Appeal details
Counselvise Citation
[2011] 119 COUNSELVISE.COM (IT) 6803 (ITAT-KOLKATA)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
2 year(s) 2 month(s) 7 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
24-06-2011
Appeal Filed By
Department
Bench Allotted
C
Assessment Year
2005-2006
Appeal Filed On
17-04-2009
Judgement Text
, C , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH: KOL KATA () , , , !' ) [BEFORE HONBLE SRI MAHAVIR SINGH, JM & HONBLE SHR I AKBER BASHA, AM] # # # # / I.T.A NO. 586/KOL/2009 $% &' $% &' $% &' $% &'/ // / ASSESSMENT YEAR: 2005-06 INCOME-TAX OFFICER, WD-12(1), KOLKATA. VS M/S. R. V. INVESTMENT & DEALERS LTD. (PAN AABCR 4000 P) ()* /APPELLANT ) (+,)*/ RESPONDENT ) & C.O. NO.32/KOL/2009 # # # # / I.T.A NO. 586/KOL/2009 $% &' $% &' $% &' $% &'/ // / ASSESSMENT YEAR: 2005-06 M/S. R. V. INVESTMENT & DEALERS LTD. VS INCOME-TAX OFFICER, WD-12(1), KOLKATA. (CROSS OBJECTOR) (+,)*/ RESPONDENT ) & # # # # / I.T.A NO. 609/KOL/2009 $% $% $% $% &' &' &' &'/ // / ASSESSMENT YEAR: 2005-06 DEPUTY COMMISSIONER OF INCOME-TAX, VS M/S. KIRTI VARDHAN FINVEST SERVICES LTD. CIRCLE-12, KOLKATA. (PAN AABCK 2706 P) ()* /APPELLANT ) (+,)*/ RESPONDENT ) & C.O. NO.33/KOL/2009 # # # # / IN I.T.A NO. 609KOL/2009 $% &' $% &' $% &' $% &'/ // / ASSESSMENT YEAR: 2005-06 M/S. KIRTIVARDHAN FINVEST SERVICES LTD. VS DEPUTY C OMMISSIONER OF INCOME-TAX, CIRCLE-12, KOLKATA. (CROSS OBJECTOR) (+,)*/ RESPONDENT ) FOR THE REVENUE: SHRI D. R. SINDHAL FOR THE ASSESSEE: S/SHRI R. SALARPURIA & S. JHAJHARIA 2 ITA 586/K/20 0 9 M/S. R. V. INVESTMENT & DEALERS LTD..& 609/K/2009-KIRTIVARDHAN FINVEST SERVICES LTD. & CO 32&33/K/09 A.Y.05-06 ! / ORDER PER MAHAVIR SINGH, JM/ , : APPEAL IN ITA NO.586/K/2009 BY REVENUE AND CROSS OB JECTION NO.32/K/2009 BY ASSESSEE ARE ARISING OUT OF THE ORDER OF CIT(A)-XXX II, KOLKATA IN APPEAL NO. 72/CIT(A)- XXXII/CIR-12/08-09/KOL VIDE DATED 22.01.2009, ITA N O.609/K/2009 BY REVENUE AND CROSS OBJECTION NO.33/KOL/2009 BY ASSESSEE ARE ARISING OU T OF THE ORDER OF CIT(A)-XXXII, KOLKATA IN APPEAL NO. 42/CIT(A)-XXXII/CIR-12/08-09/KOL VIDE DA TED 22/1/2009 U/S 143(3) OF INCOME TAX ACT, 1961(HEREINAFTER REFERRED TO AS THE ACT) , FOR ASSESSMENT YEARS 2005-06. BOTH THE ASSESSMENTS WERE FRAMED BY DCIT, CIRCLE-12, KOLKATA FOR ASSESSMENT YEARS 2005-06 U/S. 143(3) OF THE ACT VIDE HIS ORDERS DATED 20.12.2007. FOR THE SAKE OF BREVITY AND CLARITY, WE DISPOSE OF ALL THESE APPEALS AND CROSS OBJECTIONS B Y THIS CONSOLIDATED ORDER. 2. THE ONLY COMMON ISSUE IN THESE TWO APPEALS OF TH E REVENUE IS AGAINST THE ORDER OF CIT(A) IN DIRECTING TO COMPUTE THE PROFIT ON SALE O F SHARES AND SECURITIES UNDER THE HEAD CAPITAL GAINS AS AGAINST ASSESSED BY THE ASSESSIN G OFFICER AS BUSINESS INCOME. FOR THIS, THE REVENUE IN BOTH THE CASES HAS RAISED FOLLOWING COMM ON GROUNDS: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, LD. CIT(A) HAS ERRED IN DIRECTING TO ASSESS THE PROFIT ON SALE OF SHARES AND SECURITIES UNDER THE HEAD CAPITAL GAIN INSTEAD OF BUSINESS INCOME CONSIDERED BY THE A.O. 3. SINCE ISSUES ARE IDENTICAL AND FACTS ARE COMMON, WE DISCUSS THE FACTS FROM ITA NO. 586/K/2009. BRIEF FACTS RELATING TO THE ABOVE ISSUE ARE THAT THE ASSESSING OFFICER NOTED IN ASSESSMENT ORDER THAT THE ASSESSEE COMPANY IS ENGAG ED IN THE BUSINESS OF BUYING AND SELLING OF SHARES/UNITS. THE ASSESSING OFFICER ALSO NOTED THE MAIN OBJECT OF THE COMPANY AS PER MEMORANDUM OF ASSOCIATION, WHICH ARE AS UNDER: 2. TO CARRY ON THE BUSINESS OF INVESTMENT COMPANY AND TO INVEST IN, ACQUIRE, HOLD AND TO DEAL IN SHARES, STOCKS, DEBENTURES, DEBENTURE ST OCKS, BONDS, OBLIGATIONS AND SECURITIES ISSUED OR GUARANTEED BY ANY COMPANY CONSTITUTED OR CARRYING ON BUSINESS IN INDIA OR ELSEWHERE AND DEBENTURES, DEBENTURE, STOCKS, BONDS, OBLIGATIONS AND SECURITIES, ISSUED OR GUARANTEED BY ANY GOVERNMENT, STATE, DOMINION, SOVE REIGN, RULER, COMMISSIONER PUBLIC BODY OR AUTHORITY, SUPREME, MUNICIPAL, LOCAL OR OTH ERWISE WHETHER IN INDIA OR ELSEWHERE. 3. TO ACQUIRE ANY SUCH SHARES, STOCKS, DEBENTURES, DEBENTURE STOCKS, BONDS, OBLIGATIONS OR SECURITIES, BY ORIGINAL SUBSCRIPTION, PARTICIPAT ION IN SYNDICATES, TENDER, PURCHASE, 3 ITA 586/K/20 0 9 M/S. R. V. INVESTMENT & DEALERS LTD..& 609/K/2009-KIRTIVARDHAN FINVEST SERVICES LTD. & CO 32&33/K/09 A.Y.05-06 EXCHANGE OR OTHERWISE AND TO GUARANTEE THE SUBSCRIP TION THEREOF AND TO EXERCISE AND ENFORCE ALL RIGHTS AND POWERS CONFERRED BY OR INCID ENTAL TO THE OWNERSHIP THEREOF. ACCORDINGLY, ASSESSING OFFICER NOTED THAT THE MAIN OBJECT OF THE ASSESSEE COMPANY IS TO BUY, INVEST, ACQUIRE, SUBSCRIBE, TO HOLD, DISPOSE OF AND DEAL IN SHARES/UNITS ETC. THE ASSESSING OFFICER ALSO NOTED THAT THE ASSESSEE COMPANY HAS CA RRIED OUT IN A SYSTEMATIC AND ORGANIZED MANNER NUMEROUS TRANSACTIONS OF BUYING AND SELLING OF SHARES/UNITS, WHICH CONSTITUTED ITS BUSINESS ACTIVITIES AND ACCORDINGLY, HE ASSESSED TH E ASSESSEES INCOME UNDER THE HEAD CAPITAL GAIN DISCLOSED BY ASSESSEE BUSINESS INCOME. AGG RIEVED, ASSESSEE PREFERRED APPEAL BEFORE CIT(A) AND HE REVERSED THE ORDER OF ASSESSING OFFIC ER BY HOLDING THAT THE ASSESSEE COMPANY IS INVESTMENT COMPANY AND INCOME EARNED FROM SALE AND PURCHASE OF SHARES IS CAPITAL GAIN. FOR THIS, THE CIT(A) HELD AS UNDER: I HAVE CONSIDERED THE SUBMISSIONS MADE BY THE A.R OF THE APPELLANT AND PERUSED THE IMPUGNED ASSESSMENT ORDER. I HAVE ALSO CAREFULLY GO NE THROUGH THE JUDICIAL DECISIONS RELIED UPON BY THE AO AND BY THE A.R. IN GROUNDS NOS. I & 2 THE MATERIAL QUESTION RAISED BY THE ASSESSEE IS WHETHER THE INCOME REALISED BY THE TRANSFER OF SHARES/UNITS OF MUTUAL FUNDS HELD BY IT AS INVESTMENT WAS ASSESSABLE AS BUSINESS INCOME OR A S CAPITAL GAINS, ONE OF THE FACTOR WHICH APPEARS TO HAVE LARGELY INF LUENCED THE A,O.S DECISION TO TREAT ASSESSEES ACTIVITY OF PURCHASE AND SALE OF S HARES AND SECURITIES AS BUSINESS ACTIVITY IS THE VOLUME OF SUCH TRANSACTIONS. IN THI S CONNECTION, IT IS OBSERVED THAT, HONBLE SUPREME COURT IN THE CASE OF CIT VS. ASSOCI ATED INDUSTRIAL DEVELOPMENT CO. LTD. (82 ITR 586) HAS OBSERVED THAT WHETHER A P ARTICULAR HOLDING OF SHARES IS BY WAY OF INVESTMENT OR FORMS PART OF THE STOCK-IN-TRA DE, IS A MATER WHICH IS WITHIN THE KNOWLEDGE OF THE ASSESSEE WHO HOLDS SHARES AND IT S HOULD, IN NORMAL CIRCUMSTANCES, BE IN A POSITION TO PRODUCE EVIDENCE FROM ITS RECOR DS AND WHETHER IT HAS MAINTAINED DISTINCTION BETWEEN THOSE SHARES WHICH ARE ITS STOC K IN TRADE AND THOSE WHICH ARE THE ONE BY WAY OF INVESTMENTS. ALSO IN THE CASE OF JANAK S. RANGWAILA V. ACIT [200 7] 11 SOT 627 (MUM) THE HONBLE MUMBAI TRIBUNAL HAS HELD THAT IT WAS THE IN TENTION OF THE ASSESSEE WHICH WAS TO BE SEEN TO DETERMINE THE NATURE OF TRANSACTI ON CONDUCTED BY THE ASSESSEE. THOUGH THE INVESTMENT IN SHARES WAS ON A LARGE MAGN ITUDE BUT THE SAME WOULD NOT DECIDE THE NATURE OF TRANSACTION. SIMILAR TRANSACTI ONS OF SALE AND PURCHASE OF SHARES IN THE PRECEDING YEARS HAD BEEN HELD TO BE INCOME F ROM CAPITAL GAINS BOTH ON LONG- TERM AND SHORT-TERM BASIS. THE TRANSACTION IN THE Y EAR UNDER CONSIDERATION ON ACCOUNT OF SALE AND PURCHASE OF SHARES WAS SAME AS IN THE PRECEDING YEARS AND THE SAME WAS TO BE ACCEPTED AS SHORT TERM CAPITAL GAINS . THERE WAS NO BASIS FOR TREATING THE ASSESSEE AS A TRADER IN SHARES, WHEN HIS INTENT ION WAS TO HOLD SHARES IN THE INDIAN COMPANIES AS AN INVESTMENT AND NOT AS STOCK-IN-TRAD E. THE MERE MAGNITUDE OF THE TRANSACTION DOES NOT CHANGE THE NATURE OF TRANSACTI ON WHICH ARE BEING ASSESSED AS INCOME FROM CAPITAL GAINS IN THE PAST SEVERAL YEARS . 4 ITA 586/K/20 0 9 M/S. R. V. INVESTMENT & DEALERS LTD..& 609/K/2009-KIRTIVARDHAN FINVEST SERVICES LTD. & CO 32&33/K/09 A.Y.05-06 BEFORE ME THE APPELLANT FILED COPIES OF ITS AUDITED FINAL ACCOUNTS FOR THE RELEVANT YEAR AND FOR EARLIER YEARS, I.E., 2001-02, 2002-03, 2003 -04 & 2004-05 AND OTHER DOCUMENTS. FROM THE PERUSAL OF THESE EVIDENCES IT I S OBSERVED THAT: (1) THE SHARES/UNITS OF MUTUAL FUNDS PURCHASED BY THE ASSESSEE HAVE BEEN CLASSIFIED AS INVESTMENT IN ITS BOOKS OF ACCOUNT S. (2) PROFIT EARNED OUT OF SALE/TRANSFER OF SHARES W AS ALL ALONG BEEN DECLARED AS CAPITAL GAINS BY THE ASSESSEE. (3) CAPITAL GAINS SO DECLARED BY THE ASSESSEE HAD ALL ALONG BEEN ASSESSED UPTO A.Y.2004-05 AS SUCH BY THE RESPECTIVE A.O.S. (4) IT IS CLEAR FROM THE AUDITED ACCOUNTS THAT INV ESTMENT IN SHARES AND UNITS WAS MADE BY THE ASSESSEE OUT OF ITS OWN FUNDS AND NOT OUT OF ANY BORROWED FUNDS AS ITS BALANCE SHEETS DO NOT REFLECT ANY BORROWED FUNDS. (5) THE ASSESSEE HAS CARRIED ITS INVESTMENTS IN SH ARES/UNITS, IN ITS BOOKS OF ACCOUNTS, AT COST PRICE AND NOT AT COST OR MARKE T PRICE WHICH IS GENERALLY THE CASE OF GOODS ARE HELD AS STOCK-IN-TRADE. I HAVE ALSO CONSIDERED THE DECISION OF HONBLE DELH I HIGH COURT IN THE CASE OF CIT VS. ESS JAY ENTERPRISES PVT. LTD. [2007] 165 TAXMAN 465 WHEREIN THE COURT FOLLOWING THE APEX COURT JUDGMENT IN 77 ITR 253 & D ISTINCTLY HELD THAT GAIN ON SHARES, HELD AS INVESTMENT AND NOT AS STOCK-IN-TRAD E, HAVE TO TREATED AS CAPITAL GAIN ONLY. THE APPELLANT HAD ALSO PLACED A COPY OF THE O RDER OF JURISDICTIONAL TRIBUNAL IN THE CASE OF DCIT VS. RELIANCE TRADING ENTERPRISES L TD. BEING ITA NO. 944/KOL/2008 DATED 03.10.2008. IT IS OBSERVED THAT THE FACTS OF THAT CASE ARE VERY SIMILAR THAT OF THE APPELLANT. THERE THE HONBLE TRIBUNAL HAS HELD THAT THE PROFIT FROM ASSESSEES ACTIVITY OF PURCHASE AND SALE OF SHARES AND SECURIT IES WAS TO BE ASSESSED AS CAPITAL GAINS AND NOT BUSINESS INCOME. ACCORDINGLY, I AM OF THE VIEW THAT THE INVESTMENTS HAVE BEEN CLEARLY DISCLOSED IN THE BALANCE SHEET. WHEN THE SHARES ARE ACCOUNTED FOR IN THE BOOKS AS INVESTMENT SHARES, THE VOLUME OF TRANSACTIONS / FREQUENCY OF TRANSACTI ON OF SUCH SHARE CANNOT ALTER ITS STATUS FROM INVESTMENT TO TRADING. PROFIT ON SALE O F SUCH SHARES HELD AS INVESTMENT ARE CAPITAL ASSETS AND ARE ASSESSABLE AS INCOME UNDER CAPITAL GAINS. THE SHARES WERE PURCHASED WITH THE INTENTION OF EARNING DIVIDE NDS IN ADDITION TO THE PROSPECT OF MAKING PROFIT ON SALE OF SUCH INVESTMENT SHARES AT AN OPPORTUNE MOMENT WITHOUT MAKING ANY BURRY FOR SALE IGNORING DIVIDEND. THE IN VESTMENT SHARES AND SECURITIES PURCHASED AND HELD TILL THEIR SALE HAD SERVED THE D UAL PURPOSE I.E., FOR EARNING DIVIDEND AS AN INCIDENTAL INCOME AS WELL AS TO MAKE PROFIT ON SALE AT APPROPRIATE TIME. THE AO DID NOT REJECT THE BOOKS OF ACCOUNTS V IS--VIS THE AUDITED ACCOUNTS U/S. 145 OF THE ACT BEFORE ARRIVING AT SUCH CONCLUSION. THE AO S FINDING CANNOT, THEREFORE, BE ACCEPTED. CONSIDERING ALL THE ABOVE, IT IS HELD THAT THE PROFIT ON SALE OF SHARES AND SECURITIES BY THE ASSESSEE IS TO BE ASSESSED UNDER THE HEAD CAPITAL GAIN. AGGRIEVED, NOW REVENUE IS IN APPEALS BEFORE US. 5 ITA 586/K/20 0 9 M/S. R. V. INVESTMENT & DEALERS LTD..& 609/K/2009-KIRTIVARDHAN FINVEST SERVICES LTD. & CO 32&33/K/09 A.Y.05-06 4. BEFORE US LD CIT-DR SHRI D. R. SINDHAL ARGUED ON BEHALF OF REVENUE AND ALSO FILED WRITTEN SUBMISSION. SH. SINDHAL ARGUED THAT CUMULAT IVE EFFECT OF ALL FACTORS IS TO BE SEEN AND INCOME DECLARED BY ASSESSEE IS BUSINESS INCOME. HE STATED THAT THERE IS NOTHING ON RECORD TO SHOW THAT PURCHASE OF SHARES WAS FOR NON-COMMERCIAL PURPOSES AND PURCHASE WAS ALSO NOT FOR GETTING CONTROL INTEREST OF COMPANY AND EVEN SHARES SOLD WITHIN A SHORT PERIOD. MANNER IN WHICH SHARES ARE SHOWN IN THE BALANCE SHEET IS NOT CONCLU SIVE AND FOR THIS HE CITED FOLLOWING CASE LAWS: (I) CIT V. KARAM CHAND THAPARS & BROS. P. LTD. 176 ITR 535 (S.C.) (II) NEW ERA AGENCIES P. LTD. V. CIT 68 ITR 585 (S .C.) (III) CIT V. AMALGAMATION P. LTD. 108 ITR 895 (MAD ) HE ALSO MADE ARGUMENTS ON FOLLOWING LINES: (I) MAGNITUDE OF PURCHASE AND SALE OF SHARES SHOWS THAT IT IS BUSINESS INCOME. RAJA BAHADUR VISHESHWARA SINGH & ORS. V. CIT 41 I TR 685 (S.C.) (II) DEALING IN SHARES AUTHORIZED BY ARTICLE OF AS SOCIATION OF COMPANY, INCOME EARNED FROM THE SHARE TRANSACTION IS A BUSINESS I NCOME. DALMIA CEMENT LTD. V. CIT 12 ITR 50 (PAT). (III) PURCHASE AND SALE OF SHARES WITHIN A SHORT P ERIOD HELD ADVENTURE IN THE NATURE OF TRADE. V. AMRITHAM AMMAL V. CIT 74 ITR 739 (MAD) BURNSIDE INVESTMENT AND HOLDINGS LTD. V. CIT 61 I TD 501 (MAD,ITAT). (IV) SHARES PURCHASED WITH BORROWED FUNDS THE SALE OF THE SHARE HELD ADVENTURE IN THE NATURE OF TRADE (A) CIT V. SUTLEJ COTTON MILLS SUPPLY AGENCY LTD. 100 ITR 706 (SC) (B) ATLAS CORPORATION V. ITO 57 ITD 139 (ITAT, MU MBAI) (C) NEERAJA BIRLA V. ACIT 66 ITD 148 (ITAT, MUMBA I) (V) AS THE ASSESSEE CARRIED OUT 253 PURCHASE AND SA LE TRANSACTION, THE SPECULATIVE TRANSACTIONS WERE 31, ALL SHARES WERE PURCHASED AND SOLD IN THE SAME YEAR, NO SHARE WAS HELD FOR ONE YEAR, 100 TRANSACTIONS WERE PURCHA SED AND SOLD WITHIN 30 DAYS. IT WAS HELD THAT THE INCOME WAS TO BE ASSESSED AS BUSINES S INCOME. ITAT, MUMBAI IN THE CASE OF ACIT V. TRIPURA PRASAD N. PANDYA ITA NO.1336/MUM/2010 DATED 18.02.2011. (VI) IN THE SHARES PURCHASED BY RAISING SHARE CAPIT AL AND ACQUIRED MONEY FROM OTHER SOURCES WITH WHICH THE COMPANY HAD ACQUIRED VERY LA RGE BLOCKS OF SHARES AND ON SALE THE TRANSACTION HELD BUSINESS INCOME - XYZ/ABC, EQ UITY FUND, IN RE, (250 ITR 194) (AAR). (VII) ALSO THERE IS AN UNREPORTED ORDER OF DIVISION BENCH OF ITAT, KOLKATA A BENCH IN ITA NO. 1005/KOL/2008, A.Y. 2005-06 IN THE DEPTT.S APP EAL ITO 6(2), KOLKATA V. LILLY 6 ITA 586/K/20 0 9 M/S. R. V. INVESTMENT & DEALERS LTD..& 609/K/2009-KIRTIVARDHAN FINVEST SERVICES LTD. & CO 32&33/K/09 A.Y.05-06 EXPORTERS (P) LTD., KOLKATA WHEREIN SUCH TRANSACTIO NS WERE HELD AS BUSINESS TRANSACTIONS. THE COPY OF THE ORDER IS ENCLOSED HER EWITH. LD. CIT-DR FURTHER ARGUED THAT IT IS NOT ONE REASON WHICH DECIDES THE ISSUE BUT THE ISSUE CAN BE DECIDED AFTER CONSIDERING ALL THE FACTS OF T HE CASE AND IT VARIES FROM CASE TO CASE DEPENDING ON THEIR OWN FACTS. HE STATED THAT REJEC TION OF BOOKS OF ACCOUNTS VIS--VIS THE AUDITED ACCOUNTS U/S. 145 IS NOT STATUTORY REQUIREM ENT FOR DECIDING THE ISSUE IN HAND. HENCE, CIT(A) WAS NOT JUSTIFIED FOR HIS ABOVE OBSERVATION THAT THE A.O. HAD NOT REJECTED BOOKS OF ACCOUNTS VIS A VIS THE AUDITED ACCOUNTS U/S. 145. HE ARGUED THAT LASTLY COURTS HELD AS UNDER: IF THE PREVIOUS DECISION IS PLAINLY ERRONEOUS, THE RE IS A DUTY OF THE COURT TO REVIEW IT AND NOT PERPETUATE THE MISTAKE I.E. A VITAL POINT WAS NOT C ONSIDERED OR WHEN AN EARLIER RELEVANT STATUTORY PROVISION HAVE NOT BEEN BROUGHT TO THE NO TICE OF COURT. (I) U.O.I. VS. RAGHUBIR SINGH 178 ITR 548 (S.C.). (II) SRI AGASTHYAR TRUST V. CIT 236 ITR 23 (S.C.) (III) SRI RAM TRANSPORT FINANCE CO. LTD. V. ACIT 70 ITD 406 (MAD) HE REQUESTED THE BENCH TO CONSIDER ABOVE SUBMISSIO NS, A.OS ORDER BEFORE DECIDING THE ISSUE AND RESTORE THE ORDER OF A.O. 5. THE LD. CIT-DR IN HIS WRITTEN SUBMISSIONS, STATE D THAT IN THE CASE OF SHARES, NO PARTICULAR FACTOR IS DECISIVE FOR THE NATURE OF LOS S. AS OBSERVED BY THE SUPREME COURT IN THE CASE OF RAMNARAIN SONS (P)LTD. V. CIT [1961] 41 ITR 534 , NO PARTICULAR FACTOR, HOWEVER, IS A DETERMINING FACTOR OR A DECISIVE FACTOR. THE LENGTH OF TIME, NATURE OF THE DEALINGS, THE METHOD OF DEALINGS, HOW THE PROCEEDS OF THE SALE ARE DEALT WITH BY THE ASSESSEE, THESE INGREDIENTS AND OTHER FACTORS ARE SOME OF THE PRINCIPLES THAT THE C OURTS HAVE LAID DOWN WHICH SHOULD DETERMINE THE QUESTION WHETHER A PARTICULAR TRANSACTION IS IN REALISATION OF INVESTMENT OR SALE IN THE ORDINARY COURSE OF BUSINESS. HE ARGUED THAT IN C ASE SHARES ARE TAKEN AS STOCK-IN-TRADE, THEN LOSS IS BUSINESS LOSS AND ONUS TO PROVE THE SAME IS ON THE ASSESSEE. IF PURCHASED IN ORDINARY COURSE OF DEALING WITHOUT ANY OTHER INTENTION, THEN THE SAME WILL BE ALLOWABLE, OTHERWISE NOT. IT DEPENDS ON SITUATION TO SITUATION AND AS A GENERAL RULE, WHEN SHARES ARE PURCHASED TO SELL THE SAME ON PROFIT AND NO OTHER MOTIVE IS INVOLVED, THE N IT IS BUSINESS LOSS, OTHERWISE IT IS NOT ALLOWABLE AS BUSINESS LOSS. HE STATED THAT FOR TREA TMENT OF LOSS ON SALE OF SHARES IT IS NOT RELEVANT WHETHER THE SHARES ARE SHOWN AS INVESTMENT OR STOCK -IN-TRADE AND ALSO IT IS NOT RELEVANT WHETHER THE SHARES ARE VALUED AT COST OR MARKET PRICE OR EV EN WHEN A DEALER DID NOT DEAL IN SHARES FOR 7 ITA 586/K/20 0 9 M/S. R. V. INVESTMENT & DEALERS LTD..& 609/K/2009-KIRTIVARDHAN FINVEST SERVICES LTD. & CO 32&33/K/09 A.Y.05-06 FEW YEARS AND THEN SOLD SHARES, IT WAS HELD AS BUSI NESS LOSS. HE REFERRED TO THE FOLLOWING FACTORS: MERE POSSIBILITY OF REALISATION OF ENHANCED VALUE WILL NOT RENDER THE TRANSACTION A BUSINESS VENTURE WHETHER TRANSACTIONS OF SALE AND PURCHASE OF SHARES WERE TRADING TRANSACTIONS OR WHETHER THESE WERE IN THE NATURE OF INVESTMENT DEPENDS ON THE QUESTION WHETHER THE EXCESS IS AN ENHANCEMENT OF THE VALUE B Y REALISING A SECURITY OR A GAIN IN AN OPERATION OF PROFIT-MAKING. THE TOTALITY OF ALL THE FACTS WILL HAVE TO BE BORNE IN MIND AND THE CORRECT LEGAL PRINCIPLES HAVE TO APPLIED TO THE M RAJA BAHADUR VISHESHWARA SINGH V. CIT [1961] 41 ITR 685 (SC). THE SURPLUS REALISED ON THE SALE OF SHARES WOULD BE CAPITAL IF THE ASSESSEE IS AN ORDINARY INVESTOR REALISING H IS HOLDING; BUT IT WOULD BE REVENUE, IF HE DEALS WITH THEM AS AN ADVENTURE IN THE NATURE OF TR ADE. THE FACT THAT THE ORIGINAL PURCHASE WAS MADE WITH THE INTENTION TO RESELL AT A N ENHANCED PRICE WOULD BE OBTAINED BY ITSELF IS NOT ENOUGH, BUT IN CONJUNCTION WITH TH E CONDUCT OF THE ASSESSEE AND OTHER CIRCUMSTANCES, IT MAY POINT TO THE TRADING CHARACTE R OF THE TRANSACTION. THE TEST OFTEN APPLIED IS WHETHER THE ASSESSEE HAS MADE HIS SHARES AND SECURITIES, THE STOCK-IN-TRADE OF A BUSINESS RAJA BAHADUR KAMAKHYA NARAIN SINGH V. CI T (1970) 77 ITR 253 (SC). WHERE INITIAL INTENTION ITSELF IS TO MAKE PROFIT BY RESELL, TRANSACTION IS A BUSINESS VENTURE IT IS NO DOUBT CORRECT TO SAY THAT THE PRINCIPAL CONSIDERATION IN DETERMINING WHETHER INCOME FROM SALE OF SHARES IS REVENUE INCOME OR CAP ITAL GAIN IS TO FIND OUT WHAT WAS THE PURPOSE OF PURCHASE OF THOSE SHARES AND, IF THE PUR POSE WAS INVESTMENT, THE FACT THAT THE SALE OF THOSE SHARES RESULTED IN A PROFIT WILL NOT MAKE THAT PROFIT REVENUE INCOME. HOWEVER, THIS PRINCIPLE IS NOT APPLICABLE TO CASES WHERE IT IS FOUND THAT EVEN THE INITIAL PURCHASE OF SHARES BY THE ASSESSEE WAS NOT FOR THE PURPOSE OF INVESTMENT; FOR EARNING INCOME FROM DIVIDENDS, BUT WAS WITH A VIEW TO EARN PROFIT BY RESALE OF THOSE SHARES DALHOUSIE INVESTMENT TRUST CO. LTD. V. CIT (1968) 68 ITR 486 (SC). MERE FACT THAT ASSESSEE IS A BIG LAND-HOLDER IS NOT RELEVANT THE FACT THAT THE ASSESSEE WAS, AT THE MATERIAL TIME A LAND-HOLDER OF A LARGE ESTATE, WOULD NOT MEAN THAT HIS TRANSACTIONS IN SHARES, SECURITIES AND BULLION COUL D NOT BE TREATED IN THE NATURE OF TRADE. THEY HAD, THEREFORE, TO BE EXAMINED IN THE LIGHT OF ALL THE FACTS AND CIRCUMSTANCES TO ASCERTAIN WHETHER THEY HAD BEEN ENTERED INTO IN PUR SUIT OF A TRADING ACTIVITY RAJA BAHADUR KAMAKHYA NARAIN SINGH V. CIT (1970) 77 ITR 253 (SC). LATER STAGES OF OPERATIONS MUST ALSO BE LOOKED INTO IN ORDER TO DETERMINE WHETHER AN ASSESSEE IS A DEALER IN SHARE OR AN INVESTOR, THE R EAL QUESTION IS NOT WHETHER THE TRANSACTIONS OF BUYING AND SELLING THE SHARES LACKS THE ELEMENT OF TRADING, BUT WHETHER THE LATER STAGES OF THE WHOLE OPERATION SHOW THAT T HE FIRST STEP THE PURCHASE OF THE SHARES IS NOT TAKEN AS, OR IN THE COURSE OF, A TRADING TRA NSACTION CIT V. H.HOLCK LARSEN (1986) 160ITR 67 (SC). HE NARRATED THE FOLLOWING PRINCIPLES BASED ON COURT DECISIONS: (I) IN CASE SHARES ARE TAKEN AS STOCK-IN-TRADE, TH EN THE LOSS IS BUSINESS LOSS I.E. IF THE ASSESSEE IS DEALER IN SHARES AND INCURS LOSS IN DEA LING IN SHARES THAT ARE PURCHASED IN ORDINARY COURSE OF DEALING WITHOUT ANY OTHER INTENT ION. (II) BUT IT DOES NOT MEAN THAT EVERY KIND OF DEAL I N SHARES IN CASE OF DEALER WILL BE BUSINESS DEAL AND RESULT IN REVENUE LOSS, I.E. IF T HE SHARES ARE PURCHASED FOR ACQUISITION OF 8 ITA 586/K/20 0 9 M/S. R. V. INVESTMENT & DEALERS LTD..& 609/K/2009-KIRTIVARDHAN FINVEST SERVICES LTD. & CO 32&33/K/09 A.Y.05-06 MANAGING AGENCY BY VIRTUE OF THE INTENTION BEHIND S UCH ACQUISITION, THEY WILL, IN ALL PROBABILITY, CONSTITUTE CAPITAL ASSET IN THE HANDS OF THE PURCHASER AND NOT HIS STOCK-IN- TRADE. THE SAME WAY, IF THE SHARES ARE PURCHASED ON INVESTMENT ACCOUNT, THEN ALSO THE LOSS WILL BE ON CAPITAL ACCOUNT. (III) WHETHER THE PURCHASES OF SHARES/SECURITIES AR E ON TRADING ACCOUNT OR INVESTMENT IS DEPENDENT ON MANY CONSIDERATIONS, I.E. LENGTH OF TIME, NUMBER OF TRANSACTIONS, MOTIVE BEHIND PURCHASE AND TREATMENT GIVEN BY THE ASSESSEE OR DEPARTMENT, BUT THE SAME MAY NOT BE CONCLUSIVE IN ITSELF. IT WILL ALSO BE NOT RELEVA NT THAT THE SAME WERE SHOWN AS STOCK OR INVESTMENT IN THE ACCOUNTS. (IV) IF THE LOSSES ARE INCURRED ON PURCHASE AND SAL E OF SHARES OR SECURITIES DUE TO BUSINESS CONSIDERATIONS, THEN THE LOSSES WILL BE AL LOWABLE EVEN IF THE ASSESSEE IS NOT THE DEALER IN SHARES. WHETHER THE PURCHASE IS MADE VOLU NTARILY OR UNDER PRESSURE OF SOME AUTHORITIES, IS NOT RELEVANT. (V) IF THE CAPITAL ASSETS ARE TRANSFERRED INTO STOC K, THEN FAIR MARKET VALUE OF THE ASSET ON THE DATE OF SUCH CONVERSION SHALL BE DEEMED TO B E THE FULL VALUE OF THE CONSIDERATION ACCORDING TO SECTION 45 (2), BUT THERE IS NO PROVIS ION TO DEAL WITH THE CASE OF TRANSFER OF STOCK TO INVESTMENT ACCOUNT. (VI) IF THE TRANSACTION IS NOT BONAFIDE, THEN THE A BOVE STATED PRINCIPLES WILL NOT BE APPLICABLE AND THE LOSS WILL NOT BE ALLOWABLE. 6. LD. CIT-DR ALSO DISCUSSED THE CONCEPT OF RELEVAN CY OF LENGTH OF TIME IN HIS WRITTEN SUBMISSIONS, WHICH IS AS UNDER: IT WAS OBSERVED BY THE SUPREME COURT IN INVESTMENT LTD. V . CIT [1970] 77ITR 533, THAT THE MERE LENGTH OF TIME MIGHT NOT BE A DETERMINING FACTOR. THE SAME VIEW WAS EXPRESSED BY THE SUPREME COURT IN THE CASE OF NEW ERA AGENCIE S (P) LTD. V. CIT [1968] 68 ITR 585 . THERE THE SUPREME COURT WAS DEALING WITH PREFERENCE SHARES; AND IT WAS HELD THAT THIS FACT HAD TO BE NOTED, BECAUSE THE CASE WAS CONCERNE D WITH PREFERENCE SHARES AND THESE SHARES HAD BEEN HELD FOR A CONSIDERABLE TIME. THE S UPREME COURT OBSERVED THAT THE FACT THAT THE APPELLANT HAD NOT DEALT WITH THE SHARES FO R ABOUT 14 YEARS FROM 1949 TO 1963 WOULD NOT BE SUFFICIENT TO DRAW THE INFERENCE THAT THE ASSESSEE HAD TREATED HIS HOLDING OF SHARES AS INVESTMENT. BUT AS HELD BY THE SUPREME C OURT, IT IS ONE OF THE RELEVANT FACTOR. IN A CASE BEFORE CALCUTTA HIGH COURT GOLD CO. LTD . V. CIT [1973] 92 ITR 121 ASSESSEE PURCHASED SHARES OF TWO COMPANIES. SHARES OF S LTD. WERE HELD FOR SEVEN AND HALF YEARS AND SHARES OF B LTD. WERE HELD FOR SIXTEEN YEARS. L OSS IN CASE OF S LTD. WAS HELD AS REVENUE AND IN CASE OF B LTD., IT WAS HELD AS CAPIT AL LOSS BEING HELD FOR CONSIDERABLE LENGTH OF TIME. ALSO IN ANOTHER CASE KARAM CHAND TH APAR & BROS. (P) LTD. V. CIT [1971] 82 ITR 899 (SC), SEE ALSO CENTRAL INDIA AGENCIES (P ) LTD. V. CIT [1970] 77 ITR 959 (ALL), WHERE SHARES WERE HELD FOR FOURTEEN YEARS AND SHOWN AS INVESTMENT, THE COURT HELD THAT THOUGH THIS WAS NOT CONCLUSIVE BY ITSELF, BUT WAS R ELEVANT AND HELD THE SAME AS CAPITAL LOSS. HE ALSO DISCUSSED THE CONCEPT OF RELEVANCY OF NUMBE R OF TRANSACTIONS WITH REGULARITY, WHICH IS AS UNDER: 9 ITA 586/K/20 0 9 M/S. R. V. INVESTMENT & DEALERS LTD..& 609/K/2009-KIRTIVARDHAN FINVEST SERVICES LTD. & CO 32&33/K/09 A.Y.05-06 GENERALLY IF SHARES ARE DEALT WITH REGULARLY, IT I S PRESUMED THAT THE ASSESSEE IS A DEALER IN SHARES AND IN CASE OF ISOLATED TRANSACTIONS, IT IS TREATED AS INVESTMENT. BUT ONLY THAT IS NOT CONCLUSIVE BY ITSELF; EVEN A SINGLE TRANSACTION CAN BE TREATED AS AN ADVENTURE IN THE NATURE OF TRADE. THE SUPREME COURT IN THE CASE OF RAMNARAIN SONS (P)LTD. V. CIT [1961] 41 ITR 534 OBSERVED THAT IN CONSIDERING WHETHER A T RANSACTION WAS OR WAS NOT AN ADVENTURE IN THE NATURE OF TRADE, THE PROBLEM SHOUL D BE APPROACHED IN THE LIGHT OF THE INTENTION OF THE ASSESSEE HAVING REGARD TO THE LEGA L REQUIREMENTS WHICH WERE ASSOCIATED WITH THE CONCEPT OF TRADE AND BUSINESS. THE INFEREN CE ON THIS QUESTION RAISED BY THE TRIBUNAL ON THE FACTS FOUND WAS A MIXED QUESTION OF LAW AND FACT AND WAS OPEN TO CHALLENGE BEFORE THE COURT. WHERE MEMORANDUM OF ASS OCIATION OF A COMPANY PERMITTED DEALING IN SHARES, THEN LOSS SUFFERED BY THE COMPAN Y IN A SOLITARY TRANSACTION OF PURCHASE AND SALE OF SHARES COULD NOT BE ALLOWED AS TRADING LOSS. SO A SOLITARY TRANSACTION IN SHARES IF RESULTING IN LOSS, WILL, IN THE ABSENCE OF PROOF TO THE CONTRARY, BE CAPITAL IN NATURE AS HELD BY THE SUPREME COURT IN CASE OF PATIALA BISCUI T MFRS. (P.) LTD. V. CIT [1971] 82 ITR 812 AND SETH BANARSI DAS GUPTA V. ITO [1977] 108 IT R 377 (ALL). THE LD. CIT-DR ALSO DISCUSSED IN GENERAL, WHAT TREA TMENT IS GIVEN BY ASSESSEES OR DEPARTMENT AND THE RELEVANCY OF THE SAME AS UNDER: SOMETIMES THE TREATMENT GIVEN BY THE ASSESSEE OR D EPARTMENT MAY BE RELEVANT. IN ONE CASE THE DEPARTMENT ITSELF TREATED, DEALING IN SHAR ES AS BUSINESS IN EARLIER YEARS AND SO THE COURT JUSTIFIED THE TREATMENT OF LOSS AS BUSINESS L OSS IN A LATER YEAR CIT V. KARAM CHAND THAPAR & BROS. (P) LTD. [1989] 176 ITR 535 (SC). IN EXPRESS NEWSPAPERS LTD. V. DY. CIT [1997] 59 TTJ (MAD. TRIB.) 516, IT WAS HELD THAT WH ERE THERE WAS ADEQUATE EVIDENCE TO PROVE THAT THE LOSS SUFFERED BY THE ASSESSEE IN THE TRADING ACTIVITIES OF PURCHASE AND SALE OF SHARES WAS GENUINE, SUCH LOSS COULD NOT BE DISALLOW ED, WHERE ASSESSEES INCOME FROM SALE OF SHARES IN EARLIER YEARS HAD BEEN TREATED AS BUSI NESS INCOME. IN THE CASE OF INVESTMENT LTD. V. CIT [1970] 77 ITR 533 (SC),THE ASSESSEE-COM PANY WAS FORMED WITH THE OBJECTS, AMONGST OTHERS, OF DEALING IN SHARES, DEBENTURES AN D SECURITIES, AND IT EFFECTED TRANSACTIONS OF SALE AND PURCHASE OF SHARES AND SEC URITIES OF LARGE MAGNITUDE. WHILE DETERMINING THE NATURE OF SHARES OR SECURITIES IT W AS HELD (I) THAT THE VERY FACT THAT SIMILAR CLAIM WAS ALLOWED IN EARLIER AND LATER YEARS PRIMA FACIE LED TO AN INFERENCE THAT THE COMPANY WAS A DEALER IN SHARES; (II) THAT THERE WAS NO EVIDENCE ON RECORD AS TO THE TRUE NATURE OF WHAT WAS CALLED BY THE TAXING AUTHORITIES AS REDEMPTION OF SECURITIES; (III) THAT EVEN ASSUMING THAT THE COMPANY WOULD REDEEM THE SEC URITIES ON MATURITY, NO INFERENCE THAT THE COMPANY WAS AN INVESTOR AND NOT A DEALER A ROSE SOLELY FROM THAT FACT, THAT NO FIRM CONCLUSION COULD BE DRAWN FROM THE DESCRIPTION IN I TS BALANCE-SHEET OF ITS STOCK AS INVESTMENT AND FROM THE VALUATION OF ITS SECURITI ES AND SHARES AT COST; AND (IV) THAT THOUGH THE TRANSACTIONS WERE NOT FREQUENT, THE TRAN SACTIONS OF SALE AND PURCHASE OF SECURITIES WERE IN SUBSTANTIAL NUMBER AND VALUE THE REOF WAS CONSIDERABLE. THE INFERENCE THAT THE ASSESSEE HELD THE SECURITIES AS INVESTMENT AND NOT AS STOCK-IN-TRADE WAS, THEREFORE, NOT CORRECT, AND THE IMPUGNED LOSS WAS HELD ALLOWAB LE AS BUSINESS LOSS. HE ALSO DISCUSSED THE CONCEPT OF RELEVANCY OF MOTIV E/INTENTION RELEVANT BUT NOT CONCLUSIVE BY ITSELF, AS UNDER: MOTIVE IS ALSO ONE OF THE RELEVANT FACTORS TO DETE RMINE NATURE OF LOSS BUT IS NOT CONCLUSIVE BY ITSELF. WHERE SHARES ARE PURCHASED WITH THE INTE NTION TO RESELL AT PROFIT THEN LOSS WILL BE BUSINESS LOSS NEW PRAHLAD MILLS (P) LTD. V. CIT [19 72] 85 ITR 480 (BOM) BUT IF THE 10 ITA 586/K/20 0 9 M/S. R. V. INVESTMENT & DEALERS LTD..& 609/K/2009-KIRTIVARDHAN FINVEST SERVICES LTD. & CO 32&33/K/09 A.Y.05-06 ASSESSEES INTENTION IS TO HOLD AS INVESTMENT, THEN IT IS CAPITA LOSS SETH GANGA SAGAR, IN RE [1934] 2 ITR 155 (ALL). WHEN THE MAIN PURPOSE IS NO T TO GET PROFIT FROM RESALE BUT SOME OTHER MOTIVE SUCH AS TO OBTAIN MANAGING AGENCY CIT V. NATIONAL FINANCE LTD. [1962] 44 ITR 788 (SC) THEN IT WILL BE CAPITAL LOSS EVEN IN T HE CASE OF DEALER OF SHARES RAMNARAIN SONS (P)LTD. V. CIT [1961] 41 ITR 534 (SC) AND TRIB UNALS FINDING IN THIS CASE THAT SHARES WERE PURCHASED TO ACQUIRE CONTROL OR NOT WAS A RELE VANT ONE CIT V. SHREE KRISHNA PROPERTIES LTD. [1994] 205 ITR 308 (CAL.). IN ANOTH ER CASE, WHERE SHARES WERE PURCHASED TO ELIMINATE COMPETITION GONDHARA TRANSPORT CO. (P. ) LTD. V. CIT [1972] 84 ITR 294 (P&H), IT WAS HELD AS CAPITAL LOSS. SOMETIMES MOTIV E IS NOT TO TRADE IN SHARES BUT EITHER TO GET TAX ADVANTAGE OR MANIPULATE IN SHARES FOR SOME OTHER PURPOSE AND TRANSACTIONS ARE GENERALLY BETWEEN RELATIVES OR GROUP COMPANIES AND EVEN DEALINGS ARE ALSO SOMETIMES NOT AT MARKET PRICES, SO THESE ARE DEEMED AS SHAM TRANS ACTIONS SOUTH ASIA INDUSTRIES (P.) LTD. V. CIT [1985] 155 ITR 392 (DELHI) AND CIT V. L.N. D ALMIA [1994] 207 ITR 89 (CAL.) AND LOSS IS NOT ALLOWABLE. BUT MERE FACT THAT SELLER AN D PURCHASERS ARE INTER-CONNECTED IS NOT ENOUGH TO SHOW THE TRANSACTION AS SHAM IF OTHERWISE THE TRANSACTIONS ARE FAIR AND AT MARKET PRICE CIT V. PITTY BROS. (P.) LTD. [1979] 12 0 ITR 709 (BOM). THE LD. CIT-DR FURTHER DISCUSSED WHEN LOSS IS BUSIN ESS LOSS, IN CASE SHARES ARE TAKEN AS STOCK IN TRADE, AS UNDER: IN CASE SHARE ARE TAKEN AS STOCK-IN-TRADE OR ON TR ADING ACCOUNT, THEN THE LOSS IS BUSINESS LOSS, I.E., IF THE ASSESSEE IS DEALER IN SHARES AND INCURS LOSS IN DEALING IN SHARES THAT ARE PURCHASED IN THE ORDINARY COURSE OF DEALING WITH AN Y OTHER INTENTION. SOME OF THE POINTS ARE DISCUSSED BELOW: LOSSES IN CASE OF DEALER IN SHARES: IN THE CASE OF A DEALER, SHARES ARE HELD AS STOCK-I N-TRADE, SO LOSS ON SALE IS REVENUE LOSS. BUT IT DOES NOT MEAN THAT EVERY KIND OF DEAL IN SHARES IN CASE OF DEALER WILL BE BUSINESS DEAL AND RESULT IN REVENUE LOSS. IN SOME CASES, IT IS HELD NOT ON R EVENUE ACCOUNT AS BELOW: I) IN A CASE BEFORE CALCUTTA HIGH COURT - GOLD CO. LTD. V. CIT [1973] 92 ITR 121, ASSESSEE PURCHASED SHARES OF TWO COMPANIES . SHARES OF S LTD. WERE HELD FOR SEVEN AND HALF YEARS AND SHARES OF B LTD. WERE HELD FOR SIXTEEN YEARS. LOSS IN CASE OF S LTD. WAS HELD AS REVENUE AND IN CASE OF B LTD. AS CAPITAL LOSS BEING HELD FOR CONSIDERABLE LENGTH OF TIME. II) IN ANOTHER CASE LOSS ON SALE OF SHARES WAS HELD NOT ALLOWABLE BECAUSE OF EXTRAORDINARY FEATURE OF TRANSACTION AS COMPARED TO OTHER DEALINGS, THOUGH THE ASSESSEE WAS DEALER IN SHARES STAR CO. LTD. V. CIT [1970] 75 ITR 179(SC). III) WHEN DEALING IN SHARES WAS NOT FOR BUSINESS PU RPOSE BUT FOR SOME OTHER CONSIDERATION, SUCH AS FOR ACQUIRING CONTROLLING IN TEREST IN MANAGING AGENCY ETC., THE SAME WAS HELD AS CAPITAL LOSSES CIT V. NA TIONAL FINANCE LTD. [1962] 44 ITR 788(SC). SO IT DEPENDS ON SITUATION TO SITUATION, AND AS A G ENERAL RULE WHEN SHARES ARE PURCHASED TO SELL THE SAME ON PROFIT AND NO OTHER MOTIVE IS I NVOLVED, THEN IT IS BUSINESS LOSS AND WHETHER SHOWN AS INVESTMENT OR STOCK IN TRADE IS NOT RELEVA NT, ALSO WHETHER VALUED AT COST OR MARKET 11 ITA 586/K/20 0 9 M/S. R. V. INVESTMENT & DEALERS LTD..& 609/K/2009-KIRTIVARDHAN FINVEST SERVICES LTD. & CO 32&33/K/09 A.Y.05-06 PRICE INVESTMENT LTD. V. CIT [1970] 77 ITR 533 (SC) . EVEN WHEN A DEALER DID NOT DEAL IN SHARES FOR FEW YEARS AND THEN SOLD SHARES, IT WAS H ELD AS BUSINESS LOSS KARSONDAS RANCHHODDAS V. CIT [1972] 83 ITR 256 (BOM). IT WAS OBSERVED IN CIT V. SHANTI PRASAD JAIN [1967] 66 ITR 289 (PAT.). SEE ALSO CIT V. SHREE KRISHNA PROPERTIE S LTD. [1994] 205 ITR 308 (CAL.) AND CIT V. BAGLA BROS. [1972] 84 ITR 20 (ALL), THAT WHERE A DE ALER IN SHARES SOLD CERTAIN SHARES AND INCURRED LOSS AND THE SHARES HAD NOT BEEN ACQUIRED TO OBTAIN CONTROLLING INTEREST IN THE COMPANIES, THE SAID LOSS WAS A BUSINESS LOSS. IN C IT V. CHASE TRADING CO. [1999] 236 ITR 665 (BOM), IT WAS OBSERVED THAT AS ASSESSEE-FIRM WAS DE ALER IN SHARES, THE SALE OF SHARE BY FIRM TO PARTNERS WAS A COMMERCIAL TRANSACTION AND, THEREFOR E, THE ASSESSEE-FIRM WAS ENTITLED TO CLAIM DEDUCTION OF LOSS SUFFERED IN SUCH TRANSACTION. LOSSES IN SHARE BUSINESS OF HUF TAKEN OVER BY FIRM ARE BUSINESS LOSS IF SHARES WERE HELD AS STOCK-IN-TRADE. FINALLY, HE SUMMARIZED THE ARGUMENTS AS UNDER: (I) FOR DECIDING THE ISSUE VARIOUS FACTORS HAVE TO BE CONSIDERED AND THE ISSUE CANNOT BE DECIDED ON ONE FACTOR. CONSIDERING THE ALL THE F ACTORS AS DISCUSSED BY THE A.O. IN ASSESSMENT ORDER AND AS ARGUED BY ME THE CUMULATIVE FACTORS SHOWS THAT THE SHARE TRANSACTIONS HAVE BEEN RESULTED INTO BUSINESS INCOM E. (II) IT DEPENDS ON SITUATION TO SITUATION WHETHER THE TRANSACTIONS BUSINESS INCOME OR CAPITAL GAINS. THE VOLUME OF TRANSACTIONS, FREQUENC Y OF TRANSACTIONS, THE SYSTEMATIC AND ORGANIZED MANNER OR UNDERTAKING THE TRANSACTION, ST RONGLY POINT TO THE CONCLUSION THAT THE SHARES COULD NOT HAVE BEEN PURCHASED AS AN INVE STMENT TO EARN INCOME FROM DIVIDEND AND THAT THE PURCHASE OF THESE SHARES WERE WITH THE OBJECT OF SELLING THEM SUBSEQUENTLY AT A PROFIT. (III) AS A GENERAL RULE WHEN SHARES ARE PURCHASED T O SELL THE SAME ON PROFIT AND NO OTHER MOTIVE IS INVOLVED, THEN THE TRANSACTIONS RESULTED INTO BUSINESS INCOME/LOSS. THE PURCHASE OF THESE SHARES WAS WITH THE OBJECT OF SELLING THEM SUBSEQUENTLY AT A PROFIT AND THE SHARES WERE IN FACT SOLD AT CONSIDERABLE PROFIT SUBSEQUENT LY. (IV) WHETHER SHARES SHOWN AS INVESTMENT OR STOCK IN TRADE IS NOT RELEVANT FOR DECIDING THE ISSUE ON HAND (INVESTMENT LTD. V. CIT [1970] 77 IT R 533 (SC) ). FOLLOWING THE RATIO OF THIS JUDGMENT, IT IS IMMATERIAL AS TO WHETHER THE S HARES HAVE BEEN SHOWN AS INVESTMENT OR STOCK IN TRADE. SO BY SHOWING THE SHARES AS INVESTM ENT BY ITSELF WILL NOT PROVE THAT THE SHARES WERE HELD AS INVESTMENT AND BY SHOWING THEM AS INVESTMENT, THE ASSESSEE WILL NOT BE BENEFITED FOLLOWING THE RATIO OF THIS JUDGMENT. (V) WHETHER SHARES VALUED AT COST OR MARKET PRICE IS IMMATERIAL TO DECIDE THE ISSUE ON HAND (INVESTMENT LTD. V. CIT [1970] 77 ITR 533 (SC) ). FOLLOWING THE RATIO OF THIS JUDGMENT, IT IS IMMATERIAL AS TO WHETHER THE SHARES HAVE BEEN VALUED AT COST OR MARKET PRICE. SO BY SHOWING THE SHARES AT COST PRICE BY IT SELF WILL NOT PROVE THAT THE SHARES WERE 12 ITA 586/K/20 0 9 M/S. R. V. INVESTMENT & DEALERS LTD..& 609/K/2009-KIRTIVARDHAN FINVEST SERVICES LTD. & CO 32&33/K/09 A.Y.05-06 HELD AS INVESTMENT AND BY SHOWING THEM AS INVESTMEN T, THE ASSESSEE WILL NOT BE BENEFITED FOLLOWING THE RATIO OF THIS JUDGMENT. (VI) THE OBJECTS CONTAINED IN THE MOA OF THE ASSE SSEE COMPANY CLEARLY SHOW THAT THE OBJECT WAS TO DEAL IN SHARE. (VII) THE ASSESSEE HAS RAISED SHARE CAPITAL AND A CQUIRED MONEY FROM OTHER SOURCES WITH WHICH IT HAS ACQUIRED VERY LARGE BLOCKS OF SHARES W HICH INDICATES IN LARGE, SYSTEMATIC ACTIVITY FOR MAKING PROFITS (RELIANCE IS PLACED ON XYZ/ABC, EQUITY FUND, IN RE. 250 ITR 194 (AAR). (VIII) SCHEDULE J OF P & L A/C. OF THE ASSESSEE FOR A.Y. 2005-06 REVEALS THE OPERATIONAL, ADMINISTRATIVE AND THE OTHER EXPENSES AT VERY HIGH FIGURE OF RS. 2,73,58,733/- (PAGE NO. 204 OF P/B). THE NATURE AND THE VOLUME OF THE EXPEN DITURE IN THE SCHEDULE J FURTHER SUGGEST THAT THE ASSESSEE WAS DEALING IN SHARE BUSI NESS TRANSACTIONS AND WAS NOT AN INVESTOR. (IX) ALL THE ABOVE REFERRED FACTS LEAD TO THE INFE RENCE THE ASSESSEES TRANSACTION IN BUYING AND SELLING UNITS/SHARES AMOUNT TO BUSINESS ACTIVIT IES WITH THE MOTIVE BEHIND THE TRANSACTIONS BEING TO EARN PROFITS. (X) THE ABOVE CONCLUSION IS ALSO STRONGLY SUPPORTE D BY THE HONBLE SUPREME COURT OF DALHOUSIE INVESTMENT TRUST CO. LTD. V. CIT 68 ITR 4 86. (XI) THE CIT(A) HAS FAILED TO REBUT ALMOST ALL THE FINDINGS GIVEN BY THE A.O. HENCE, HE HAS NOT PASSED A REASONED AND SPEAKING ORDER. HENCE THE SAME IS UNTENABLE IN THE EYES OF LAW. LD. CIT-DR, IN VIEW OF THE ABOVE STATED THAT IN THE PRESENT CASE SHARE TRANSACTIONS ARE BUSINESS TRANSACTIONS, HENCE RESULTED IN BUSINESS INCOME AND NOT CAPITAL GAINS. HE URGED THE BENCH TO RESTORE THE ORDER OF THE AO. 7. ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSES SEE SHRI R. SALARPURIA ARGUED THAT ONLY GROUND RAISED BY REVENUE IS IN RESPECT TO TREATMENT ON PURCHASE AND SALE OF SHARES AS BUSINESS INCOME AS AGAINST CAPITAL GAIN DECLARED BY THE A SSESSEE AND FOR THIS, HE STATED THAT THE AO IN HIS ORDER HAS ALLEGEDLY OBSERVED THAT THE ASSESSEE HAS SHOWN LONG TERM CAPITAL GAIN AND SHORT TERM CAPITAL GAIN FROM NUMEROUS SALE AND PURCHASE T RANSACTIONS OF SHARES AND UNITS OF MUTUAL FUND. LD. COUNSEL STATED THAT INTENTION OF THE AO T O TREAT PROFIT ON SALE OF INVESTMENT AS BUSINESS INCOME HAS ARISEN DUE TO THE FACT THAT W .E.F. 1.9.2004 THERE WAS CHANGE IN THE STATUTE BY INTRODUCTION OF SECTION 111A IN STATUTE BY FINAN CE ACT 2004, WHEREBY THE GAIN ON LONG TERM INVESTMENT WAS MADE EXEMPT AND THE GAIN ON SHO RT TERM INVESTMENT WAS LIABLE TO BE TAXED ONLY @ 10% AS AGAINST THE EARLIER PREVAILING RATE O F TAX WHICH WERE QUITE HIGH AT 20% AND 30% 13 ITA 586/K/20 0 9 M/S. R. V. INVESTMENT & DEALERS LTD..& 609/K/2009-KIRTIVARDHAN FINVEST SERVICES LTD. & CO 32&33/K/09 A.Y.05-06 RESPECTIVELY. HE STATED THAT THE REVENUE ACCEPTED SUCH PROFIT ON SALE OF INVESTMENT AS CAPITAL GAIN IN ALL EARLIER YEARS AND SINCE SUCH ASSESSMENT HAD REACHED FINALITY, REVENUES STAND IN THIS PARTICULAR YEAR IS AGAINST THE PRINCIPAL OF CONSIST ENCY. HE RELIED ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF 330 ITR 485. TO EL ABORATE ASPECT, IT WAS FURTHER SUBMITTED AS UNDER:- A.Y 2002-03 : A) IN ASSESSMENT YEAR 2002 -03 IN THE PROFIT & LOS S A/C (PAGE 106 OF THE P.B.) THE PROFIT ON SALE OF INVESTMENT HAS BEEN DISCLOSED AT RS. 43,82, 849/-. IN SUCH ASSESSMENT YEAR IN THE COMPUTATION OF INCOME (PAGE 369 OF THE P.B.) THE IN COME FROM CAPITAL GAIN HAS BEEN REFLECTED AT RS. 69,72,779/- IN AGGREGATE AND THE TOTAL INCOME WAS SHOWN AT RS. (-) 5,38,783/-. THE ASSESSMENT ORDER WAS MADE U/S 143(1 ) (PAGE 371 OF THE P.B.) WHEREIN THE INCOME WAS ASSESSED AT (-) RS. 5,38,783/- AS SUCH THE CAPITAL GAIN AS DECLARED BY THE ASSESSEE HAS BEEN ACCEPTED. REVENUE HAS NOT INITI ATED ANY SEPARATE PROCEEDINGS IN SUCH RESPECT AND AS SUCH THE ASSESSMENT FOR SUCH YEAR HA S REACHED FINALITY. A.Y 2003-04 : B) IN ASSESSMENT YEAR 2003-04 THE PROFIT ON SALE OF INVESTMENT WAS DECLARED AT RS.53,82,341/- AND RS. (-) 71,69,792/- AND RS. 37, 700/- BEING THE PROFIT ON MUTUAL FUND AND SHARES RESPECTIVELY. (PAGE 160 OF THE P.B.) IN THE COMPUTATION OF INCOME (PAGE 372 OF THE P.B. ) SUCH CAPITAL GAIN WAS DECLARED AT RS. 72,08,058/- IN AGGREGATE AND THE TOTAL INCOME FOR SUCH YEAR WAS COMPUTED AT RS. (-) 2,58,40,946/-. THE ASSESSMENT ORDER WAS MADE U/S 14 3(1) (PAGE 374 OF P.B.) AND INCOME HAS BEEN ASSESSED AT RETURNED INCOME AND NO SEPARAT E PROCEEDINGS U/S 147 OR 265 HAVING BEEN INITIATED SUCH ORDER HAS BECOME FINAL. A.Y 2004-05 : C) IN ASSESSMENT YEAR 2004-05 THE PROFIT ON SALE OF INVESTMENT WAS SHOWN AT RS. 48,79,072/- (PAGE 197 OF THE P.B.) IN THE COMPUTATION OF INCOME PLACED AT PAGE 375 OF THE P.B. THE INCOME FROM CAPITAL GAIN AFTER SET-UP OF BROUGHT FORWARD LOSSES WAS SHOWN AT RS.72,08,236/- AND THE TOTAL INCOME FOR SUCH YEAR WAS SHOWN AT RS. 23,46,730/-. IN THE ASSESSMENT ORDER PASSED U/S 143(3), PAGE 377 OF T HE P.B., THE AO HAS PASSED ORDER AFTER TAKING SEVEN HEARINGS. THE AO HAS MADE DUE DI SCUSSION IN THE ORDER IN RESPECT OF THE CAPITAL GAIN AND HAS ALSO MENTIONED THAT THE AS SESSEE COMPANY IS ENGAGED IN BUSINESS OF INVESTMENT IN SHARES AND MUTUAL FUND. HAVING ALL THE DETAILS AND DOCUMENTS THE AO HAS ACCEPTED THE CAPITAL GAIN SO DECLARED BY THE A SSESSEE WHICH IS EVIDENT FROM THE COMPUTATION OF INCOME DONE BY THE AO AND WHICH IS A PART OF SUCH ORDER PLACED AT PAGE 379 OF THE P.B. A.Y 2006-07 : D) IN ASSESSMENT YEAR 2006-07 THE ASSESSEE HAD DECL ARED CAPITAL GAIN OF RS. 1,28,38,601/- AFTER SET OFF OF BROUGHT FORWARD LOSSES AND SHORT TERM CAPITAL GAIN OF RS. 26,12,926/- (PLACED AT PAGE 395 OF THE P.B.) AND IN SUCH COMPUT ATION OF INCOME THE TOTAL INCOME WAS DECLARED AT RS. 1,19,26,738/-. THE AO PASSED AN ORD ER U/S 143(3) (PAGE 397 404 OF 14 ITA 586/K/20 0 9 M/S. R. V. INVESTMENT & DEALERS LTD..& 609/K/2009-KIRTIVARDHAN FINVEST SERVICES LTD. & CO 32&33/K/09 A.Y.05-06 THE P.B.) THE AO HAS MADE DETAILED DISCUSSION REGAR DING THE PROFIT ON SALE OF INVESTMENT. IN SUCH ORDER THE AO CONSIDERED THE PROFIT ON SALE OF INVESTMENT HELD FOR MORE THAN THREE YEARS AS CAPITAL GAIN ONLY AND FOR CAPITAL GAIN L ESSER THAN SUCH PERIOD I.E. LESS THAN THREE YEARS THE AO CONSIDERED SUCH CLAIM AS BUSINE SS INCOME. IT MAY KINDLY BE APPRECIATED THAT THE STATUTE PROVIDES FOR HOLDING P ERIOD OF ONE YEAR ONLY AND THE CONSEQUENT GAIN OR LOSS IS TREATED AS LONG TERM GA IN OR LOSS ONLY. THE AO HAS NO AUTHORITY TO TINKER WITH LAW AND SINCE THE AO HIMSE LF TREAT A PART OF THE GAIN IN SUCH YEAR AS CAPITAL GAIN ONLY HE HAS JUSTIFIED HIS ACTION ON SALE OF INVESTMENT AS CAPITAL GAIN EVEN THOUGH APART OF SUCH GAIN HAS BEEN TREATED OTHERWIS E. THE LAW ITSELF PROVIDES AS TO THE PERIOD OF HOLDINGS AND THE AO HAS NO AUTHORITIES TO CHANGE SUCH COMMISSION ON HIS WHIMS AND FANCIES. LD. COUNSEL STATED THAT REVENUE HAVING ACCEPTED SUC H TREATMENT OF GAIN AS CAPITAL GAIN, HAS NO AUTHORITY TO TREAT THE SAME IN A PARTICULAR MANNER IN ASSESSMENT YEAR 2005-06 ACCORDING TO ITS OWN CONVENIENCE AND HENCE SUCH GAIN SHOULD BE TREA TED AS CAPITAL GAIN AS DECLARED BY THE ASSESSEE. HE CONTENDED THAT AO IN HIS ORDER STATED THAT THE ASSESSEE S MAIN BUSINESS IS TO BUY, INVEST, ACQUIRE, SUBSCRIBE, TO HOLD, DISPOSE OF AND DEAL IN SHARES / UNITS ETC. THE AO FURTHER CONTENDED THAT THE ASSESSEE COMPANY CARRIED ON IN S YSTEMATIC AND ORGANIZED MANNER NUMEROUS TRANSACTIONS OF BUYING AND SELL OF SHARES / UNITS, WHICH STATUTE ITS BUSINESS ACTIVITIES. THE AO FURTHER ANNEXED STATEMENT OF CAPITAL GAIN TO BUTTRE SS HIS CONTENTION. HE FURTHER STATED THAT THE AO ON SUCH PREMISE TREATED THE ENTIRE VALUE OF QUOT ED INVESTMENT AND UNQUOTED INVESTMENT BY TREATING THEIR MARKET VALUE AND BOOK VALUE RESPECTI VELY AND COMPUTED THE PROFIT FROM SALE AND PURCHASE OF INVESTMENT AT RS.2,43,83,784/- (CONSIDE RED AT RS. 4,98,17,046/- WHICH WAS SUBSEQUENTLY RECTIFIED U/S 154 OF THE ACT) AND TREA TED THE SAME AS BUSINESS INCOME. HE STATED THAT THE CIT(A) HAS CONSIDERED THIS ISSUE IN LENGTH AND OBSERVED AS UNDER: I. THE SHARES / UNITS OF MUTUAL FUND WERE CLASSIF IED AS INVESTMENT IN THE BOOKS OF THE ASSESSEE. II. THE PROFIT EARNED OUT OF SALE / TRANSFER WERE ALL ALONG DECLARED AS CAPITAL GAIN. III. CAPITAL GAIN SO DECLARED WAS ASSESSED UP T O THE ASSESSMENT YEAR 2004-05. IV. INVESTMENT IN SHARES AND UNITS WERE MADE BY T HE ASSESSEE OUT OF ASSESSEES OWN FUND AND NOT OUT OF BORROWE D FUND. V. THE ASSESSEE CARRIED INVESTMENT IN SHARES / UN ITS IN ITS BOOKS OF ACCOUNTS AT COST PRICE AND NOT AT COST OF MARKET VALUE WHICHEVER IS LOWER, WHICH IS GENERALLY THE CASE OF GOODS HELD AS STOCK IN TRADE. 15 ITA 586/K/20 0 9 M/S. R. V. INVESTMENT & DEALERS LTD..& 609/K/2009-KIRTIVARDHAN FINVEST SERVICES LTD. & CO 32&33/K/09 A.Y.05-06 THE LD. COUNSEL STATED THAT THE CIT(A) HAS RIGHTLY HELD THAT THE VOLUME OF TRANSACTIONS / FREQUENCY CANNOT ALTER THE CHARACTER OF THE TRANSAC TIONS AND FURTHER THE AO HAS NOT REJECTED THE BOOKS OF ACCOUNT BEFORE ARRIVING AT SUCH CONCLUSION . THE LD. COUNSEL REQUESTED THE BENCH TO CONSIDER THE FOLLOWING: I. THE SHARES / MUTUAL FUND WERE DULY CLASSIFIED AS INVESTMENT IN THE BOOKS OF ACCOUNTS. IN SUCH RESPECT IT IS FURTHER SUBMITTED THAT. II. THE PROFIT EARNED OUT OF SUCH SALE AS ALL ALONG BEEN DECLARED AS CAPITAL GAIN AND THE SAME HAS BEEN ACCEPTED BY THE REVENUE IN PRECEDING AND S UCCEEDING YEARS. III. SHARES AND SECURITIES WERE HELD AS INVESTMENT AND WERE DULY REFLECTED IN THE BALANCE SHEET FOR THE A.Y 2002-03 (PAPER BOOK PAGE 99), A.Y 2003-0 4 (PAPER BOOK PAGE 152), A.Y 2004-05 (PAPER BOOK PAGE 187) & A.Y 2005-06 (PAPER BOOK PAGE 225). FOR SUCH INVESTMENT, INVESTMENT REGISTER HAS BEEN MAINTAINED SEPARATELY AND THIS IS DULY MENTIONED IN RELEVANT PAGES OF ACCOUNTS OF YEAR ENDED 31.03.2002 (P/B 95), 31.0 3.2003 (P/B 148), 31.03.2004 (P/B 181) & 31.03.2005 (P/B 219). IV. INVESTMENTS WERE VALUED AT COST AND STOCK-IN-TR ADE WAS VALUED AT COST OF MARKET VALUE. THIS FACT DULY CERTIFIED IN THE AUDITED ACCOUNTS. (PAGES 107, 162, 199, 236 OF PAPER BOOK) V. ASSESSEE COMPANY IS A NBFC COMPANY (MENTIONED IN AUDITORS REPORT AT PAGE 220 OF PAPER BOOK) AND AS PER THE RBI NORMS PROVISION OF DIMINU TION IN VALUE OF INVESTMENT DULY REFLECTED WHICH GOES ON TO SHOW THE SHARES WERE HELD AS INVES TMENT ONLY. VI. IN TAX AUDIT REPORT FOR A.Y 2002-03 (PAGE 22), A.Y 2003-04 (PAGE 35), A.Y 2004-05 (PAGE 53) & A.Y 2005-06 (PAGE 71) NATURE OF BUSINESS OF THE C OMPANY WAS SHOWN AS INVESTMENT IN SHARES AND MUTUAL FUNDS. VII. AS REGARDS THE AOS CONTENTION REGARDING THE VOLUME AND FREQUENCY OF THE TRANSACTION IT MAY KINDLY APPRECIATE THAT THE SHARES ON WHICH LONG TER M CAPITAL GAIN HAS BEEN DECLARED TREATING THE YEAR HAS BEEN BROUGHT FORWARD FROM EARLIER YEAR ONL Y. PLEASE REFER PAGE 405 OF THE P.B. BESIDES THE AO NOT HAVING REJECTED THE BOOKS OF ACC OUNTS, THE AO CANNOT ASSUME THE POWER TO REPLACE THE VALUE SO DISCLOSED IN THE AUDITED BOOKS OF ACCOUNTS BY TREATING THE OPENING AND CLOSING VALUE OF INVESTMENT AS OPENING STOCK AND CL OSING STOCK AND REPLACING THE COST OF SUCH INVESTMENT BY MARKET VALUE. VIII. THE EXPENSES INCURRED AS REFLECTED IN PROFIT & LOSS ACCOUNT IS ONLY ROUTINE EXPENSES AND VERY MUCH NECESSARY FOR RUNNING OF THE COMPANY. IX. THE ASSESSEE ALSO RELIED ON DECISIONS IN THE FOLLOWING CASES FOR WHICH A BUNCH HAVING THE CATCH NOTES ON SUCH DECISIONS HAS BEEN SUBMITTED. SUCH CASES ARE AS FOLLOWS:- A) CIT V. GOPALPUROHIT (2010) 228 CTR 582 (BOM) B) DCIT V. S. M. K. SHARES AND STOCK BROKING ITA NO. 7 00/ MUM / 09 DT. 24.10.10 C) RAMESH BABU RAO V. ACIT ITA NO. 3719/MUM/ 09 DT. 13 .4.11 16 ITA 586/K/20 0 9 M/S. R. V. INVESTMENT & DEALERS LTD..& 609/K/2009-KIRTIVARDHAN FINVEST SERVICES LTD. & CO 32&33/K/09 A.Y.05-06 D) NAGAIN DAS P. SHED )HUF) V. ACIT ITA NO. 961 / MUM /2010 DT. 5.4.11 E) DCIT V. RELIANCE TRADING ENTERPRISES LTD. ITA NO. 2 024 / K/ 08 DT. 13.3.09 F) R.B.A FINANCE AND INVESTMENT CO. V. ACIT ITA NO. 12 70/K/ 07 DT. 29.6.07 G) ITO V. LOOK AD FINANCE & LEASING LTD. ITA NO. 659/K /07 THE LD. COUNSEL FOR THE ASSESSEE ALSO NEGATED THE A RGUMENTS OF LD. CIT-DR, WHICH WE WILL DISCUSS IN THIS ORDER I.E. THE LATER PART. 8. WE HAVE HEARD RIVAL SUBMISSIONS AND GONE THROUGH FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT LD. CIT-DR MAINLY CONTENDED THAT THE P URCHASE AND SALE OF SHARES IS WITHIN A SHORT PERIOD AND ABOUT THE PROPOSITION LAID DOWN BY HONBLE APEX COURT AND HONBLE HIGH COURTS THERE IS NO DISPUTE BUT IN THE GIVEN FACTS A ND CIRCUMSTANCES OF THIS CASE, WE HAVE TO TAKE A DECISION. WE FIND FROM RECORDS THAT SUCH SHARES H AVE BEEN HELD BY ASSESSEE FOR A CONSIDERABLE PERIOD OF TIME SAY 3-4 MONTHS AND EVEN MORE THAN YE AR IN SOME OF THE CASES, HENCE FACTS HAVE BEEN PROPERLY VERIFIED. CONTENTION OF LD. CIT-DR TH AT SHARES WERE PURCHASED WITH THE BORROWED FUND AS WELL AS RAISING SHARE CAPITAL BY A SSESSEE, WE FIND FROM FACTS THAT ASSESSEE HAS NOT ISSUED ANY FRESH SHARE CAPITAL DURING THE YEAR FOR WHICH MONEY HAS BEEN RECEIVED AND INDEED IT IS THE ONLY AMALGAMATION OF OTHER COMPANI ES WITH THE ASSESSEE WHICH HAS TAKEN PLACE IN RESPECT OF WHICH SHARES HAVE BEEN ISSUED AND THI S FACT IS VERIFIED FROM ASSESSEES PAPER BOOK PAGE 89, WHERE THE ASSESSEE HAS ATTACHED ANNUAL REP ORT FOR FY 2001-02 RELEVANT TO AY 2003- 04, WHEREIN SCHEME OF AMALGAMATION WITH OTHER COMPA NIES IS INCORPORATED AND THE SAME READS AS UNDER: THE COMPANY HAS FILED A REVISED SCHEME OF AMALGAMA TION WITH THE HONBLE HIGH COURT AT KOLKATA ON 25 TH SEPTEMBER, 2002 PURSUANT TO WHICH DUDHI LIMITED, S HEELA FISCAL SERVICES PVT. LTD., GURGAON FLORICULTURE LIM ITED, CHANDNI INVESTMENTS PRIVATE LIMITED, NAV-JYOTI INVESTMENT AND DEALERS LIMITED A ND ANUMEHA FINVEST SERVICE LIMITED ARE PROPOSED TO BE AMALGAMATED WITH THE COM PANY W.E.F. 1 ST OCTOBER, 2001. EVEN FROM THE ANNUAL REPORT OF FY 2004-05 RELEVANT TO AY 2005-06, YEAR UNDER CONSIDERATION, WE FIND THAT THERE IS NO ISSUE OF AN Y FRESH SHARES FOR WHICH THE ASSESSEE HAS RECEIVED MONEY AND EVEN THERE IS NO SECURED OR UNSE CURED LOAN RECEIVED. SIMILAR IS THE POSITION IN AYS 2002-03, 2003-04 AND 2004-05 EXCEPT THE LOANS APPEARING AS ON 31.3.2002 IN THE BALANCE SHEET, WHICH IS DEPICTED AT PAGE 99 OF THE ASSESSEES PAPER BOOK AND SUCH LOAN RELATES TO TEXTILE BUSINESS OF THE ASSESSEE COMPANY IN THAT YEAR AND SAME HAVE BEEN SQUARED UP IN THE VERY NEXT YEAR. WE FIND THAT THE ENTIRE INV ESTMENT IS OUT OF ASSESSEES OWN FUND AS IS EVIDENT FROM ENCLOSED CHART, WHICH SHOWS THE SOURCE S OF FUNDS, APPLICATION OF FUNDS FOR THE AYS. 2002-03, 2003-04 AND 2004-05 AND RELEVANT CHAR T READS AS UNDER: 17 ITA 586/K/20 0 9 M/S. R. V. INVESTMENT & DEALERS LTD..& 609/K/2009-KIRTIVARDHAN FINVEST SERVICES LTD. & CO 32&33/K/09 A.Y.05-06 18 ITA 586/K/20 0 9 M/S. R. V. INVESTMENT & DEALERS LTD..& 609/K/2009-KIRTIVARDHAN FINVEST SERVICES LTD. & CO 32&33/K/09 A.Y.05-06 19 ITA 586/K/20 0 9 M/S. R. V. INVESTMENT & DEALERS LTD..& 609/K/2009-KIRTIVARDHAN FINVEST SERVICES LTD. & CO 32&33/K/09 A.Y.05-06 9. APART FROM THE ABOVE FACTS AND DISCUSSION, THE L D. CIT-DR STATED THAT REJECTION OF BOOKS OF ACCOUNT U/S. 145 OF THE ACT IS NOT A STATU TORY REQUIREMENT FOR DECIDING THE ISSUE, FOR THIS, WE ARE OF THE VIEW THAT AO HAS TREATED VALUE OF INVESTMENT AS STOCK IN TRADE AND AS SUCH HE HAS COMPUTED THE ALLEGED BUSINESS INCOME, AS SUCH AS PER THE REQUIREMENT OF SECTION 145 FOR MAKING ANY ESTIMATION OF INCOME THE AO HAS TO FIRS T REJECT THE BOOKS OF ACCOUNTS AND THEN PROCEED, SINCE THE SAME HAS NOT BEEN DONE BY THE AO THE ACTION OF AO IN SUCH RESPECT SUFFERS 20 ITA 586/K/20 0 9 M/S. R. V. INVESTMENT & DEALERS LTD..& 609/K/2009-KIRTIVARDHAN FINVEST SERVICES LTD. & CO 32&33/K/09 A.Y.05-06 INFIRMITY. ANOTHER ARGUMENT OF LD. CIT-DR WAS THAT THE ASSESSEE HAS CARRIED ON THIS BUSINESS IN A SYSTEMATIC AND ORGANIZED MANNER, WHICH CLEARLY JUSTIFIES THE ACTION OF THE AO FOR HOLDING THE INCOME AS BUSINESS INCOME AND NOT CAPITAL GAINS . WE FIND FROM THE FACTS OF THE CASE THAT THE EXPENSES INCURRED ARE DAY TO DAY ROUTINE EXPENSES N ECESSARY FOR RUNNING OF THE COMPANY. THE LD. CIT-DR IN THIS RESPECT HAS ALSO POINTED OUT THA T THE BAD DEBT DEBITED IN PROFIT & LOSS A/C SHOWS THAT THE ASSESSEE CARRYING ON BUSINESS OF SHA RES. IN THIS RESPECT, WE ARE OF THE VIEW THAT SUCH BAD DEBT RELATES TO THE TEXTILE BUSINESS OF TH E ASSESSEE WHICH WAS CARRIED ON IN EARLIER YEAR AND HAS CLOSED SINCE 2002. SINCE THE MONEY IN RESPE CT OF SUCH BUSINESS IS NOT RECOVERED FROM THE DEBTORS OF SUCH TEXTILE BUSINESS, HENCE THE AMO UNT IS BEING WRITTEN OFF IN A PARTICULAR YEAR AND AS SUCH IT CANNOT BE CONSTRUED AS ROUTINE EXPEN SES. 10. ANOTHER OBJECTION OF LD. CIT-DR IS THAT THE DEC ISION TAKEN IN EARLIER YEAR, IF THE SAME IS PLAINLY ERRONEOUS, THERE IS DUTY OF COURT TO REVIEW IT AND NOT TO PERPETUATE THE MISTAKE, WHEN AN EARLIER RELEVANT STATUTORY PROVISION IS NOT BROUGHT TO THE NOTICE OF THE COURT. WE FIND FROM THE FACTS OF THE CASE THAT IN EARLIER YEARS REVENUE HAV ING ACCEPTED SUCH GAIN AS CAPITAL GAIN ONLY AND THE ASSESSMENT HAVING REACHED FINALITY, IT CANNOT B E CONTENDED NOW THAT SUCH CONCLUSION BY THE AO IS ERRONEOUS IN THOSE YEARS, BESIDES, THE AO H AS PASSED SUCH ORDERS AFTER DUE DISCUSSION. WE ARE OF THE VIEW THAT THE RULE OF CONSISTENCY H AS TO BE FOLLOWED ALTHOUGH THE PRINCIPLE OF RES-JUDICATA DOES NOT APPLY TO INCOME TAX PROCEEDI NGS, WHERE THE FACTS ARE IDENTICAL AND ISSUE IN HAND IS THE SAME. IN CASE THERE IS CHANGE IN FA CTS AND CIRCUMSTANCES, THE DECISION CAN BE CHANGED BUT IN THE PRESENT CASE THE REVENUE COULD N OT BRING ANY NEW FACT OR EVIDENCE WHICH CHANGES THE FACTUAL POSITION FROM EARLIER YEAR, IN SUCH CIRCUMSTANCES, WE CANNOT TAKE A DIFFERENT VIEW. SIMILARLY, HONBLE GUJARAT HIGH COURT IN THE CASE OF SAURASHTRA CEMENT & CHEMICAL INDUSTRIES LTD. VS. CIT (1980) 123 ITR 669 (GUJ.) W HEREIN IT IS HELD THAT WHETHER THE ITO WAS JUSTIFIED IN REFUSING TO CONTINUE THE RELIEF OF TAX HOLIDAY GRANTED TO THE ASSESSEE-COMPANY FOR THE ASSESSMENT YEAR 1968-69, IN THE ASSESSMENT YEAR UND ER REFERENCE, THAT IS, 1969-70, WITHOUT DISTURBING THE RELIEF GRANTED FOR THE INITIAL YEAR . HONBLE COURT HELD THAT IT SHOULD BE STATED THAT THERE IS NO PROVISION IN THE SCHEME OF S. 80J SIMIL AR TO THE ONE WHICH WE FIND IN THE CASE OF DEVELOPMENT REBATE WHICH COULD BE WITHDRAWN IN SUBS EQUENT YEARS FOR BREACH OF CERTAIN CONDITIONS AND NO DOUBT, THE RELIEF OF TAX HOLIDAY UNDER S. 80J CAN BE WITHHELD OR DISCONTINUED PROVIDED THE RELIEF GRANTED IN THE INITIAL YEAR OF ASSESSMENT IS DISTURBED OR CHANGED ON VALID GROUNDS. FURTHER, HONBLE COURT HELD THAT WITHOUT D ISTURBING THE RELIEF GRANTED IN THE INITIAL 21 ITA 586/K/20 0 9 M/S. R. V. INVESTMENT & DEALERS LTD..& 609/K/2009-KIRTIVARDHAN FINVEST SERVICES LTD. & CO 32&33/K/09 A.Y.05-06 YEAR, THE ITO CANNOT EXAMINE THE QUESTION AGAIN AND DECIDE TO WITHHOLD OR WITHDRAW THE RELIEF WHICH HAS BEEN ALREADY ONCE GRANTED. ACCORDING TO C OURT LEARNED ADVOCATE FOR THE REVENUE, INVITED ATTENTION TO CERTAIN OBSERVATIONS MADE BY T HIS COURT IN CIT V. SATELLITE ENGINEERING LTD. [1978] 113 ITR 208 (GUJ), WHERE THE COURT WAS CONC ERNED WITH THE QUESTION, WHETHER AN INDUSTRIAL UNDERTAKING WHICH DID NOT SATISFY THE P RESCRIBED CONDITIONS SO AS TO ENTITLE ITSELF TO THE RELIEF UNDER S. 80J IN THE INITIAL YEAR CAN SU CCESSFULLY CLAIM THE RELIEF, IF THE PRESCRIBED CONDITIONS ARE SATISFIED IN THE SUBSEQUENT YEARS. HONBLE COURT ANSWERED THAT THIS DECISION OF THIS COURT IN SATELLITE ENGINEERING LTD.'S CASE [1 978] 113 ITR 208 (GUJ) CAN BE OF ANY ASSISTANCE TO THE CAUSE OF THE REVENUE, BECAUSE TH E QUESTION WITH WHICH THIS COURT WAS CONCERNED IN THAT CASE WAS ALTOGETHER A DIFFERENT ONE IN THE CONTEXT IN WHICH THE DIVISION BENCH WAS SPEAKING. HONBLE COURT FINALLY HELD THAT IT SHOULD BE UNDERSTOOD THAT THIS IS SUBJECT TO THE RIGHT OF THE ITO TO ADJUST THE RELIEF BY FIX ING THE QUANTUM HAVING REGARD TO THE RESPECTIVE CAPITAL EMPLOYED IN THE NEW UNDERTAKING IN THE YE AR WITH WHICH HE IS CONCERNED. 11. SIMILARLY, HONBLE MADHYA PRADESH HIGH COURT IN THE CASE OF CIT VS. BHILAI ENGINEERING CORPORATION PVT. LTD. (1982) 133 ITR 68 7 (MP) HAS HELD THAT NO FRESH MATERIAL WAS BROUGHT IN THE ASSESSMENT PROCEEDINGS FOR THE YEARS 1974-75 AND 1975-76 TO SHOW THAT THE FINDING REACHED BY THE ITO IN THE ASSESSMENT FOR TH E YEAR 1973-74 THAT THE ASSESSEE HAD INSTALLED NEW PLANT AND MACHINERY AND HAD CONSTRUCT ED A NEW BUILDING WAS IN ANY WAY ERRONEOUS. FURTHER, THE RELIEF UNDER S. 80J COULD B E OBTAINED WHEN NEW PLANT AND MACHINERY WERE ERECTED FOR PRODUCING THE SAME COMMODITY WHICH AN ASSESSEE WAS PRODUCING EARLIER. HONBLE HIGH COURT HELD THAT IT CANNOT, THEREFORE, BE SAID THAT THE ITO IN GRANTING THE RELIEF UNDER S. 80J FOR THE ASSESSMENT YEAR 1973-74 PROCEE DED UPON A WRONG INTERPRETATION OF THE SECTION. HENCE, FOR THE ASSESSMENT YEARS 1974-75 AN D 1975-76, THE DISALLOWANCE OF THE RELIEF UNDER S. 89J TO THE ASSESSEE WAS NOT VALID. FOR THI S, HONBLE HIGH COURT HELD AS UNDER: IT IS CONTENDED BY THE LEARNED COUNSEL FOR THE DEP ARTMENT THAT THE PRINCIPLE OF RES JUDICATA HAS NO APPLICATION TO PROCEEDINGS UNDER TH E I.T. ACT AND THE FINDINGS REACHED FOR ONE PARTICULAR ASSESSMENT YEAR CANNOT BE HELD TO BE BINDING IN THE ASSESSMENT PROCEEDINGS FOR A SUBSEQUENT YEAR. AS A GENERAL RUL E, THERE CAN BE NO DISPUTE WITH THIS PRINCIPLE. BUT THIS GENERAL RULE IS SUBJECT TO THE QUALIFICATION THAT A FINDING REACHED IN THE ASSESSMENT PROCEEDINGS FOR AN EARLIER YEAR WOULD NO T BE REOPENED IN A SUBSEQUENT YEAR IF IT IS NOT ARBITRARY OR PERVERSE, HAS BEEN ARRIVED A T AFTER DUE ENQUIRY AND IF NO FRESH FACTS ARE PLACED IN THE SUBSEQUENT ASSESSMENT YEAR. THIS IS ON THE PRINCIPLE THAT THERE SHOULD BE FINALITY AND CERTAINTY IN ALL LITIGATIONS INCLUD ING LITIGATIONS ARISING OUT OF THE I.T. ACT (SEE BURMAH-SHELL REFINERIES LTD. V. G. B. CHAND [1 976] 61 ITR 493 (BOM) AND CIT V. 22 ITA 586/K/20 0 9 M/S. R. V. INVESTMENT & DEALERS LTD..& 609/K/2009-KIRTIVARDHAN FINVEST SERVICES LTD. & CO 32&33/K/09 A.Y.05-06 DALMIA DADRI CEMENT LTD. [1970] 77 ITR 410 (P & H). IN THE INSTANT CASE, NO FRESH MATERIAL WAS BROUGHT IN, IN THE ASSESSMENT PROCEEDI NGS FOR THE YEARS 1974-75 AND 1975- 76, TO SHOW THAT THE FINDING REACHED BY THE ITO IN THE ASSESSMENT PROCEEDINGS FOR THE YEAR 1973-74, THAT THE ASSESSEE HAD INSTALLED NEW P LANT AND MACHINERY AND HAD CONSTRUCTED A NEW BUILDING, WAS IN ANY WAY ERRONEOU S. AS EARLIER POINTED OUT BY US, THE ITO, IN GRANTING THE RELIEF FOR THE YEAR 1973-74, H AD RELIED UPON THE DECISION OF THE CALCUTTA HIGH COURT IN INDIAN ALUMINIUM CO.'S CASE [1973] 88 ITR 257. THAT DECISION WAS CONFIRMED IN APPEAL BY THE SUPREME COURT IN CIT V. INDIAN ALUMINIUM CO. LTD. [1977] 108 ITR 367. THE SUPREME COURT IN TEXTILE MA CHINERY CORPN. LTD. V. CIT [1977] 107 ITR 195, HELD THAT THE RELIEF UNDER S. 80J COUL D BE OBTAINED ALSO WHEN NEW PLANT AND MACHINERY WERE ERECTED FOR PRODUCING THE SAME COMMO DITY WHICH THE ASSESSEE WAS PRODUCING EARLIER. IT CANNOT, THEREFORE, BE SAID TH AT THE ITO, IN GRANTING THE RELIEF UNDER S. 80J FOR THE ASSESSMENT YEAR 1973-74, PROCEEDED U PON A WRONG INTERPRETATION OF THE SECTION. ON THESE FACTS AND CIRCUMSTANCES, IT WAS N OT OPEN TO THE ITO, IN DEALING WITH THE ASSESSMENT FOR THE YEARS 1974-75 AND 1975-76, TO RE FUSE TO GRANT THE RELIEF UNDER S. 80J TO THE ASSESSEE. WE ARE INFORMED THAT THE RELIEF UN DER THAT SECTION HAS ALREADY BEEN GRANTED TO THE ASSESSEE FOR THE YEARS 1976-77 AND 1 977-78. FOR THE REASON GIVEN ABOVE, WE ANSWER THE QUESTION AS FOLLOWS : ' ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE INCOME TAX OFFICER WAS NOT COMPETENT TO DISALLOW THE RELIEF UNDER SECTION 80J FOR THE ASSESSMENT YEARS 1974-75 AND 1975-76. ' 12. HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS . DARIUS PANDOLE (2011) 330 ITR 485 (BOM) HAS DISCUSSED THE RULE OF CONSISTENCY STATING THAT THE PRINCIPLE OF RES JUDICATA COULD NOT AS AN ABSTRACT PRINCIPLE APPLY TO ASSESSMENT PROCEE DINGS SINCE EACH YEAR OF ASSESSMENT HAD TO BE CONSIDERED SEPARATELY, YET WHEN A FUNDAMENTAL AS PECT WAS DULY CONSIDERED AFTER A QUERY WAS RAISED BY THE ASSESSING OFFICER AND WAS ANSWERED BY THE ASSESSEE ON THE SAME FACTS, A CHANGE IN VIEW WAS EVIDENTLY NOT WARRANTED FOR THE ASSESSMENT YEAR IN QUESTION. HONBLE BOMBAY HIGH COURT HELD (PAGE 487) AS UNDER: IT IS IN THIS FACTUAL BACKGROUND THAT THE TRIBUNAL , WHILE DECIDING THE APPEAL FOR THE ASSESSMENT YEAR 2003-04 HAS OBSERVED THAT THERE WAS NO CHANGE IN THE SET OF FACTS AND CIRCUMSTANCES AS THEY OBTAINED FOR THE ASSESSMENT YEARS 1997-98 AND 2002-03. THE TRIBUNAL WAS CORRECT IN HOLDING THAT THERE WAS DUE APPLICATION OF MIND BY THE ASSESSING OFFICER TO THE VERY SAME ISSUE DURING THE COURSE O F THE EARLIER TWO ASSESSMENT YEARS AND THAT THE ASSESSMENTS WERE FINALIZED AFTER CONSIDERI NG THE REPLY FILED BY THE ASSESSEE SPECIFICALLY TO THE QUERY RAISED BY THE ASSESSING O FFICER. IN THE CIRCUMSTANCES, THE TRIBUNAL WAS, IN OUR VIEW, JUSTIFIED IN FOLLOWING T HE DECISION OF THE SUPREME COURT IN RADHASOAMI SATSANG V. CIT [1992] 193 ITR 321. WHILE THE PRINCIPLE OF RES JUDICATA COULD NOT AS AN ABSTRACT PRINCIPLE APPLY TO ASSESS MENT PROCEEDINGS SINCE EACH YEAR OF ASSESSMENT HAS TO BE CONSIDERED SEPARATELY, YET WH EN A FUNDAMENTAL ASPECT WAS DULY CONSIDERED AFTER A QUERY WAS RAISED BY THE ASSESSI NG OFFICER AND WAS ANSWERED BY THE ASSESSEE ON THE SAME FACTS, A CHANGE IN VIEW, WAS E VIDENTLY NOT WARRANTED FOR THE ASSESSMENT YEAR IN QUESTION. SO CONSTRUED, WE DO NO T FIND THAT THE DECISION OF THE TRIBUNAL WILL GIVE RISE TO ANY SUBSTANTIAL QUESTION OF LAW. THE VIEW WHICH WE HAVE TAKEN 23 ITA 586/K/20 0 9 M/S. R. V. INVESTMENT & DEALERS LTD..& 609/K/2009-KIRTIVARDHAN FINVEST SERVICES LTD. & CO 32&33/K/09 A.Y.05-06 IS CONSISTENT WITH THE PRINCIPLE LAID DOWN BY THE D IVISION BENCH OF THIS COURT IN KARSONDAS RANCHHODDAS V. CIT [1972] 83 ITR 256. T HE APPEAL IS HENCE DISMISSED. 13. IN VIEW OF THE ABOVE FACTUAL AND LEGAL POSITION , WE ARE OF THE VIEW THAT THE ASSESSEES TRANSACTION OF SHARES IS IN THE NATURE OF INVESTMEN T IN SHARES AND ACCORDINGLY DELIVERY BASED TRANSACTION IN THE PRESENT CASE IS TREATED AS THOSE IN THE NATURE OF INVESTMENT AND PROFIT RECEIVED IS TO BE TREATED EITHER AS SHORT TERM CAPITAL GAIN OR LONG TERM CAPITAL GAIN DEPENDING UPON THE PERIOD OF HOLDING. ACCORDINGLY, WE ARE OF THE VIEW THAT THE CIT(A) HAS RIGHTLY HELD THE TRANSACTIONS OF THE ASSESSEE AS INVESTMENT IN SHARE S CHARGEABLE TO CAPITAL GAIN BY TAKING UNIFORMITY IN TREATMENT AND OBSERVING THE PRINCIPLE OF CONSISTENCY, WHEN THE FACTS AND CIRCUMSTANCES ARE IDENTICAL IN ASSESSEES OWN CASE IN EARLIER YEARS. ACCORDINGLY, THIS ISSUE OF BOTH THE APPEALS OF REVENUE IS DISMISSED. 14. NOW, WE ARE COMING TO ASSESSEES CROSS OBJECTIO NS. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS IN CO NO.32/KOL/2009: 1. FOR THAT IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT(A) WAS WHOLLY WRONG AND UNJUSTIFIED IN CONFIRMING THE ARBITRARY, AD HOC AND ESTIMATED DISALLOWANCE OF EXPENSE OF RS.2,80,686/- U/S 14A OF THE I.T ACT @ 5 % OF THE EXEMPT DIVIDEND INCOME OF RS. 56,13,729/- MADE IN THE ASSESSMENT MERELY ON PR ESUMPTION WITHOUT CONSIDERING THE FACT THAT NO EXPENDITURE WAS INCURRED FOR EARNING T HE SAID INCOME AND WITHOUT BRINGING ON RECORD ANY MATERIAL OR EVIDENCE TO ESTABLISH THE NEXUS BETWEEN SUCH ALLEGED EXPENDITURE AND THE EARNING OF SAID INCOME. ACTIONS OF BOTH THE A.O AND THE LD. CIT(A) WERE WHOLLY UNREASONABLE, UNCALLED FOR AND BAD IN L AW. 2 FOR THAT IN VIEW OF THE FACTS AND CIRCUMSTANCES O F THE CASE THE LD. CIT(A) WAS WHOLLY WRONG AND UNJUSTIFIED IN FURTHER ENHANCING THE DISA LLOWANCE OF SAID EXPENSE U/S 14A OF THE ACT BY A FURTHER SUM OF RS.3,20,438/- BY WRONGL Y APPLYING RULE 8D OF THE IT RULES PRESUMING IT TO BE APPLICABLE ALSO IN CASE OF A PRO CEEDING PENDING AS ON 24.03.2008 WITHOUT CONSIDERING THAT RULE 8D INSERTED IN THE IT RULES ONLY W.E.F 24.03.2008 WAS NOT APPLICABLE FOR THE YEAR UNDER APPEAL. THE LD. CIT(A ) WAS ALSO WRONG AND UNJUSTIFIED IN NOT CONSIDERING THE FACT THAT ON THE DATE OF SUBMIS SION OF THE RETURN ON 07.10.2005 AND ALSO ON THE DATE OF ASSESSMENT MADE ON 20.12.2007 T HE SAID RULE WAS NOT ON THE STATUTE. ACTION OF THE ED. CIT(A) WAS WHOLLY UNREASONABLE, U NCALLED FOR AND BAD IN LAW. THE ASSESSEE ALSO RAISED THE FOLLOWING GROUND IN CO NO. 33/K/2009: 1. FOR THAT IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT (A) WAS WHOLLY WRONG AND UNJUSTIFIED IN DISALLOWING RS.8,41 ,755/- AS AGAINST THE DISALLOWANCE OF RS.1,82,145/- MADE BY THE AO U/S 14A OF INCOME T AX ACT, 1961. THE LD. CIT (A) HAD ENHANCES THE SAID DISALLOWANCE BY APPLYING THE PROV ISIONS OF RULE 8D(2)(III) OF INCOME TAX RULES. THE CIT (A)S ACTION IN SUCH REGARD IS B AD AND ILLEGAL AS SUCH RULE-8D 24 ITA 586/K/20 0 9 M/S. R. V. INVESTMENT & DEALERS LTD..& 609/K/2009-KIRTIVARDHAN FINVEST SERVICES LTD. & CO 32&33/K/09 A.Y.05-06 HAVING BEEN NOTIFIED ONLY ON 24.03.2008 CANNOT BE A PPLIED FOR COMPUTATION OF SUCH EXPENSES. THE AOS ACTION IS LIABLE TO BE QUASHED / CANCELLED. EVEN OTHERWISE AND WITHOUT PREJUDICE THE DISALLOWANCE MADE WAS HIGHLY EXCESSIVE AND WHOLLY UNREASONABLE. 15. WE HAVE HEARD RIVAL SUBMISSIONS AND GONE THROUG H FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT THE COORDINATE BENCH OF THIS TRIBUNAL HAS BEEN TAKING A CONSISTENT VIEW TO RESTRICT THE DISALLOWANCE TO 1% IN RELATION TO EARNING OF EX EMPT DIVIDEND INCOME. WE FIND THAT HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOY CEE MFG. CO. LTD. VS. DCIT [2010] 328 ITR 81 (BOM.) AT PAGES 138 & 139 VIDE SUB PARAS (V) TO (VII) HELD THAT RULE 8D IS PROSPECTIVE 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 IN VIEW OF FACTS OF THIS CASE AND THE PRINCIPLE LAI D DOWN BY HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCEE MFG. CO. LTD. (S UPRA), THAT RULE 8D IS APPLICABLE FOR AND FROM ASSESSMENT YEAR 2008-09 AND PRIOR TO THAT THE ASSESSING OFFICER CAN MAKE ESTIMATE IN THE GIVEN FACTS AND CIRCUMSTANCES. HEN CE, WE RESTRICT THE DISALLOWANCE TO 1% IN RELATION TO EARNING OF EXEMPTED DIVIDEND INCO ME AND DIRECT THE ASSESSING OFFICER 25 ITA 586/K/20 0 9 M/S. R. V. INVESTMENT & DEALERS LTD..& 609/K/2009-KIRTIVARDHAN FINVEST SERVICES LTD. & CO 32&33/K/09 A.Y.05-06 TO CALCULATE THE EXPENDITURE ON THAT BASIS. THIS G ROUND OF ASSESSEES CROSS OBJECTIONS IS PARTLY ALLOWED. 16. IN THE RESULT, THE APPEALS OF THE REVENUE ARE D ISMISSED AND THE CROSS OBJECTIONS OF THE ASSESSEE ARE PARTLY ALLOWED. 17. ORDER IS PRONOUNCED IN THE OPEN COURT ON 24.6.2 011. SD/- SD/- , !' , (AKBER BASHA) (MAHAVIR SINGH) (ACCOUNTANT MEMBER) JUDICIAL MEMBER ( -' -' -' -') )) ) DATED 24TH JUNE, 2011 PRONOUNCED BY SD/-(CDR) SD/-(M. SINGH) AM JM ./ $01 2 JD.(SR.P.S.) 24.6.11 ! 3 +4 5!4&6- COPY OF THE ORDER FORWARDED TO: 1 . )* / APPELLANT ITO, WARD-12(1), KOLKATA. /DCIT, CIR-1 2, KOLKATA 2 +,)* / RESPONDENT M/S. R. V. INVESTMENT & DEALERS LTD. , 23C, ASHUTOSH CHANDRA AVENUE, KCI PLAZA, KOLKATA-700 019. M/S. KIRTIVARDHAN FINVEST SERVICES LTD., 23C, ASHUT OSH CHOWDHURY AVENUE, KOLKATA-19. 3 . $ ( )/ THE CIT(A), KOLKATA 4. 5. $ / CIT KOLKATA 4<= +$ / DR, KOLKATA BENCHES, KOLKATA ,4 +/ TRUE COPY, ! $>/ BY ORDER, 1 /ASSTT. REGISTRAR .
