DCIT, New Delhi V. M/s. Dreamland Buildtech (P) Ltd., New Delhi

ITA 5492/DEL/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 91089 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 6 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-05-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 25-03-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 30-10-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANTOSH K AGGARWAL
• Assessee Lawyers: PARWINDER KAUR
• Keywords: Capital asset; Business income; Earning of tax free income; Question of law; Speculation loss
• Section: 143(3); 14A

Judgement Text

ITA 4562/DEL/2012 AY: 2008 - 09 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH `B NEW DELHI BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER I.T.A.NO.4562/DEL/2012 ASSTT.YEAR: 2008 - 09 DREAMLAND BUILDTECH PVT. LTD., VS ACIT, 910, ANSAL BHAWAN, CIRCLE 10(1), KASTURBA GANDHI MARG, NEW DELHI. NEW DELHI. I.T.A.NO.5492/DEL/2012 ASSTT.YEAR: 2008 - 09 DCIT, VS DREAMLAND BUILDTECH PVT. LTD., CENTRAL CIRCLE - 14, NEW DELHI. NEW DELHI. (PAN: AACCD0809M) (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI SANTOSH K. AGGARWAL, ADV. RESPONDENT BY : SMT. PARWINDER KAUR, SR. DR DATE OF HEARING: 25.03.2015 DATE OF PRONOUNCEMENT: 2 9 .05.2015 O R D E R PER CHANDRA MOHAN GARG, JUDICIAL MEMBER THE SE APPEALS BY THE REVENUE AND THE ASSESSEE HAVE BEEN PREFERRED AGAINST THE ONE ORDER OF CIT(A) - XIII, NEW DELHI DATED 16.6.2012 IN APPEAL NO. 225/10 - 11 FOR AY 2008 - 09. ITA 4562/DEL/2012 AY: 2008 - 09 2 2. GROUND NO. 1, 5 TO 8 OF THE ASSESSEE ARE GENERAL IN NATURE WHICH NEED NO ADJUDICATION. REMAINING GROUNDS FOR ADJUDICATION IN ITA NO. 4562/DEL/12 READ AS UNDER: - 2. THAT THE COMMISSIONER (APPEALS) ERRED IN HOLDING THAT THE GAIN OF RS.64,09 ,978/ - OUT OF THE TOTAL SHORT TERM CAPITAL GAIN FROM SALES OF SHARES WAS BUSINESS PROFIT; 2.1 THAT THE COMMISSIONER (APPEALS) ERRED IN HOLDING THAT THE GAINS ON THE SHARES SO LD WITHIN THE PERIODS OF 30 DAYS OF THEIR ACQUISITIONS WERE BUSINESS PROFITS INSTEAD OF SHORT TERM CAPITAL GAINS; 3. THAT THE COMMISSIONER (APPEALS) ERRED IN CONFIRMING THE DISALLOWANCE OF EXPENDITURE OF RS.L,65,196/ - UNDER SECTION 14A OF THE ACT; 3.1 THAT THE COMMISSIONER (APPEALS) FAILED TO APPRECIATE THAT NO EXPENDITURE WAS INCURRED FOR THE DIVIDEND INCOME EARNED AND AS SUCH NO EXPENDITURE WAS TO BE DEDUCTED UNDER THE SAID PROVISIONS; 3.2 THAT THE COMMISSIONER (APPEALS) FAILED TO APPRECIATE THAT TH E ENTIRE EXPENDITURE WAS INCURRED BY THE APPELLANT FOR THE PURPOSES OF ITS BUSINESS; 3.3 THAT THE COMMISSIONER (APPEALS) FAILED TO APPRECIATE THAT THE ASSESSING OFFICER ERRED IN APPLYING THE FORMULA LAID DOWN IN THE RULE 8D OF THE RULES WITHOUT RECORDIN G AS TO WHY THE CLAIM OF THE APPELLANT THAT NO EXPENDITURE WAS INCURRED FOR THE DIVIDEND INCOME WAS INCORRECT; 3.4 THAT THE COMMISSIONER (APPEALS) FAILED TO APPRECIATE THAT THE ASSESSING OFFICER ERRED IN CALCULATING THE DISALLOWANCE UNDER RULE 8D OF THE RULES AT RS.16,40,609/ - ; 3.5 THAT THE DISALLOWANCE OF RS. 1,65, 196/ - UNDER SECTION L4A OF THE ACT IS EXCESSIVE AND UNREASONABLE; 4. THAT THE LOSS OF RS.66,59,311/ - ON SALES OF SHARES DURING THE YEAR WAS ALSO BUSINESS LOSS AND WAS TO DEDUCTED FROM THE TO TAL INCOME FROM BUSINESS; ITA 4562/DEL/2012 AY: 2008 - 09 3 3. THE SOLE GROUND RAISED BY THE REVENUE IN ITA NO. 5492/D/12 READS AS UNDER: - 1. ON THE FACT AND IN THE CIRCUMSTANCES OF THE CAS E , THE CIT(A) HAS ERRED IN DIRECTING THE AO TO TREAT THE INCOME OF RS.1,10,92,223/ - AS SHORT TERM CAPITAL GAIN INSTEAD OF BUSINESS INCOME, AS HELD BY THE AO IN ASSESSMENT ORDER PASSED U/S 143(3) OF THE INCOME TAX ACT, 1961. GROUND NO. 2 AND 2.1 OF THE ASSESSEE AND GROUND NO. 1 OF THE REVENUE 4. APROPOS THESE GROUNDS, WE HAVE HEARD ARGUMENTS OF BOTH THE SIDES AND CAREFULLY PERUSED THE RELEVANT MATERIAL PLACED ON RECORD. AT THE VERY OUTSET, LD. COUNSEL OF THE ASSESSEE HAS DRAWN OUR ATTENTION TOWARDS ORDE R DATED 12.12.2014 OF ITAT DELHI B BENCH IN ASSESSEE S OWN CASE IN ITA NO. 2596/D/2010 AND ITA NO. 3115/D/2010 BOTH FOR 2006 - 07 AND OTHER APPEALS AND SUBMITTED THAT THE ISSUE S INVOLVED IN THESE GROUNDS ARE SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY TH E DECISION OF THE TRIBUNAL (SUPRA). LD. COUNSEL TOOK US THROUGH PARA 4 TO 8.5 OF THE ORDER OF THE TRIBUNAL AND SUBMITTED THAT IN THE SIMILAR SET OF FACTS AND CIRCUMSTANCES ON SIMILAR ISSUE, THE TRIBUNAL IN THE ORDER DATED 12.12.14 (SUPRA) FOR AY 2006 - 07 H AS HELD THAT THE BIFURCATION OF THE SHORT TERM CAPITAL GAIN AND TREATING THE TRANSACTION AS INVESTMENT IN THE COMPANY WHERE THE HOLDING PERIOD OF MORE THAN 30 DAYS AS BUSINESS TRANSACTION AND IN THE CASE WHERE THE HOLDING PERIOD IS LESS THAN 30 DAYS IS NOT JUSTIFIED ON THE PART OF THE REVENUE. FURTHER PLACING RELIANCE ON THE RATIO OF THE ORDER OF ITAT MUMBAI H BENCH IN THE CASE OF HITESH CHANDER JOSHI VS JCIT (SU P R A), LD. COUNSEL FURTHER ITA 4562/DEL/2012 AY: 2008 - 09 4 SUBMITTED THAT THERE CANNOT BE A SINGLE CRITERIA FOR JUDGING THE TRAN SACTION AS CAPITAL ASSET OR TRADIN G ASSET AND THE HOLDING PERIOD A S ADOPTED BY THE CIT(A) AS A SOLE CRITERIA FOR BIFURCATION OF TRANSACTION RELATED TO SHORT TERM CAPITAL GAIN IS NEITHER PROPER NOR JUSTIFIED. LD. DR FAIRLY ACCEPTED THE ISSUE HAS BEEN DECID ED IN FAVOUR OF THE ASSESSEE BY THE TRIBUNAL ORDER DATED 12.12.14 (SUPRA) FOR AY 2006 - 07. 5. WE MAY POINT OUT THAT IN THE SIMILAR SET OF FACTS AND CIRCUMSTANCES , AFTER CONSIDERING THE CONTENTIONS PLACED IN PARA 8.1 OF THE TRIBUNAL ORDER (SUPRA), THE TRIBUNAL IN ASSESSEE S OWN CASE FOR AY 2006 - 07 (SUPRA) HAS CATEGORICALLY HELD AS UNDER: 4. THE LD. COUNSEL FOR THE ASSESSEE MR. AJAY VOHRA REPEATED THE ARGUMENTS RAISED BY THE ASSESSEE BEFORE THE LD.CIT(A). HE SUPPORTED THE ORDER OF THE LD.CIT(A) TO THE E XTENT THE LD.CIT(A) ACCEPTED THE CONTENTIONS OF THE ASSESSEE. ON THE FINDING OF THE LD.CIT(A) THAT WHEREVER THE HOLDING PERIOD OF SHARES IS LESS THAN 30 DAYS, IT SHOULD BE HELD THAT THE INCOME ARISING FROM SUCH SHARES IF BUSINESS INCOME, THE LD.COUNSEL ARG UED THAT THIS IS AN ARTIFICIAL SEGREGATION, WHICH IS NOT SUPPORTED BY ANY PRECEDENT OR PROPOSITION OF LAW. HE REFERRED TO PAGE 37 OF THE LD.CIT(A) S ORDER AND POINTED OUT THAT CERTAIN SHARES SOLD, WERE FROM OUT OF INVESTMENT MADE DURING THE PREVIOUS YEAR A ND WHICH WERE OPENING BALANCES OF THE CURRENT YEAR. HE CONTENDED THAT THERE WERE NO BORROWED FUNDS AND THE ASSESSEE HAD NO INFRASTRUCTURE WHATSOEVER TO CARRY OUT ANY TRADING ACTIVITY. HE POINTED OUT THAT THE ASSESSEE HAD PAID SECURITY TRANSACTIONS TAX AND HAD NOT CLAIMED ANY DEDUCTION FOR THE SAME. LD.COUNSEL POINTED OUT THAT TRADING IN SHARES, IS NOT AN OBJECT OF THE COMPANY AND THAT THE SHARES HELD WERE DISCLOSED AS INVESTMENTS IN THE BALANCE SHEET OF THE COMPANY. HE RELIED ON THE DECISION OF MUMBAI H BENCH OF THE TRIBUNAL IN ITA 6497/MUM/2009 AND ITA 6603/MUM/2009 AND OTHER CASES AND SPECIFICALLY AT PARA 9 FOR THE PROPOSITION THAT SUCH ARTIFICIAL SEGREGATION IS NOT CONTEMPLATED EITHER UNDER THE STATUTE OR ANY CIRCULAR/INSTRUCTIONS OR JUDICIAL PRONOUNC EMENTS. HE RELIED ON THE FOLLOWING CASE LAWS. * CIT VS. ROHIT ITA 1135/2010 JUDGEMENT DT. 16.8.2010 (DEL) * NIRMAL KUMAR JAIN ITA 3562 AND 2729/DEL/09 ORDER DT. 29.1.2010 ITA 4562/DEL/2012 AY: 2008 - 09 5 * CIT VS. GOPAL PUROHIT (BOM) * SARNATH INFRASTRUCTURE 313 ITR CAT (13) (LUCKN OW) 5. MR.SUNIL BAJPAI, THE LD.CIT, D.R. ALONG WITH SMT.PARWINDER KAUR, SR.D.R. SUBMITTED THAT THE ASSESSEE HAS BEEN FREQUENTLY AND REGULARLY CONDUCTING SHARE TRANSACTIONS DURING THE YEAR. THEY ARGUED THAT THE ASSESSEE WAS DOING SYSTEMATIC ACTIVITY OF T RADING IN SHARES AND THAT HUGE VOLUMES OF TRANSACTIONS WERE DONE, WHETHER THE PERIOD OF HOLDING WAS LESS THAN ONE MONTH. HE REFERRED TO THE OVERALL PERIOD OF HOLDING AND ARGUED THAT THE HOLDING PERIOD WAS SO SHORT THAT IT CANNOT BE CLAIMED THAT THE ASSES SEE COULD HAVE EARNED THE DIVIDEND. THEY POINTED OUT THAT THE ASSESSEE WAS IN FACT INDULGING IN SPECULATION OF SHARES AND HAD DISCLOSED CERTAIN SPECULATION LOSSES. THE LD.SR.D.R. VEHEMENTLY CONTENDED THAT ON ONE HAND ASSESSEE SUBMITS THAT IT IS NOT AUTHO RISED UNDER THE MOA AND AOA TO DO BUSINESS IN SHARES AND ON THE OTHER HAND DOES SPECULATION BUSINESS AND DISCLOSES SPECULATION LOSSES AND THAT A CONTRARY ARGUMENT IS RAISED THAT THE ENTIRE HOLDING OF SHARES IS INVESTMENT. THEY RELIED ON THE FINDING OF THE AO. 6. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND PERUSAL OF PAPERS ON RECORD AND ORDERS OF THE AUTHORITIES BELOW, CASE LAWS CITED, WE HOLD AS FOLLOWS. 7. THE ISSUE WHETHER A PARTICULAR TRANSAC TIONS RESULTS IN BUSINESS INCOME OR A CAPITAL GAIN IS A QUESTION OF INTENTION OF THE ASSESSEE AND MANY OTHER FACTORS HAVE TO BE ANALYSED BEFORE COMING TO A CONCLUSION. NO SINGLE FACTOR OR ASPECT CAN BE TAKEN AS A DETERMINING FACTOR. BEFORE WE CONSIDER T HE LEGAL PROPOSITIONS, WE RECORD THE FACTS OF THIS CASE FOR THE AY 2006 - 07 HEREIN BELOW. 1 . THE ASSESSEE OBJECTS IS TO CARRY ON THE BUSINESS AS REAL ESTATE DEVELOPERS. AS THE COMPANY WAS NOT ABLE TO START ITS BUSINESS, INVESTMENTS WERE MADE IN VARIOUS SHARES AND SECURITIES. 2 . THE BOARD OF DIRECTORS AT ITS MEETING ON 26.12.2004 AND 25.3.2005 RESOLVED TO ACQUIRE AND HOLD SHARES OUT OF SURPLUS FUNDS AS PART OF ITS INVESTMENT PORTFOLIO. 3 . THE SHARES AND SECURITIES ACQUIRED ARE CLASSIFIED AS INVESTMENTS IN THE BALANCE SHEET AND WERE VALUED AT COST ONLY. 4 . THERE WERE NO BORROWED FUNDS OUT OF WHICH THE SHARES/SECURITIES WERE PURCHASED. THE PURCHASES WERE MADE OUT OF OWN FUNDS. 5 . IN AN ORDER PASSED U/S 143(3) OF THE ACT FOR THE AY 2005 - 06 SIMILAR PROFITS/GAINS DECLAR ED UNDER THE HEAD CAPITAL GAINS ARE ACCEPTED BY THE DEPARTMENT AS SUCH. 6 . SOME OF THE SHARES SOLD WERE ACQUIRED DURING THE PRECEDING F.Y., WHEREIN IT WAS CLASSIFIED AS INVESTMENTS AND ACCEPTED AS SUCH. ITA 4562/DEL/2012 AY: 2008 - 09 6 7 . THE SHORT TERM CAPITAL GAINS OF RS.1,75,51,496/ - WAS EAR NED OUT OF 41 SHARES/SECURITIES AND THUS CAN BE CLASSIFIED AS FOLLOWS. I . RS.1,01,92,939 ON SHARES HELD FOR MORE THAN 90 DAYS; II . RS.19,03,596/ - FOR SHARES HELD BETWEEN 61 TO 90 DAYS AND RS.18,45,019/ - FOR SHARES HELD BETWEEN 31 TO 60 DAYS AND RS.36,09,941/ - FOR SHARES HELD BELOW A PERIOD OF 30 DAYS. 8 . THE FINDING OF THE AO THAT THE HOLDING PERIOD OF MAJORITY OF THE SHARES BY THE ASSESSEE WAS BETWEEN 10 DAYS TO 01 MONTH IS FACTUALLY INCORRECT. 8. WE NOW DISCUSS THE CASE LAWS ON THE SUBJECT. IN THE CASE OF G.VENKATESWAMI NAIDU AND CO. VS. CIT : 35 ITR 594 (SC), THE SUPREME COURT HELD AS UNDER: IF A PERSON INVESTS MONEY IN LAND INTENDING TO HOLD IT, ENJOYS ITS INCOME FOR SOME TIME, AND THEN SELLS IT AT A PROFIT, IT WOULD BE A CLEAR CASE OF CA PITAL ACCRETION AND NOT PROFIT DERIVED FROM AN ADVENTURE IN THE NATURE OF TRADE. IN DECIDING THE CHARACTER OF SUCH TRANSACTIONS SEVERAL FACTORS ARE RELEVANT. WHETHER THE PURCHASER WAS A TRADER AND THE PURCHASE OF THE COMMODITY AND ITS RESALE WERE ALLIED TO - HIS USUAL TRADE OR BUSINESS OR INCIDENTAL TO IT? .... WHAT IS THE NATURE AND QUANTITY OF THE COMMODITY PURCHASED AND RESOLD? ... . DID THE PURCHASER BY ANY ACT SUBSEQUENT TO THE PURCHASE IMPROVE THE QUALITY OF COMMODITY PURCHASED AND THEREBY MAKE IT MORE READILY RESALEABLE? ... WHERE THEY (ACTS OF PURCHASE OR SALE) SIMILAR OPERATIONS USUALLY ASSOCIATED WITH TRADE OR BUSINESS? . . . ARE THE TRANSACTIONS OF PURCHASE AND SALE REPEATED' IN REGARD TO THE PURCHASE OF THE COMMODITY AND ITS SUBSEQUENT POSSESSION BY THE PURCHASERS, DOES NOT ELEMENT OF PRIDE OF POSSESSION COME INTO THE PICTURE. A PERSON MAY PURCHASE A PIECE OF ART, HOLD IT FOR SOME TIME AND IF A PROFITABLE OFFER IS RECEIVED SELL IT. DURING THE TIME THAT THE PURCHASER HAD ITS POSSESSION HE MAY BE ABL E TO CLAIM PRIDE OF POSSESSION AND AESTHETIC SATISFACTION; AND IF SUCH A CLAIM IS UPHELD THAT WOULD BE A FACTOR AGAINST THE TRANSACTION BEING IN THE NATURE OF TRADE ..... THE PRESENCE OF ALL THESE RELEVANT FACTORS MAY HELP THE COURT TO DRAW AN INFERENCE TH AT A TRANSACTION IS IN THE NATURE OF TRADE; BUT IT IS NOT A MATTER OF MERELY COUNTING THE NUMBER OF FACTS AND CIRCUMSTANCES PRO AND CON; WHAT IS IMPORTANT TO CONSIDER IS THEIR DISTINCTIVE CHARACTER. IN EACH CASE, IT IS THE TOTAL EFFECT OF ALL RELEVANT FACT ORS AND CIRCUMSTANCES THAT DETERMINES THE CHARACTER OF THE TRANSACTION. . .. . .. WHERE THE PURCHASE HAS BEEN MADE SOLELY AND EXCLUSIVELY WITH THE INTENTION TO RESELL AT A PROFIT AND THE PURCHASER HAS NO INTENTION OF HOLDING THE PROPERTY FOR HIMSELF OR OTHERWISE ENJOYING OR USING IT .... THE PRESENCE OF SUCH AN INTENTION IS NO DOUBT, A RELEVANT FACTOR AND UNLESS IT IS OFFSET BY THE PRESENCE OF OTHER FACTORS, IT WOULD RAISE A STRONG PRESUMPTION THAT THE TRANSACTION IS AN ADVENTURE IN THE NATURE OF TRADE. EVEN SO, THE PRESUMPTION IS NOT CONCLUSIVE; AND IT IS CONCEIVABLE THAT, ON CONSIDERING ALL THE FACTS AND CIRCUMSTANCES IN THE CASE, THE COURT MAY, DESPITE THE SAID - ITA 4562/DEL/2012 AY: 2008 - 09 7 INITIAL INTENTION, BE INCLINED TO HOLD THAT THE TRANSACTION WAS NOT AN ADVENTURE IN THE NAT URE OF TRADE'.' (EMPHASIS SUPPLIED) THE APEX COURT IN THE CASE OF SUTLEJ COTTON MILLS SUPPLY AGENCY LTD: 100 ITR 706 (SC) OBSERVED AS FOLLOWS: ..... WHERE THE PURCHASE OF ANY ARTICLE OR OF ANY CAPITAL INVESTMENT, FOR IN STANCE, SHARES, IS MADE WITHOUT THE INTENTION TO RESELL AT A PROFIT, A RESALE UNDER CHANGED CIRCUMSTANCES WOULD ONLY BE A REALISATION OF CAPITAL AND WOULD NOT STAMP THE TRANSACTION WITH A BUSINESS CHARACTER. WHERE A PURCHASE IS MADE WITH THE INTENTION OF RESALE, IT DEPENDS UPON THE COND UCT OF THE ASSESSEE AND THE CIRCUMSTANCES OF THE CASE WHETHER THE VENTURE IS ON CAPITAL ACCOUNT OR IN THE NATURE OF TRADE. A TRANSACTION I S NOT NECESSARILY IN THE NATURE OF TRADE BECAUSE THE PURCHASE WAS MADE WITH THE INTENTION OF RESALE. A CAPITAL INVESTM ENT AND RESALE DO NOT LOSE THEIR CAPITAL NATURE MEREL Y BECAUSE THE RESALE WAS FORESEEN AND CONTEMPLATED WHEN THE INVESTMENT WAS MADE AND THE POSSIBILITY OF ENHANCED VALUES MOTIVATED THE INVESTMENT. (EMPHASIS SUPPLIED) IN COMMISSIONER OF INLAND REVENUE V. FRASER: [1942] 24 TC 498,502 LORD NORMAND SAID: 'THE INDIVIDUAL WHO ENTERS INTO A PURCHASE OF AN ARTICLE OR COMMODITY MAY HAVE IN VIEW THE RESALE OF IT AT A PROFIT, AND YET IT MAY BE THAT THAT IS NOT THE ONLY PURPOSE FOR WHICH HE PURCHASED THE ARTICL E OR THE COMMODITY, NOR THE ONLY PURPOSE TO WHICH HE MIGHT TURN IT IF FAVOURABLE OPPORTUNITY FOR SALE DOES NOT OCCUR ... AN AMATEUR MAY PURCHASE A PICTURE WITH A VIEW TO ITS RESALE AT A PROFIT, AND YET HE MAY RECOGNISE AT THE TIME OR AFTERWARDS THAT THE PO SSESSION OF THE PICTURE WILL GIVE HIM AESTHETIC ENJOYMENT IF HE IS UNABLE ULTIMATELY, OR AT HIS CHOSEN TIME, TO REALISE IT AT A PROFIT. ... ' AN ACCRETION TO CAPITAL DOES NOT BECOME INCOME MERELY BECAUSE THE ORIGINAL CAPITAL WAS INVESTED IN THE HOPE AND E XPECTATION THAT IT WOULD RI SE IN VALUE; IF IT DOES SO RISE, ITS REALIZATION DOES NOT MAKE IT INCOME. LORD DUNEDIN SAID IN L EEMING V. JONES AT PAGE 360: 'THE FACT THAT A MAN DOES NOT MEAN TO HOLD AN INVESTMENT MAY BE AN ITEM OF EVIDENCE TENDING TO SHOW WHETHER HE IS CARRYING ON A TRADE OR CONCERN IN THE NATURE OF TRADE IN RESPECT OF HIS INVESTMENTS BUT PER SE IT LEADS TO NO CONCLUSION WHATEVER.' IN THE CASE OF RAJA BAHADUR KAMAKHYA NARAIN SINGH VS. CIT: 77 ITR 253 (SC) THE SUPREME COURT OBSERVED AS UNDER: 'SINCE THE EXPRESSION 'ADVENTURE IN THE NATURE OF TRADE' IMPLIE S THE EXISTENCE OF CERTAIN ELEMENTS IN THE TRA NSACTIONS WHICH IN LAW WOULD INVEST THEM WITH THE CHARACTER OF TRADE OR BUSINESS AND THE QUESTION ITA 4562/DEL/2012 AY: 2008 - 09 8 ON THAT ACCOUNT BECOMES A MIXED QUESTION OF LAW AND FACT, THE COURT CAN REVIEW THE TRIBUNAL'S FINDING IF IT HAS MISDIRECTED ITSELF IN LAW. IT IS FAIRLY CLEAR THAT WHERE A PERSON IN SELLING HIS INVE STMENT REALISES AN ENHANCED PRICE, THE EXCESS OVER HIS PURCHASE PRICE IS NOT PROFIT ASSESSABLE TO TAX. BUT IT WOULD BE SO, IF WHAT IS DONE IS NOT A MERE REALISATION OF THE INVESTMENT BUT AN ACT DONE FOR MAKING PROFITS. THE DISTINCTION BETWEEN THE TWO TYPES OF TRANSACTIONS IS NOT ALWAYS EASY TO MAKE. WHETHER THE TRANSACTION IS OF ONE KIND OR THE OTHER DEPENDS ON THE QUESTION WHETHER THE EXCESS WAS AN ENHANCEMENT OF THE VALUE BY REALISING A SECURITY OR GAIN IN AN OPERATION OF PROFIT - MAKING. IF THE TRANSACTION IS IN THE ORDINARY LINE OF THE ASSESSEE'S BUSINESS, THERE WOULD HARDLY BE ANY DIFFICULTY IN CONCLUDING THAT IT WAS A TRADING TRANSACTION, BUT WHERE IT IS NOT, THE FACTS MUST BE PROPERLY ASSESSED TO DISCOVER WHETHER IT WAS IN THE NATURE OF TRADE. THE SURPL US REALISED ON THE SALE OF SHARES, FOR INSTANCE, WOULD BE CAPITAL IF THE ASSESSEE IS AN ORDINARY INVESTOR REALISING HIS HOLDING; BUT IT WOULD BE REVENUE IF HE DEALS WITH THEM AS AN ADVENTURE IN THE NATURE OF TRADE. THE FACT THAT THE ORIGINAL PURCHASE WAS M ADE WITH THE INTENTION OF RESELL IF AN ENHANCED PRICE COULD BE OBTAINED IS BY ITSELF NOT ENOUGH BUT IN CONJUNCTION WITH THE CONDUCT OF THE ASSESSEE AND OTHER CIRCUMSTANCES IT MAY POINT TO THE TRADING CHARACTER OF THE TRANSACTION. FOR INSTANCE, AN ASSESSEE MAY INVEST HIS CAPITAL IN SHARES WITH THE INTENTION TO RESELL THEM IF IN FUTURE THEIR SALE MAY BRING IN A HIGHER PRICE. SUCH AN INVESTMENT, THOUGH MOTIVATED BY A POSSIBILITY OF ENHANCED VALUE, DOES NOT RENDER THE INVESTMENT A TRANSACTION IN THE NATURE OF T RADE. THE TEST OFTEN APPLIED IS, HAS THE ASSESSEE MADE HIS SHARES AND SECURITIES THE STOCK - IN - TRADE OF A BUSINESS ..... ' (EMPHASIS SUPPLIED) IN THE CASE OF KARAM CHAND THAPAR & BROS. (P) LTD. REPORTED IN 82 ITR 899 THE HON BLE SUPREME COURT HELD AS FOLLOWS. ..................... THE TRIBUNAL ALSO RELIED ON THE CIRCUMSTANCE THAT THE ASSESSEE WAS SHOWING THESE SHARES AS INVESTMENT SHARES IN ITS BOOKS AS WELL AS IN THE BALANCE SHEET. IT IS TRUE THAT CIRCUMSTANCE BY ITSELF IS NOT A CONCLUSIVE CIRCUMSTA NCE. IT CANNOT BE DENIED THAT THAT IS A RELEVANT CIRCUMSTANCE ON WHICH THE TRIBUNAL COULD HAVE RELIED FOR DRAWING THE INFERENCE IT DID. THE EXPLANATION THAT IT HAD TO DO SO BECAUSE OF THE PROVISIONS OF THE COMPANY LAW IS UNFOUNDED. (EMPHASIS SUPPLIED). THE LUCKNOW BENCH OF THE ITAT IN THE CASE OF SARNATH INFRASTRUCTURE P.LTD. VS. ACIT, 313 ITR (AT) 13 (LUCKNOW) HELD AS FOLLOWS. 13. AFTER CONSIDERING THE ABOVE RULINGS, WE CULL OUT THE FOLLOWING PRINCIPLE WHICH CAN BE APPLIED ON THE FACTS OF A CASE TO FIND OUT WHETHER TRANSACTIONS IN QUESTION ARE IN THE NATURE OF TRADE OR ARE MERELY FOR INVESTMENT PURPOSES: ( I ) WHAT IS THE INTENTION OF THE ASSESSEE AT THE TIME OF PURCHASE OF SHARES (OR ANY OTHER ITEM). THIS CAN BE FOUND OUT FROM THE ITA 4562/DEL/2012 AY: 2008 - 09 9 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 SEPARATELY AS INVESTMENT OR NON - TRADING ASSET. ( II ) WHETHER THE ASSESSEE HAS BORROWED MONEY TO PURCHASE AND PAY INTE REST THEREON? NORMALLY, MONEY IS BORROWED TO PURCHASE GOODS FOR THE PURPOSE OF TRADE AND NOT FOR INVESTING IN AN ASSET FOR RETAINING. ( III ) WHAT IS THE FREQUENCY OF SUCH PURCHASES AND DISPOSAL IN THAT PARTICULAR ITEM? IF PURCHASE AND SALE ARE FREQUENT, OR THER E ARE SUBSTANTIAL TRANSACTIONS IN THAT ITEM, IT WOULD INDICATE TRADE. HABITUAL DEALING IN THAT PARTICULAR ITEM IS INDICATIVE OF INTENTION OF TRADE. SIMILARLY, RATIO BETWEEN THE PURCHASES AND SALES AND THE HOLDINGS MAY SHOW WHETHER THE ASSESSEE IS TRADIN G OR INVESTING (HIGH TRANSACTIONS AND LOW HOLDINGS INDICATE TRADE WHEREAS LOW TRANSACTIONS AND HIGH HOLDINGS INDICATE INVESTMENT). ( IV ) WHETHER PURCHASE AND SALE IS FOR REALISING PROFIT OR PURCHASES ARE MADE FOR RETENTION AND APPRECIATION 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 PURCHASE OF SHARES. A COMMERCIAL MOTIVE IS AN ESSENTIAL INGREDIENT OF TRADE. ( V ) HOW THE VALUE OF THE ITEMS HAS BEEN TAKEN IN THE BALANCE SHEET? IF THE ITEMS IN QUESTION ARE VALUED AT COST, IT WOULD INDICATE THAT THEY ARE INVESTMENTS OR WHERE THEY ARE VALUED AT COST OR MARKET VALUE OR NET REALISABLE VALUE (WHICHEVER IS LESS), IT WILL INDICATE THAT IT EMS IN QUESTION ARE TREATED AS STOCK IN TRADE. ( VI ) HOW THE COMPANY IS AUTHORISED IN MOA/AOA? WHETHER FOR TRADE OR FOR INVESTMENT? IF AUTHORISED ONLY FOR TRADE, THEN WHETHER THERE ARE SEPARATE RESOLUTIONS OF THE BOARD OF DIRECTORS TO CARRY OUT INVESTMENTS IN THAT COMMODITY AND VICE VERSA. ( VII ) IT IS FOR THE ASSESSEE TO ADDUCE EVIDENCE TO SHOW THAT HIS HOLDING IS FOR INVESTMENT OR FOR TRADING AND WHAT DISTINCTION HE HAS KEPT IN THE RECORDS OR OTHERWISE, BETWEEN TWO TYPES OF HOLDINGS. IF THE ASSESSEE IS ABLE TO DIS CHARGE THE PRIMARY ONUS AND COULD PRIMA FACIE SHOW THAT PARTICULAR ITEM IS HELD AS INVESTMENT (OR SAY, STOCK IN TRADE) THEN ONUS WOULD SHIFT TO THE REVENUE TO PROVE THAT APPARENT IS NOT REAL. ( VIII ) THE MERE FACT OF CREDIT OF SALE PROCEEDS OF SHARES(OR FOR THAT MATTER 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 THE ASSESSEE WAS HOLDING THE SHARES (OR THE ITEMS IN QUESTION) FOR INVESTMENT. ( IX ) ONE HAS TO FIND OUT WHAT A RE THE LEGAL REQUISITES FOR DEALING AS A TRADER IN THE ITEMS IN QUESTION AND WHETHER THE ASSESSEE IS COMPLYING WITH THEM. WHETHER IT IS THE ARGUMENT OF THE ASSESSEE THAT IT IS VIOLATING THESE LEGAL REQUIREMENTS, IF IT IS CLAIMED THAT IT IS DEALING AS A TR ADER IN THAT ITEM? WHETHER IT HAD SUCH AN ITA 4562/DEL/2012 AY: 2008 - 09 10 INTENTION TO CARRY ON ILLEGAL BUSINESS IN THAT ITEM SINCE BEGINNING OR WHEN PURCHASES WERE MADE? ( X ) IT IS PERMISSIBLE AS PER CBDT CIRCULAR NO.4 OF 2007 OF JUNE 15, 2007 THAT AN ASSESSEE CAN HAVE BOTH PORTFOLIOS, ONE F OR TRADING AND OTHER FOR INVESTMENT PROVIDED IT IS MAINTAINING SEPARATE ACCOUNT FOR EACH TYPE, THERE ARE DISTINCTIVE FEATURES FOR BOTH AND THERE IS NO INTERMINGLING OF HOLDINGS IN THE TWO PORTFOLIOS. ( XI ) NOR ONE OR TWO FACTORS OUT OF THE ABOVE ALONE WILL BE SU FFICIENT TO COME TO A DEFINITE CONCLUSION BUT THE CUMULATIVE EFFECT OF SEVERAL FACTORS HAS TO BE SEEN. THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. ROHIT ANAND, ITA NO. 1135/2010 DT. 16.8.2010 UPHELD THE FINDING OF THE TRIBUNAL IN THE FOLLOWING WORDS. 3. HOWEVER, UPON A PERUSAL OF THE IMPUGNED ORDER, WE ARE OF THE OPINION THAT NO SUBSTANTIAL QUESTION OF LAW ARISES IN THE PRESENT PROCEEDINGS INASMUCH AS BOTH THE COMMISSIONER OF INCOME TAX (APPEALS) AND THE TRIBUNAL HAVE GIVEN COGENT REASONS IN ARRIVING AT THE CONCLUSION THAT THE RESPONDENT - ASSESSEE WAS NOT - A - TRADER IN STOCK BUT ONLY A INVESTOR AND FURTHER HIS INCOME ON SALE OF SHARES WAS NOT BUSINESS INCOME. IN FACT, THE TRIBUNAL IN ITS IMPUGNED ORDER HAS OBSERVED AS UNDER. - '9. WE HAVE CAREFULLY CONSIDERED THE RELEVANT FACTS AND THE FINDINGS OF BOTH THE AUTHORITIES BELOW. THE ASSESSEE IN HIS INDIVIDUAL CARRIES ON BUSINESS OF JEWELLERY. APART FROM SAID BUSINESS, THE ASSESSEE INVESTED IN SHARES AND TREATS SHARES AS INVESTMENT IN HIS BOOKS OF ACCOUNT. THIS ITSELF MANIFEST THE INTENTION OF THE ASSESSEE AS TO WHETHER HE PROPOSED INTO DEALING IN SHARES OR EARN DIVIDEND AND PROFIT OUT OF SUCH INVESTMENT. THE ASSESSING OFFICER WAS GUIDED MORE BECAUSE OF THE TOTAL AMOUNT INVOLVED RATHER THA N THE ACTUAL INTENTION AND THE WAY OF CARRYING ON SHARE TRANSACTION. THERE IS NO DOUBT THAT EVEN A SINGLE TRANSACTION CAN BE IN THE NATURE OF TRADE BUT THE ASSESSEE HAS DEMONSTRATED THAT HIS. INTENTION WAS NEVER TO TRADE IN SHARES. THE INTENTION IS MANIFES TED BY TREATMENT GIVEN TO SUCH INVESTMENT THAT THE INVESTMENT IS OUT OF OWN FUND AND NOT BORROWED THAT THE INVESTMENT IS NOT ROTATED FREQUENTLY, THAT THE TOTAL NUMBER OF TRANSACTIONS ARE VERY FEW, THAT ALL THE SHARES PURCHASED ARE NOT SOLD AND RATHER HEL D FOR QUITE NUMBER OF DAYS. IT IS TO BE NOTED THE INCOME TAX ACT ITSELF HAS PROVIDED THAT WHEN THE SHARES ARE HELD FOR A PERIOD OF ONE YEAR OR MORE WILL BE TREATED AS LONG TERM CAPITAL ASSET CONTRARY TO OTHER ASSETS WHERE THE HOLDING PERIOD TO TREAT SUCH ASSET A LONG TERM IS MORE THAN 36 MONTHS. THUS EVEN AFTER HOLDING THE SHARES FOR MORE THAN 12 MONTHS AND SHOWING SUCH INTENTION FROM THE CONDUCT, THE ASSESSING OFFICER CANNOT REPLACE HIS OPINION FOR THAT OF THE ASSESSEE IN HOLDING THAT THE SHARES ARE HELD AS STOCK IN TRADE AND PROFIT FROM WHICH IS TO BE ASSESSED AS BUSINESS INCOME. IN ALL SUCH CASES THE INTENTION IS MANIFESTED BY THE ASSESSEE HIMSELF BY HIS CONDUCT AND OTHER RELEVANT FACTORS AS CONSIDERED BY THE LEARNED CJT(A). IT IS ALSO SEEN THAT THE ITA 4562/DEL/2012 AY: 2008 - 09 11 SHA RES WERE TREATED AS INVESTMENT IN EARLIER YEAR AND WHICH FACT HAS BEEN ACCEPTED BY THE ASSESSING OFFICER. THE ASSESSEE HAS ALSO EARNED HUGE DIVIDEND INCOME FROM SUCH SHARES. THE ASSESSING OFFICER MERELY BECAUSE OF THE TOTAL VOLUME OF TRANSACTION IS SUBSTAN TIAL, IS GUIDED TO HOLD THE INCOME AS BUSINESS INCOME. HOWEVER, HE FAILED TO. RECOGNIZE THAT THE VOLUME OF TRANSACTION INCLUDES THE APPRECIATION IN SHARES ALSO AND SUCH APPRECIATION 'HAS BEEN OFFERED FOR TAX. IF VOLUME OF TRANSACTION IS THE CRITERIA, WHAT IS TO BE EXAMINED IS HOW FREQUENTLY THE TRANSACTION IS DONE, WHETHER THE TRANSACTION IS SETTLED IN THE COURSE OF THE DAY OF TRADING ITSELF OR IN THE SETTLEMENT PERIOD ITSELF SO AS TO AVOID PAYMENT OF FULL PURCHASE PRICE. HERE. THE ASSESSEE HAS BEEN HOLDING THE SHARES BY TAKING DELIVERY AND MAKING FULL PAYMENT FOR SUCH INVESTMENT. IN SUCH CIRCUMSTANCES, THE TRANSACTIONS ARE TO BE TREATED AS GIVING RISE TO THE CAPITAL GAIN AND CANNOT BE BRANDED AS TRADING OF MAKING INVESTMENT SO AS TO DETERMINE WHETHER THE TR ANSACTION WAS FOR DEALING IN SHARES OR MAKING INVESTMENT FOR EARNING DIVIDEND AND APPRECIATION FROM SUCH INVESTMENT. THE TOTAL NUMBER OF SHARES DEALT IN RESPECT OF LONG TERM PORTFOLIO IS ONLY 5. THIS CANNOT BE CONSIDERED AS VOLUME TRANSACTION. THEREFORE, T HIS TRANSACTION IN SHARES CANNOT BE SAID TO BE WITH INTENTION TO DEAL IN SUCH SHARES. RATHER THE TRANSACTION WERE WITH INTENTION OF EARNING APPRECIATION FROM SUCH SHARES. THEREFORE, THE SAME ARE ASSESSABLE AS CAPITAL GAIN AND NOT AS PROFITS AND GAINS OF BU SINESS. WE, THEREFORE, UPHOLD THE ORDERS OF THE LEARNED CIT(A) . 4. IN OUR OPINION, THE FACTUAL FINDINGS OF THE FINAL FACT FINDING AUTHORITY ARE NEITHER PERVERSE NOR CONTRARY TO RECORD. ACCORDINGLY, WE FIND THAT NO SUBSTANTIAL QUESTION OF LAW ARISES IN THE PRESENT APPEAL. 8.1. THE MAIN ARGUMENTS OF THE ASSESSEE HAVE BEEN SUMMARISED BY THE FIRST APPELLATE AUTHORITY AT PAGES 33 TO 35 OF HIS ORDER WHICH IS EXTRACTED FOR READY REFERENCE. I. THE ASSESSEE HAS BEEN INVESTING SURPLUS FUNDS IN SHARES SINCE AY 2005 - 06 AND THE FACT OF INVESTMENT IS SUPPORTED FROM AUDITED BALANCE SHEET FOR THE YEAR ENDING 31.3.2005. THE DETAILS OF INVESTMENT ARE GIVEN IN RESPECTIVE SCHEDULE TO THE BALANCE SHEET. II. IN THE PRECEDING YEAR, THERE WERE SALES OF SHARES AND SHARES WERE REFLECTED UNDER THE HEAD INVESTMENT IN THE RESPECTIVE BALANCE SHEET. THE SAME WAS ASSESSED BY THE AO U/S 143(3) AS CAPITAL GAIN ONLY. III. THE ENTIRE INVESTMENT IS OUT OF THE FUNDS OF ASSESSEE AND THERE IS NO CASE OF ANY LOAN OR USE OF BORROWED FUND S. IV. THE ASSESSEE HAS NOT PAID ANY INTEREST ON SUCH INVESTMENT. V. ALL THE SHARE TRANSACTION WHERE THROUGH DEMAT ACCOUNTS AND SUBJECTED TO SECURITY TRANSACTION TAX (STT). ITA 4562/DEL/2012 AY: 2008 - 09 12 VI. SEPARATE DETAILS WERE MAINTAINED AND PROFIT AND LOSS ACCOUNT WAS WORKED OUT ON THE BASIS OF SAME AND CORRECTNESS SUCH PROFIT/LOSS IS NOT IN DISPUTE. VII. THE ASSESSEE HAS EARNED DIVIDEND INCOME OF RS.10,01,322/ - . VIII. THE ASSESSEE HAS EARNED CAPITAL GAIN ON THE BASIS OF PERIOD OF HOLDING. IX. IN VIEW OF THE UNFAVOURABLE MARKET CONDITIONS, THE MANAGEMENT OF THE ASSESSEE DECIDED TO INVESTMENT THE AVAILABLE FUNDS IN VARIOUS SHARES/SECURITIES IN ORDER TO EARN RETURN/DIVIDEND RATHER THAN KEEPING THE FUNDS IDLE. X. IN THE MEETING HELD ON 26.12.2004 AND 24.3.2005 THE BOARD OF ASSESSEE COMPANY RESOLVED TO ACQUIRE AND HOLD SHARES/SECURITIES OUT OF SURPLUS FUNDS TO BE HELD AS PART OF THE INVESTMENT PORTFOLIO OF THE COMPANY. THIS SHOWS THE INTENTION OF APPELLANT. XI. SHARES/SECURITIES HAVE BEEN RECORDED IN SCRIP NAME INVESTMENT ACCOUNT AND NOT AS STOCK IN TRADE IN THE BOOKS OF ACCOUNTS. XII. HAD THE SHARES BEEN HELD BY THE ASSESSEE NOT AS INVESTMENT BUT AS STOCK IN TRADE, THE ASSESSEE WOULD HAVE VALUED THE SAME AT LOWER OF COST OR MARKET VALUE AND NOT AT COST. XIII. THE SALE PROCEEDS OF THE SHARES HAVE NOT BEEN REFLECTED AS TURNOVER AND THE PROFIT DERIVED FROM THE SALE HAS BEEN SHOWN AS PROFIT ON SALE OF INVESTMENTS. XIV. ACQUISITION OF SHARES WAS NOT MADE IN THE NORMAL/REGULAR COURSE OF BUSINESS OF THE ASSESSEE AS THE MAIN/NORMAL BUSINESS FOR WHICH THE ASSESSEE HAD BEEN SET UP WAS TO ENGAGE IN REAL ESTATE BUSINESS. XV. CLASSIFICATION OF SHARES/SECURITIES BY THE ASSESSEE AS INVESTMENTS HAS ALSO BEEN ACCEPTED BY THE DEPARTMENT IN THE EARLIER YEAR. IN THE INCOME TAX ASSESSMENT FOR THE AY 2005 - 06, I.E. IMMEDIATELY PRECEDING AY, COMPLETED U/S 143(3) OF THE ACT, SIMILAR GAINS/PROFITS DECLARED UNDER THE HEAD CAPITAL GAINS WERE FULLY ACCEPTED BY THE AO. XVI. IN THE EARLIER AY, THE SAID SHARES WERE CLASSIFIED AND ACCEPTED TO BE PART O F INVESTMENT PORTFOLIO OF THE ASSESSEE EVEN BY THE INCOME TAX DEPARTMENT. UNDER THESE CIRCUMSTANCES, THE ASSESSEE FAILS TO APPRECIATE AS TO HOW THE NATURE/CHARACTER OF THE SAID SHARES COULD AT ALL BE CHANGED DURING THE YEAR UNDER CONSIDERATION MERELY BECA USE THE SAID SHARES WERE SOLD BY THE ASSESSEE DURING THE CURRENT YEAR. XVII. ON PERUSAL OF THE DETAILS OF CAPITAL GAINS ON VARIOUS SHARES AND ANALYSIS OF THE GAINS WITH REFERENCE TO THE NUMBER OF DAYS FOR WHICH SHARES WERE HELD PRIOR TO ITS SALE, IT WILL BE FURTHER NOTICED THAT ITA 4562/DEL/2012 AY: 2008 - 09 13 SUBSTANTIAL PART OF THE PORT FOLIO WAS HELD FOR A CONSIDERABLE PERIOD OF TIME BY THE ASSESSEE PRIOR TO SALE. 8.2 . APPLYING THE PROPOSITIONS LAID DOWN IN THE ABOVE REFERRED CASES TO THE FACTS OF THE PRESENT CASE WE HAVE TO NECES SARILY HOLD THAT THE GAINS DERIVED FROM THE PURCHASE AND SALE OF SHARES BY THE ASSESSEE IS RIGHTLY OFFERED TO TAX UNDER THE HEAD CAPITAL GAINS AND NOT BUSINESS INCOME. THE FACTS SHOW THAT OUT OF THE TOTAL SHORT TERM CAPITAL GAIN OF RS.1,75,51,496/ - THE UN DISPUTED FACT IS THAT AN AMOUNT OF RS.1,39,41,555/ - WAS EARNED ON SHARES WHICH WERE HELD BY THE ASSESSEE FOR MORE THAN 30 DAYS. IN FACT SHORT TERM CAPITAL GAIN OF RS.83,56,196/ - WAS EARNED ON SHARES WHICH WERE HELD FOR MORE THAN 4 MONTHS. SIMILARLY THE A SSESSEE EARNED CAPITAL GAINS OF MORE THAN RS.40 LAKHS FOR SHARES WHICH WERE HELD FOR MORE THAN 5 MONTHS. THIS IS NOT A CHARACTERISTIC OF A TRADER. THERE ARE NO BORROWED FUNDS. THE ASSESSEE HAS ALWAYS CLASSIFIED THE PURCHASES AS INVESTMENTS IN ITS BOOKS OF ACCOUNTS. IN THE EARLIER YEAR THE ASSESSEE HAS DISCLOSED CAPITAL GAINS AND THE AO IN THE ORDER PASSED U/S 143(3) ACCEPTED THE SAME. ON THIS FACTUAL MATRIX WE AGREE WITH THE CONTENTIONS OF THE LD.COUNSEL FOR THE ASSESSEE THAT THE GAINS IN QUESTION CAN NOT BE ASSESSED UNDER THE HEAD INCOME FROM BUSINESS. 8.3. WE NOW CONSIDER THE FINDINGS OF THE LD.CIT(APPEALS) WHEREIN HE HAS HELD THAT THE GAINS RECEIVED ON SHARES WHICH WERE HELD FOR A PERIOD OF LESS THAN 30 DAYS SHOULD BE ASSESSED AS INCOME FROM BUSINE SS. THE MUMBAI H BENCH OF THE TRIBUNAL IN THE CASE OF MR.HITESH SATISHCHANDRA DOSHI ETEMIA VS. JCIT IN ITA NO.6497/MUM/2009 AND ITA 148/MUM/2010 FOR THE AY 2003 - 04 AND OTHER APPEALS HAD AFTER CONSIDERING A NUMBER OF DECISIONS AT PAGE 15 HELD AS FOLLOWS. THEREFORE, THE BIFURCATION OF THE SHORT TERM CAPITAL GAIN AND TREATING THE TRANSACTION AS INVESTMENT IN THE CASES WHERE THE HOLDING PERIOD OF MORE THAN 30 DAYS AND AS BUSINESS TRANSACTION IN THE CASE WHERE THE HOLDING PERIOD IS LESS THAN 30 DAY, IN OUR CONSIDERED OPINION, IS NOT JUSTIFIED ON THE PART OF THE CIT(A). SINCE THERE CANNOT BE A SINGLE CRITERIA FOR JUDGING THE TRANSACTION AS CAPITAL ASSET OR TRADING ASSET, THE CIT(A) ADOPTED ONLY HOLDING PERIOD AS A SOLE CRITERIA FOR BIFURCATING THE TRANSACTIO NS RELATING TO THE SHORT TERM CAPITAL GAIN, WHICH IS NEITHER PROPER AND NOR JUSTIFIED. 8.4. RESPECTFULLY FOLLOWING THE SAME WE HAVE TO NECESSARILY DISLODGE THIS DIRECTION OF THE LD.CIT(APPEALS). WE HOLD THAT THE ENTIRE PROFITS FROM THE PURCHASE AND SALE OF SHARES HAVE TO BE ASSESSED UNDER THE HEAD CAPITAL GAINS . 8.5 . IN VIEW OF THE ABOVE DECISION WE ALLOW GROUND NOS. 2 AND 3 FILED BY THE ASSESSEE. ITA 4562/DEL/2012 AY: 2008 - 09 14 6. WHILE EVALUATING THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE, FROM STATEMENT OF CAPITAL GAIN WITH HOLDING PERIOD 2008 - 09 AVAILABLE AT PAGE 34 OF THE PAPER BOOK, WHICH WAS ALSO SUBMITTED BEFORE THE CIT(A), WE ARE IN AGREEMENT WITH THE CONTENTION OF THE LD. COUNSEL OF THE ASSESS E E THAT THE MAXIMUM AMOUNT OF CAPITAL GAIN WAS EARNED FROM THE SHARES WHICH WERE HELD MORE THAN 6 1 TO 9 0 DAYS AMOUNTING TO RS.4,22,24.286 WHEREAS CAPITAL GAIN EARNED FROM THE SHARE HAVING HOLDING PERIOD OF LESS THAN 30 DAYS IS RS.6 4,09,978 AND ON OTHER SHARES, THE ASSESSEE COMPANY HAS SUSTAINED LOSS EXCEPT SOME SHARES HAVING HOLDING PERIOD MORE THAN 271 DAYS TO 300 DAYS WHICH ACCRUED PROFIT OF RS.17,19,705. 7. LD. DR HAS ALSO NOT DISPUTED THAT THE SHORT TERM CAPITAL GAIN ON THE OPEN ING STOCK AT THE BEGINNING OF THE YEAR WHICH WAS SOLD DURING THE YEAR UNDER CONSIDERATION WAS RS.3,88,25,762 AND AFTER SETTING OFF OF SHORT TERM CAPITAL LOSS ON THE SHARES PURCHASED AND SOLD DURING THE YEAR AMOUNTING TO RS.2,13,23,560, THE NET PROFIT OR CLAIMED SHORT TERM CAPITAL LOSS WAS RS.1,75,02,202. THESE FIGURES HAVE NOT BEEN DISPUTED BY THE AO. THE ISSUE REMAINS WHETHER THIS PROFIT IS A BUSINESS INCOME FROM THE SHARES HELD AS STOCK IN TRADE OR SHORT TERM CAPITAL GAIN FROM INVESTMENT. FROM THE IMPUGNED ORDER , WE MAY OBSERVE THAT THE CIT( A) HAS GIVEN A BIFURCATION BY HOLDING THAT GAIN EARNED BY THE ASSESSEE COMPANY ON THE SALE OF SHARES WITHIN THE PERIOD OF 30 DAYS WAS IN THE NATURE OF BUSINESS INCOME AND REMAINING AMOUNT WAS TREATED AS SHORT TER M CAPITAL GAIN ITA 4562/DEL/2012 AY: 2008 - 09 15 EARNED F R O M THE SALE OF SHARES HAVING HOLDING PERIOD OF MORE THAN 30 DAYS. IN VIEW OF ORDER OF THE TRIBUNAL IN ASSESSEE S OWN CASE FOR AY 2006 - 07 (SUP R A), THE BASIS ADOPTED BY THE CIT(A) ON THE CRITERIA OF HOLDING PERIOD IS NOT SUSTAINABLE AS PER PROVISIONS OF THE ACT AND RESPECTFULLY FOLLOWING THE ORDER OF THE COORDINATE BENCH OF THE TRIBUNAL, THE CONCLUSION OF THE CIT(A) IS DEMOLISHED. AT THE SAME TIME, WE ARE INCLINED TO HOLD THAT SINCE THE INCOME FROM SALE OF SHARES WAS TREATED AS SHORT TERM CAPITAL GAIN IN THE EARLIER AYS BY ACCEPTING THE CONTENTIONS OF THE ASSESSEE AS NOTED IN THE TRIBUNAL ORDER PARA 8.1, HENCE, WE HAVE NO REASON TO TAKE A DIFFERENT VIEW ON THE SAME SET OF FACTS AND CIRCUMSTANCES IN T HE PRESENT CASE FOR AY 2008 - 09. TH EREFORE, WE CONCLUDE THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESS E E FOR AY 2008 - 09 AND RESPECTFULLY FOLLOWING THE SAME, SOLE GROUND OF THE REVENUE BEING DEVOID OF MERITS IS DISMISSED AND GROUND NO. 2 AND 2.1 OF THE ASSESSEE ARE HEREBY ALLOWED . GROUND NO. 3 TO 3.5 OF THE ASSESSEE . 8. LD. COUNSEL OF THE ASSESSEE CONTENDED THAT THE COMMISSIONER (APPEALS) ERRED IN CONFIRMING THE DISALLOWANCE OF EXPENDITURE OF RS.L,65,196/ - UNDER SECTION 14A OF THE ACT. LD. COUNSEL ALSO CONTENDED THAT THE COMMISSIONER (APPEALS) FAILED TO APPRECIATE THAT NO EXPENDITURE WAS INCURRED FOR THE DIVIDEND INCOME EARNED AND AS SUCH NO EXPENDITURE WAS TO BE DEDUCTED UNDER THE SAID PROVISIONS OF THE ACT. LD COUNSEL STRENUOUSLY POINTED OUT THAT THE COMMISSIONER (A PPEALS) FAILED TO APPRECIATE THAT THE ENTIRE EXPENDITURE WAS ITA 4562/DEL/2012 AY: 2008 - 09 16 INCURRED BY THE APPELLANT FO R THE PURPOSES OF ITS BUSINESS AND HE ALSO FAILED TO APPRECIATE THAT THE ASSESSING OFFICER ERRED IN APPLYING THE FORMULA LAID DOWN IN THE RULE 8D OF THE RULES WITHOUT RECORDING ANY SUSTAINABLE REASONING AS TO WHY THE CLAIM OF THE APPELLANT THAT NO EXPENDITURE WAS INCURRED FOR THE DIVIDEND INCOME WAS INCORRECT. LD. COUNSEL LASTLY POINTED OUT THAT THE COMMISSIONER (APPEALS) FURTHER FAILED TO APPRECIATE THAT THE ASSESSING OFFICER ERRED IN CALCULATING THE DISALLOWANCE UNDER RULE 8D OF THE RULES AND MAKING EXCESSIVE AND UNREASONABLE DISALLOWANCE. LD. COUNSEL OF THE ASSESSEE LASTLY SUBMITTED THAT THE CIT(A) FAILED TO APPRECIATE THAT THE ENTIRE EXPENDITURE WAS INCURRED BY THE ASSESSEE FOR THE PURPOSE OF BUSINESS AND FOR MAINTAINING THE LEGAL EXISTENCE OF THE ASSESSEE COMPANY FOR COMPLYING THE RELEVANT OBLIGATIONS UNDER COMPANY S ACT AND OTHER RELATED STATUTORY PROVISIONS. 9. REPLYING TO THE ABOVE, LD. DR POINTED OUT THAT THE A O WAS QUITE JUSTIFIED IN APPLYING RULE 8D OF THE RULES FOR AY 2008 - 09. LD DR HAS FURTHER DRAWN OUR ATTENTION TOWARDS OPERATIVE PARA 7.3 OF THE ORDER AND SUBMITTED THAT THE CIT(A) WAS VERY WELL JUSTIFIED IN RESTRICTING THE DISALLOWANCE TO RS.1,65,196 AS AGAINST CALCULATED AS PER FORMULA PRESCRIBED BY RULE 8D OF THE RULES, 0.5% OF THE AVERAGE INVESTMENT AMOUNTING TO RS.16,40,609/ - . 10. ON CAREFUL CONSIDERATION OF ABOVE SUBMISSIONS, WE NOTE THAT THE CIT(A) HAS MADE DISALLOWANCE U/S 14A OF THE ACT R/W RULE 8D WITH FOLLOWING OBSERVATIONS: - ITA 4562/DEL/2012 AY: 2008 - 09 17 I HAVE CONSIDERED THE SUBMISSION OF THE APPELLANT AND OBSERVATION OF THE ASSESSING OFFICER. IT IS SEEN THAT APPELLANT HAS RECEIVED DIVIDEND INCOME OF RS. 17,27,369/ - DURING THE YEAR. THESE DIVIDENDS ARE EXEMP T FROM TAX AND SUCH INCOME DOES NOT FORM PART OF TOTAL INCOME. IT IS ALSO SEEN THAT APPELLANT HAS SHOWN TOTAL AVERAGE INVESTMENTS OF RS. 32,81,21,848/ - ON WHICH EXEMPT INCOME IN THE FORM OF DIVIDEND AND LONG TERM CAPITAL GAIN WAS RECEIVABLE TO THE APPELLAN T. IT IS OBSERVED THAT EARNING OF EXEMPT INCOME IS NOT A PASSIVE ACTIVITY. IN THE PRESENT AGE OF MAKING OF INVESTMENT, MAINTAINING OR CONTINUING WITH INVESTMENT AND TIME OF EXIT FROM THE INVESTMENT ARE WELL INFORMED AND WELL COORDINATED MANAGEMENT DECISION INVOLVING NOT ONLY INPUTS FROM VARIOUS SOURCES BUT ALSO ACUMEN OF SENIOR MANAGEMENT FUNCTIONARIES. THEREFORE, COST IS INBUILT EVEN IN SO CALLED PASSIVE INVESTMENT. THERE ARE INCIDENTAL EXPENDITURE OF COLLECTION, TELEPHONE AND FOLLOW UP ETC. THEREFORE, EXP ENSES RELATED TO EARNING OF EXEMPT INCOME ARE EMBEDDED IN THE 'EXPENSES DEBITED TO PROFIT AND LOSS ACCOUNT. IT IS SEEN THAT APPELLANT HAS INCURRED RS. 1,65,196/ - OTHER THAN SECURITY TRANSACTION TAX FOR EARNING EXEMPT INCOME. AS PER THE FORMULA PRESCRIBED BY THE RULE 8D, THE 0.5% OF THE AVERAGE INVESTMENT COMES TO RS. 16,40,609/ - , HOWEVER, THE APPELLANT HAS ONLY INCURRED RS. 1,65,196/ - ON EARNING EXEMPT INCOME. AS DISCUSSED ABOVE, ON EARNING EXEMPT INCOME THE APPELLANT HAS TO INCUR INDIRECT EXPENSES ON COLL ECTION, TELEPHONE, MANAGEMENT, FOLLOW UP ETC. THEREFORE, THE EXPENSES RELATING TO EXEMPT INCOME ARE RESTRICTED TO THE EXTENT OF EXPENSES CLAIMED. THEREFORE, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER OF RS. 1,65,196/ - IS CONFIRMED. 11. IN VIEW OF ABO VE, WE ARE INCLINED TO HOLD THE CONTENTION OF THE A SSESSEE IS NOT ACCEPTABLE THAT THE DISALLOWANCE RESTRICTED AND UPHELD BY THE CIT(A) WAS INCURRED FOR THE MAINTENANCE OF THE LEGAL EXISTENCE OF THE ASSESSEE COMPANY WHEN THE ASSESSEE COMPANY IS EARNING EXEM PT DIVIDEND INCOME OF RS.17,27,369 ON THE AVERAGE INVESTMENT OF RS.32.81 CRORE, THEN THE DISALLOWANCE OF RS.1,65,196/ - UNDER SECTION 14A R/W RULE 8D(III) BEING THE ACTUAL EXPENSES ITA 4562/DEL/2012 AY: 2008 - 09 18 CLAIMED BY THE ASSESSEE CANNOT BE HELD AS UNJUSTIFIED. IT IS PERTINENT TO N OTE THAT WHILE THE COMPANY WAS CREATED FOR THE PURPOSE OF REAL ESTATE BUSINE SS AND HAD NOT CONDUCTED ANY BUSINESS IN THIS REGARD, THEN THE HUGE EXEMPT DIVIDEND INCOME EARNED FROM HUGE AVERAGE INVESTMENT OF RS.32.8 CRORE CANNOT BE IGNORED. ON THE BASIS OF ABOVE NOTED FACT , WE SAFELY C O N C L U D E THAT THE LEGAL EXISTENCE OF ASSESSEE COMPANY DURING THE YEAR UNDER CONSIDERATION WAS MAINTAINED FOR THE PURPOSE ON INVESTMENTS AND AS SUCH NO OTHER BUSINESS ACTIVITY WAS CONDUCTED BY THE ASSESSEE DURING THE PERIOD. HENC E, IN OUR CONSIDERED OPINION , IN THIS SITUATION THERE IS NO REQUIREMENT OF BIFURCATION OF CLAIMED EXPENSES VIZ . FOR MAINTAINING THE LEGAL EXISTENCE OF COMPANY AND FOR MAKING INVESTMENTS IN SHARES. AT THE SAME TIME, WE ARE INCLINED TO HOLD THAT THE CIT(A) W AS QUITE JUSTIFIED AND REASONABLE IN RESTRICTING THE AMOUNT OF DISALLOWANCE TO THE AMOUNT OF EXPENSES CLAIMED BY THE ASSESSEE AND HENCE WE ARE UNABLE TO SEE ANY REASON TO INTERFERE WITH THE IMPUGNED ORDER IN THIS REGARD. ACCORDINGLY, THIS GROUND OF THE AS SESSEE FAILS AND THUS, THE SAME IS DISMISSED. GROUND NO. 4 12. APROPROS GROUND NO.4 OF THE ASSESSEE, THE LD. COUNSEL OF THE ASSESSEE POINTED OUT THAT THE ASSESSEE HAS SHOWN LONG TERM CAPITAL LOSS OF RS.66,59,311 ON SALE OF SHARES DURING THE YEAR UNDER CONS IDERATION WHICH WERE HELD BY THE ASSESSEE FOR MORE THAN ONE YEAR, THEREFORE, AS PER CALCULATION SUBMITTED BEFORE THE REVENUE AUTHORITIES AVAILABLE AT PAGE 34 OF THE PAPER BOOK, LONG TERM CAPITAL ITA 4562/DEL/2012 AY: 2008 - 09 19 LOSS SHOULD BE ACCEPTED AND THE SAME WAS TO BE DEDUCTED FROM THE TOTAL INCOME FROM BUSINESS. HOWEVER, LD. COUNSEL FAIRLY ACCEPTED THAT THE AO HAS NOT ADDRESSED AND ADJUDICATED THE ISSUE IN THE ASSESSMENT ORDER AND THIS GROUND WAS NOT RAISED BY THE ASSESSEE DURING FIRST APPELLATE PROCEEDINGS. 13. ON CAREFUL CONSIDER ATION OF ABOVE, WE NOTE THAT AS PER CALCULATION OF INCOME SUBMITTED ALONG WITH RETURN OF INCOME AVAILABLE AT PAGE 20 OF THE PAPER BOOK, WE NOTE THAT THE ASSESSEE HAS SHOWN LONG TERM CAPITAL LOSS OF RS.66, 5 9,311. FROM BARE READING OF ASSESSMENT ORDER, WE OBSERVE THAT THE ISSUE HAS NOT BEEN PROPER L Y AND EXPRESSLY ADDRESSED BY THE AO WHILE FRAMING ASSESSMENT ORDER AND THIS ISSUE WAS NOT RAISED BY THE ASSESSEE BEFORE THE CIT(A) IN THE FIRST APPEAL. HENCE , WE ARE OF THE CONSIDERED VIEW THAT THE CONTENTION OF T HE ASSESSEE CANNOT BE ACCEPTED AS THE ASSESSEE ITSELF HAS MADE THE CLAIM THAT THE ENTIRE INCOME/LOSS FROM SALE OF SHARES IS EITHER LONG TERM CAPITAL GAIN OR LOSS OR SHORT TERM CAPITAL GAIN OR LOSS AND THERE WAS NO OTHER BUSINESS ACTIVITY OF THE ASSESSEE CO MPANY DURING THE PERIOD UNDER CONSIDERATION. HENCE, AS PER SETTLED LEGAL POSITION OF THE ACT, THE LONG TERM CAPITAL LOSS ON SALE OF SHARES DURING THE YEAR UNDER CONSIDERATION CANNOT BE DEDUCTED AND ALLOWED AGAINST THE BUSINESS INCOME OF THE ASSESSEE. THE AO IS DIRECTED TO PROVIDE REASONABLE TREATMENT TO THIS LONG TERM CAPITAL LOSS AS PER RELEVANT PROVISIONS OF THE ACT. WITH THESE DIRECTIONS TO THE AO , GROUND NO. 4 OF THE ASSESSEE BEING DEVOID OF MERITS IS DISMISSED. ITA 4562/DEL/2012 AY: 2008 - 09 20 14. IN THE RESULT, THE APPEAL OF THE AS SESSEE ON GROUND NO. 2.1 AND 2 ARE PARTLY ALLOWED AND PARTLY DISALLOWED ON REMAINING GROUNDS. THE APPEAL OF THE REVENUE HAVING SOLE GROUND IS ALSO DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT 2 9 . 0 5 . 2 0 1 5 S D / - S D / - ( S. V. MEHROTRA) (CHANDRAMOHAN GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER DT. 2 9 T H MAY 2015 GS COPY FORWARDED TO: - 1 . APPELLANT 2 . RESPONDENT 3 . C.I.T.(A) 4 . C.I.T. 5 . DR BY ORDER ASSTT. REGISTRAR