAL CONTENTIONS AND GONE THROUGH FACTS AND CIRCUMSTANCES OF THE CASE. THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS MADE DISALLOWANCE OF EXPENSES OF INTEREST AND ADMINISTRATIVE EXPENSES AT RS.18,02,46 3/- BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT R.W.R. RULE 8D OF I. T. RULES, 1962 (THE RULES) AS THE ASSESSEE HAS EARNED DIVIDEND INCOME AT RS.14,77,571/- AND CLAIMED THE S AME AS EXEMPT. THE AO HELD THAT THESE EXPENSES PERTAINED TO EXEMPTED INCOME, HENCE SAME W AS DISALLOWED. THE CIT(A) RESTRICTED THE DISALLOWANCE AT RS.14,77,571/- BY GIVING FOLLOW ING FINDING IN PARA 4.3 OF HIS APPELLATE ORDER AS UNDER: 4.3. I HAVE CONSIDERED THE FACTS AND SUBMISSIONS O F THE APPELLANT. THE APPELLANTS SUBMISSIONS ARE NOT TENABLE. THE A.O. HAS RIGHTLY INVOKED THE PROVISIONS OF SECTION 14A READ WITH RULE 8D FOR CALCULATING SUCH EXPENDITURE AS ATTRIBUTABLE TO EARNING OF EXEMPTED INCOME. RECENTLY HONBLE MUMBAI ITAT, SPECIAL BENC H IN THE CASE OF DAGA CAPITAL MANAGEMENT PVT. LTD. IN ITS ORDER DATED 20.10.2008 (ITA NO. 8057/MUM/03 ETC.) HAS UPHELD THE APPLICABILITY OF RULE 8D OF THE I. T. RU LES READ WITH SECTION 14A OF THE ACT IN RESPECT OF ALL PENDING PROCEEDINGS AS ON 24.3.2008, INCLUDING APPEALS. THE HONBLE ITAT, KOLKATA BENCH FOLLOWING THE AFORESAID SPECIAL BENCH DECISION UPHELD THE METHOD PRESCRIBED UNDER RULE 8D IN THE CASE OF ACIT V. SHR EE CAPITAL SERVICES LTD. (ITA 7 ITA 517-627/K/2010 BHORUKA INV. LTD.. A.Y.06-07 NO.1596/KOL/2008 DT. 9.1.09). IN VIEW OF THIS, THE METHOD ADOPTED AS PER RULE 8D BY THE ASSESSING OFFICER IS CORRECT. HOWEVER THE A.O. HAS WORKED OUT THE DISALLOWANCE AT RS.18,02,463/- WHICH IS MORE THAN THE DIVIDEND INCO ME SHOWN. AS SUCH, I DIRECT THE A.O. TO RESTRICT THE DISALLOWANCE TO THE EXTEND DIVIDEND INCOME EARNED I.E. RS.14,77,571/-. THE APPELLANT GETS A PARTIAL RELIEF ON THIS COUNT. 8. WE FIND THAT THE RELEVANT ASSESSMENT YEAR IS 200 6-07 AND HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCEE MFG. CO. LTD. VS. DCIT [2010] 328 ITR 81 (BOM.) HAS LAID DOWN THE PRINCIPLE AT PAGES 138 & 139 VIDE SUB PARAS (V) TO (VII) ARE AS UNDER: (V) THE PROVISIONS OF RULE 8D OF THE INCOME-TAX RU LES WHICH HAVE BEEN NOTIFIED WITH EFFECT FROM MARCH 24, 2008, SHALL APPLY WITH E FFECT FROM THE ASSESSMENT YEAR 2008-09; (VI) EVEN PRIOR TO THE ASSESSMENT YEAR 2008-09, WHE N RULE 8D WAS NOT APPLICABLE, THE ASSESSING OFFICER HAS TO ENFORCE TH E PROVISIONS OF SUB-SECTION (1) OF SECTION 14A. FOR THAT PURPOSE, THE ASSESSING OFF ICER IS DUTY BOUND TO DETERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED I N RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE AC T. THE ASSESSING OFFICER MUST ADOPT A REASONABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FACTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTU NITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON THE RECORD; (VII) THE PROCEEDINGS FOR THE ASSESSMENT YEAR 2002 -03 SHALL STAND REMANDED BACK TO THE ASSESSING OFFICER. THE ASSESSING OFFICE R SHALL DETERMINE AS TO WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE ( DIRECT OR INDIRECT) IN RELATION TO DIVIDEND INCOME/INCOME FROM MUTUAL FUNDS WHICH D OES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED UNDER SECTION 14A. THE ASSESSING OFFICER CAN ADOPT REASONABLE BASIS FOR EFFECTING THE APPORTIONM ENT. WHILE MAKING THAT DETERMINATION, THE ASSESSING OFFICER SHALL PROVIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUNTS AND RELEVANT AND GERMANE MATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CAS E 9. WE FIND FROM ARGUMENTS OF LD. SR. COUNSEL SHRI N . K. PODDAR, IN VIEW OF DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOY CEE MFG. CO. LTD. (SUPRA), THAT IN PRESENT ASSESSMENT YEAR RULE 8D OF THE RULES DOES N OT APPLY TO THE ASSESSEES CASE, HENCE, AO HAS WRONGLY INVOKED THIS RULE. AS RIGHTLY POINTED OUT BY LD. SR. COUNSEL THAT AO HIMSELF HAS NOT INVOKED RULE 8D(2)(I) OF THE RULES AS HE HAS DE TERMINED NIL DISALLOWANCE UNDER THE SAME. FURTHER, HE HAS INVOKED RULE 8D(2)(II) OF THE RULES BUT THERE IS NO INVESTMENT ACQUIRED OUT OF BORROWED FUNDS IN THE SHARES AND ONCE THIS IS THE P OSITION NO DISALLOWANCE ON ACCOUNT OF INTEREST EXPENSES CAN BE MADE BY AO. ACCORDINGLY, WE ARE OF THE VIEW THAT ON ACCOUNT OF INTEREST EXPENDITURE NO DISALLOWANCE CAN BE MADE, B UT AS CONCEDED BY LD. COUNSEL, IN ALL HIS FAIRNESS, THAT A REASONABLE DISALLOWANCE OF 1% ON A CCOUNT OF ADMINISTRATIVE EXPENSES, AS CONSISTENTLY DONE BY THIS TRIBUNAL IN ITS ORDER, WI LL MEET THE END OF JUSTICE, WE FOLLOWING TRIBUNALS DECISION IN THE CASE OF M/S. CIVIL ENGIN EERS ENTERPRISES (P) LTD.V. DCIT IN ITA NO. 859/KOL/2010 FOR ASSESSMENT YEAR 2005-06 DATED 19.08.2010 RESTRICT THE DISALLOWANCE AT 8 ITA 517-627/K/2010 BHORUKA INV. LTD.. A.Y.06-07 1% OF DIVIDEND INCOME AND DIRECT THE AO ACCORDINGLY . HONBLE TRIBUNAL IN THE CASE OF M/S. CIVIL ENGINEERS ENTERPRISES (P) LTD. (SUPRA) HAS HE LD AS UNDER: 5. HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERI AL AVAILABLE ON RECORD AND THE CASE LAWS CITED BY THE LD. COUNSEL. WE FIND THAT THE ASSESSEE EARNED DIVIDEND INCOME OF RS.18,00,000/-. THE ASSESSEE DID NOT FILE ANY EVID ENCE IN RESPECT OF ANY EXPENDITURE INCURRED BY HIM TO EARN THE SAID DIVIDEND INCOME BE FORE THE LOWER AUTHORITIES AND ALSO BEFORE THE TRIBUNAL. IN VIEW OF THE ABOVE, AND THE CONSISTENT VIEW TAKEN BY THE TRIBUNAL IN MANY OTHER CASES ALSO A SUM OF RS.18,000/- I.E. @ 1 % OF THE DIVIDEND INCOME IS TREATED AS EXPENSES RELATED TO DIVIDEND INCOME. THEREFORE, THE DISALLOWANCE COMES TO RS.18,000/-. THIS GROUND OF THE ASSESSEE IS, THERE FORE, PARTLY ALLOWED. HENCE, THIS GROUND OF ASSESSEES APPEAL IS PARTLY A LLOWED AND THAT OF REVENUE IS DISMISSED. 10. THE NEXT ISSUE IN THIS APPEAL OF REVENUE IS AGA INST THE ORDER OF CIT(A) DELETING THE DISALLOWANCE OF INTEREST EXPENDITURE ON ADVANCES BY HOLDING THE SAME AS FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE. FOR THIS, REVENUE HAS RA ISED THE FOLLOWING GROUND NO.4: 4. THAT UNDER THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE, LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.5,11,920/- ON ACCOUNT O F INTEREST ON ADVANCES THOUGH THE SAME WERE NOT FOR THE PURPOSE OF THE BUSINESS OF THE ASS ESSEE. 11. WE HAVE HEARD RIVAL SUBMISSIONS AND GONE THROUG H FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT THE A.O. DISALLOWED INTEREST EXPENSES ON PRO RATA BASIS ON ADVANCES GIVEN FOR ACQUIRING OFFICE SPACE BY STATING THAT THE SAME IS NOT FOR THE PURPOSES OF BUSINESS. THE CIT(A) DELETED THE SAID FOR THE PURPOSES OF BUSINESS AND T HAT ALSO OUT OF ITS OWN FUNDS BY HOLDING AS UNDER: 5.3. I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE APPELLANT. I FIND FORCE IN THE APPELLANTS SUBMISSIONS. THE APPELLANT ADVANCED AM OUNTS FOR ACQUIRING OFFICE SPACE FOR ITS OWN USE AND THE ADVANCES WERE PAID OUT OF OWN F UNDS. AS THE ADVANCES WERE PAID FOR THE PURPOSE OF BUSINESS THE DISALLOWANCE OF INTERES T ON PRO RATA BASIS IS NOT CORRECT. I DIRECT THE AO TO DELETE THE ADDITION ON ACCOUNT OF DISALLOWANCE MADE. THE APPELLANTS GROUND IS ALLOWED. 12. WE FIND THAT THE ASSESSEE HAS DEBITED INTEREST OF RS.26,95,574/- ON LOANS INCLUDING SECURED LOANS OF RS.72.50 LACS AND OTHERS FOR RS.3, 42,07,694/-. THE AO DISALLOWED THE PRO RATA INTEREST OF RS.5,11,920/- AS THE SAME IS INCURRED O N INVESTMENT IN CAPITAL ASSET, WHICH IS OUT OF INTEREST BEARING LOANS, HENCE, ACCORDING TO HIM, TH E SAME SHOULD BE CAPITALIZED. WE FIND THAT THE ASSESSEE HAS ADVANCED A SUM OF RS.62 LACS FOR A CQUIRING OFFICE SPACE AT MUMBAI AND JAIPUR AND FOR THAT IT ENTERED IN AGREEMENT WITH A DEVELOP ER AND ADVANCES WERE GIVEN. THESE ADVANCES WERE GIVEN IN EARLIER YEARS AND THE SAME WAS ACCEPT ED U/S. 143(3) OF THE ACT IN THOSE YEARS. NO DISALLOWANCE WAS MADE IN THOSE YEARS. AS THE ASSES SEE DOES NOT OWN ANY OFFICE SPACE AT JAIPUR AND REQUIRES OFFICE SPACE FOR BUSINESS PURPOSES, IT HAS ADVANCED A SUM OF RS.17 LACS TO ADITYA PROPCON (P) LTD. DURING THE YEAR. WE FIND THAT THE SE AMOUNTS ARE ADVANCED OUT OF ITS OWN FUND 9 ITA 517-627/K/2010 BHORUKA INV. LTD.. A.Y.06-07 AND ONCE THIS IS THE POSITION, NO DISALLOWANCE ON A CCOUNT OF INTEREST ON PRO RATA BASIS CAN BE MADE. WE UPHOLD THE ORDER OF CIT(A) AND THIS ISSUE OF REVENUES APPEAL IS DISMISSED. 13. IN THE RESULT, THE APPEAL OF THE ASSESSEE PARTL Y ALLOWED AND THAT OF THE REVENUE IS DISMISSED. 14. ORDER PRONOUNCED IN OPEN COURT ON 23.09.2011. SD/- SD/- . . , ! ' '' ' # # # # , ! (S. V. MEHROTRA) (MAHAVIR SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER ( / / / /) )) ) DATED : 23 RD SEPTEMBER, 2011 '01 %23 4' JD.(SR.P.S.) . 5 ,6 76'8- COPY OF THE ORDER FORWARDED TO: 1 . *+ / APPELLANT DCIT, CIRCLE-10, KOLKATA 2 ,-*+ / RESPONDENT, M/S. BHORUKA INVESTMENT LTD., P-10, N EW CIT ROAD, KOLKATA-73. 3 . .% ( )/ THE CIT(A), KOLKATA 4. .% / CIT, KOLKATA 5 . '> ,% / DR, KOLKATA BENCHES, KOLKATA -6 ,/ TRUE COPY, .%?/ BY ORDER, #3 /ASSTT. REGISTRAR .