P.N. KAMDAR, MUMBAI V. ADDL CIT 13(2), MUMBAI

ITA 627/MUM/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 78912 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 4 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-05-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 27-05-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 21-01-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JI TENDRA YADAV
• Keywords: Business income; Salary income; Earning of tax free income
• Section: 143(3); 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL C B ENCH, MUMBAI . . , , !'# , $ % BEFORE SHRI I.P. BANSAL, JM AND SHRI N.K. BILLAI YA, AM ./ I.T.A. NO.627/MUM/2011 ( & & & & / ASSESSMENT YEAR :2007-08 SHRI P.N. KAMDAR, 316, LOHA BHAWAN, P.DMELLO ROAD, MUMBAI-400 009 / VS. THE ACIT-RG 13(2), AAYAKAR BHAVAN, M.K. ROAD, MUMBAI-400 021 ' $ ./ () ./ PAN/GIR NO. : AADPK 0725D ( '* / APPELLANT ) .. ( +,'* / RESPONDENT ) '* - / APPELLANT BY: SHRI PARESH SHAPARIA +,'* . - / RESPONDENT BY: SHRI JITENDRA YADAV . /0$ / DATE OF HEARING :27.05.2014 12& . /0$ / DATE OF PRONOUNCEMENT :27.05.2014 3 / O R D E R PER N.K. BILLAIYA, AM: THIS APPEAL BY THE ASSESSEE IS PREFERRED AGAINST T HE ORDER OF THE LD. CIT(A)-24, MUMBAI DT.30.11.2010 PERTAINING TO A.Y. 2007-08. 2. THE SUBSTANTIVE GROUNDS OF APPEAL RAISED BY THE ASSESSEE READ AS UNDER: 1. ON THE FACTS AND CIRCUMSTANCES OF APPELLANTS C ASE AND IN LAW, THE CIT(A) ERRED IN HOLDING THAT THE GA IN ITA NO. 627/M/2011 2 ON SALE OF INVESTMENT IN SHARES OF RS. 49,56,947/- AS BUSINESS INCOME INSTEAD OF SHORT TERM CAPITAL GAIN AS CLAIMED BY THE APPELLANT. 2. ON THE FACTS AND CIRCUMSTANCES OF APPELLANTS CA SE AND IN LAW, THE CIT(A) ERRED IN HOLDING THAT THE APPELLANT IS A TRADER IN SHARE AND NOT INVESTOR . 3. ON THE FACTS AND CIRCUMSTANCES OF APPELLANTS CA SE AND IN LAW, THE CIT(A) ERRED IN HOLDING THAT EXPENS ES OF RS. 7,45,426/- ARE DISALLOWABLE U/S. 14A R.W. RU LE 8D. 3. THE ASSESSEE IS AN INDIVIDUAL DERIVING PROFIT FR OM SHARE OF PROFIT AND INTEREST ON CAPITAL FROM FIRMS WHEREIN ASSESSEE IS ONE OF THE PARTNERS. THE ASSESSEE IS ALSO DERIVING SALARY INCOME AND HAS ALSO SHOWN SHORT TERM CAPITAL GAINS & LONG TERM CAPITAL GAINS AND IN COME FROM OTHER SOURCES. 4. DURING THE COURSE OF THE SCRUTINY ASSESSMENT PR OCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS SH OWN SHORT TERM CAPITAL GAIN (STCG) AT RS. 49,56,947/-. ON PERUSAL OF THE TRANSACTION, THE AO WAS OF THE OPINION THAT THE ASSESSEE HAS IND ULGED IN FREQUENT PURCHASE AND SALE OF SHARES WITH THE DOMINANT INTEN TION OF MAKING PROFIT. THEREFORE, THE AO WAS OF THE OPINION THAT INCOME WI LL NOT BE CAPITAL GAINS BUT BUSINESS INCOME. THE AO CONSIDERED THE CHART OF STCG WHICH HE HAS INCORPORATED AT PAGE-2 & 3 OF HIS ASSE SSMENT ORDER AND FINALLY CAME TO THE CONCLUSION THAT THE DOMINANT IN TENTION WAS THAT OF TRADE AND HENCE THE INCOME WILL HAVE TO BE TAXED AS BUSINESS INCOME ONLY, STCG OF RS. 49,56,947/- WAS TREATED AS BUSINE SS INCOME. ON FURTHER PERUSAL OF THE DETAILS, THE AO FOUND THAT T HE ASSESSEE HAS RECEIVED DIVIDEND OF RS. 7,19,231/-. THE AO WAS OF THE FIRM BELIEF THAT ITA NO. 627/M/2011 3 PROPORTIONATE EXPENSES NEED TO BE DISALLOWED U/S. 1 4A R.W. RULE 8D AND WENT ON TO COMPUTE THE DISALLOWANCE AT RS. 7,45,426 /-. 5. AGGRIEVED BY THIS, THE ASSESSEE CARRIED BOTH THE MATTER BEFORE THE LD. CIT(A). IT WAS BROUGHT TO THE NOTICE OF THE LD . CIT(A) THAT THE ASSESSEE IS ABOUT 68 YEARS OLD AND IS EXTENSIVELY E NGAGED IN THE BUSINESS OF IRON AND STEEL SINCE LAST 40 YEARS. THE ASSESSE E IS ALSO INVESTING IN SHARES AND SECURITIES. IT WAS EXPLAINED THAT DURIN G THE YEAR UNDER CONSIDERATION THE ASSESSEE HAS EARNED STCG FROM 26 SCRIPS ONLY. IT WAS FURTHER EXPLAINED THAT MOST OF THE SHARES WERE HE LD FOR MORE THAN 100 DAYS. THE SHARES WERE HELD AS INVESTMENT AND ACCOR DINGLY SHOWN AS INVESTMENT IN THE BALANCE SHEET. IT WAS FURTHER EX PLAINED THAT THE ASSESSEE HAS NOT BORROWED MONEY TO MAKE INVESTMENT IN SHARES . THE ASSESSEE HAS ALSO EARNED LONG TERM CAPITAL GAIN OF RS. 10.36 LAK HS WHICH HAS BEEN ACCEPTED AS SUCH BY THE AO. MOST OF THE SHARES SOL D DURING THE YEAR WERE BROUGHT FORWARD FROM THE EARLIER YEAR AND THEREFORE THE AO HAS GROSSLY ERRED IN TREATING THE ASSESSEE AS A TRADER. 5.1. AFTER CONSIDERING THE FACTS AND THE SUBMISSION S MADE BY THE ASSESSEE, THE LD. CIT(A) AT PARA 2.3 ON PAGE-12 OF HIS ORDER HELD AS UNDER: I HAVE CONSIDERED THE SUBMISSIONS OF THE LD. COUNS EL AND THIS CASE IT IS SEEN THAT THE APPELLANT HAS CONSIST ENTLY, SYSTEMATICALLY AND METHODICALLY ENTERED INTO THE SE RIES OF TRANSACTIONS SO DESIGNED TO BOOK A PROFIT AND EARN A QUICK GAIN WHICH CLEARLY SHOWS THAT THE INTENTION AND MOT IVE OF THE APPELLANT TO HAVE A WELL CO-ORDINATED BUSINESS ACTI VITY OF TRADING IN SHARES ON A CONTINUOUS, SEQUENTIAL PATT ERN FOLLOWING THE SWING ON THE STOCK EXCHANGE TO REAP THE BENEFITS OF THIS BUSINESS ACTIVITY AND BOOK THE PRO FITS AS AND WHEN IT IS SO OPPORTUNE-MAXIMIZING THE GAINS BY ENT ERING ITA NO. 627/M/2011 4 INTO THE SERIES OF TRANSACTIONS- WHICH CLEARLY SHO WS THE ESSENTIAL INGREDIENTS OF THE BUSINESS ACTIVITIES CA RRIED ON BY THE APPELLANT AND AS STATED BY THE AO ON PAGE 2 OF THE ASSESSMENT ORDER. IN THE STATEMENT OF SHORT TERM C APITAL GAIN ON SALE OF SHARES VERY CLEARLY SHOWS THE SER IES OF TRANSACTIONS AND THE MANNER IN WHICH THEY HAVE BEEN CARRIED OUT CLEARLY BRINGS OUT THE ESSENTIALS OF THE BUSINE SS ACTIVITY AND NOT THAT OF A INVESTOR AS THERE IS NO PRIDE OF HOLDING AVAILABLE FROM THIS STATEMENT TO EVEN SHOW THAT THE APPELLANT IS AN INVESTOR. RATHER THE STATEMENT CLEARLY SHOWS THE APPELLANT TO BE A TRADER IN SHARES BOOKING PROFIT S/GAINS AS AND WHEN IT COMES WAY. 5.2. THE LD. CIT(A) WENT ON TO CONFIRM THE FINDINGS OF THE AO. 6. AGGRIEVED BY THIS, THE ASSESSEE IS BEFORE US. TH E LD. COUNSEL FOR THE ASSESSEE REITERATED WHAT HAS BEEN SUBMITTED BEF ORE THE LOWER AUTHORITIES. 7. PER CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE STRONGLY SUPPORTED THE ORDER OF THE LD. CIT(A). 8. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE AUTH ORITIES BELOW AND HAVE PERUSED THE MATERIAL EVIDENCES BROUGHT ON RECO RD BEFORE US. THE ASSESSEE IS A PARTNER IN M/S. KAMDAR & CO., M/S. MA HEK INVESTMENTS, K. AMISHKUMAR & CO., AND M/S. HAMSA TRADING CO., FROM WHERE HE IS DERIVING SHARE OF PROFIT AND INTEREST ON CAPITAL. THE ASSESSEE IS ALSO DERIVING REMUNERATION FROM K. AMISHKUMAR TRADING PV T. LTD. IN ADDITION TO THIS, THE ASSESSEE IS ALSO DERIVING REN TAL INCOME FROM M/S. FRANKFINN INSTITUTE OF AIRHOSTESS AND K. AMISHKUMA R TRADING PVT. LTD. THE ALLEGATION OF THE REVENUE AUTHORITIES THAT THE ASSESSEE HAS INDULGED IN REPEATED TRANSACTION OF THE SAME SCRIP IS NOT SU PPORTED BY THE FACTS ON RECORD AS CAN BE SEEN FROM THE CHART WHICH IS EXHIB ITED AT PAGE-2 & 3 OF THE ASSESSMENT ORDER. ITA NO. 627/M/2011 5 8.1. THE ASSESSEE HAS PURCHASED SHARES OF RELIANCE COMMUNICATION ON 12.1.2006 AND 27/28.3.2006. THE SHARES WERE SOLD O N 15.5.2006, 15.6.2006, 14.8.2006, 8.11.2006, AND 1.12.2006. TH US, IT CAN BE SEEN THAT THE ASSESSEE HAS NOT PURCHASED THE SHARES AFTER SEL LING THE SAME. MOST OF THE SHARES IN THE CHART HAVE BEEN PURCHASED IN EARL IER YEARS AND ONLY SOLD DURING THE YEAR UNDER CONSIDERATION. THE ASSESSEE HAS ENTERED INTO 16 TRANSACTIONS OF PURCHASES DURING THE YEAR WHICH IS LESS THAN 1.5 TRANSACTIONS PER MONTH AND 28 TRANSACTIONS OF SALES WHICH IS JUST ABOUT 2 TRANSACTIONS PER MONTH. BY ANY STRETCH OF IMAGINAT ION, THIS CANNOT BE CONSIDERED TO BE THAT THE ASSESSEE WAS ENGAGED IN H IGH FREQUENCY TRANSACTIONS. A PERUSAL OF THE CHART SHOWS THAT TH E ASSESSEE WAS NOT CHURNING THE SHARES, BUYING AND SELLING THE SHARES AGAIN AND AGAIN. IN CIT V/S MADAN GOPAL RADHEY LAL, [1969] 73 ITR 652 ( SC), THE HON'BLE SUPREME COURT HAS DEALT WITH THE ISSUE AND DISCUSSE D THE QUESTION: A TRADER MAY ACQUIRE A COMMODITY IN WHICH HE IS DE ALING, FOR, HIS OWN PURPOSES, AND HOLD IT APART FROM THE S TOCK-IN-TRADE OF HIS BUSINESS. THERE IS NO PRESUMPTION THAT SUCH AN ACQUISITION, EVEN IF IT IS AN ACCRETION TO THE STOCK-IN-TRADE OF THE BUSINESS, IS AN AQUISITION FOR THE PURPOSE OF HIS BUSINESS: IN EACH CASE THE QUESTION IS ONE OF INTENTION TO BE GATHERED FROM THE EVIDENC E OF CONDUCT AND DEALINGS BY THE ACQUIRER WITH THE COMMODITY. IN ASSOCIATED INDUSTRIAL DEVELOPMENT (SUPRA), THE SUPREME COURT OBSERVED AS FOLLOWS: .IT WAS OPEN TO THE ASSESSEE TO CONTEND THAT EVEN ON THE ASSUMPTION THAT IT HAD BECOME A DEALER AND WAS NO L ONGER AN INVESTOR IN SHARES THE PARTICULAR HOLDINGS WHICH HA D BEEN CLEARED AND THE SALES OF WHICH HAD RESULTED IN THE PROFIT I N QUESTION HAD ALWAYS BEEN TREATED BY IT AS AN INVESTMENT. IT CAN HARDLY BE DISPUTED THAT THERE WAS NO BAR TO A DEALER INVESTIN G IN SHARES. BUT THEN THE MATTER DOES NOT REST PURELY ON THE TECHNIC AL QUESTION OF ONUS WHICH UNDOUBTEDLY IS INITIALLY ON THE REVENUE TO PROVE THAT A PARTICULAR ITEM OF RECEIPT IS TAXABLE. WHETHER A PA RTICULAR HOLDING OF SHARES IS BY WAY OF INVESTMENT OR FORMS PART OF THE STOCK-IN- ITA NO. 627/M/2011 6 TRADE IS A MATTER WHICH IS WITHIN THE KNOWLEDGE OF THE ASSESSEE WHO HOLDS THE SHARES AND IT SHOULD, IN NORMAL CIRCUMSTA NCES, BE IN A POSITION TO PRODUCE EVIDENCE FROM ITS RECORDS AS TO WHETHER IT HAS MAINTAINED ANY DISTINCTION BETWEEN THOSE SHARES WHI CH ARE ITS STOCK-IN-TRADE AND THOSE WHICH ARE HELD BY WAY OF I NVESTMENT. 8.2. THE HON'BLE SUPREME COURT IN ANOTHER CASE IN P.M. MOHAMMED MEERAKHAN (P.M.) V/S CIT, [1969] 073 ITR 735 (SC), REITERATED THAT IT WAS NOT POSSIBLE TO EVOLVE ANY SINGLE TEST OR FORMU LA WHICH COULD BE APPLIED IN DETERMINING THE TRANSACTION AS ADVENTURE IN NATURE OF TRADE OR NOT. THE DISTINCTION BETWEEN THE TWO TYPES OF TRANS ACTION IS NOT ALWAYS EASY TO MAKE. WHETHER THE TRANSACTION IS OF ONE KIN D OR THE OTHER DEPENDS ON THE QUESTION WHETHER THE EXCESS IS AN ENHANCEMEN T OF THE VALUE BY REALIZING THE SECURITY OR A GAIN IN AN OPERATION OF PROFIT MAKING. THE ASSESSEE MIGHT HAVE INVESTED CAPITAL IN SHARES WITH AN INTENTION TO RESALE THESE IF IN FUTURE THEIR SALE BRINGS IN A HIGHER PR ICE. SUCH AN INVESTMENT THOUGH MOTIVATED BY A POSSIBILITY OF ENHANCEMENT VA LUE, DID NOT NECESSARILY RENDER THE INVESTMENT A TRANSACTION IN THE NATURE OF TRADE. 8.3. THE PREVIOUS HISTORY OF THE ASSESSEE SHOW THAT IN A.Y. 2003-04, 2004-05 AND 2006-07 CAPITAL GAINS SHOWN BY THE ASSE SSEE HAS BEEN ACCEPTED AS SUCH IN ASSESSMENT U/S. 143(3) OF THE ACT. IT IS ALSO TO BE NOTED THAT LONG TERM CAPITAL GAIN HAS BEEN ACCEPTED BY THE AO. IF THE AO WAS OF THE FIRM BELIEF THAT THE ASSESSEE IS ENG AGED IN TRADING ACTIVITY IN THE SHARES THEN IT SHOULD NOT MAKE ANY DIFFERENC E WHETHER THE SHARES ARE HELD FOR MORE THAN 12 MONTHS OR LESS THAN 12 M ONTHS. IN THE PRESENT CASE, THE AO HAS ACCEPTED THAT THE ASSESSEE IS AN INVESTOR IN SO FAR AS THE LONG TERM CAPITAL GAIN IS CONCERNED. 8.4. CONSIDERING THE VOLUME AND FREQUENCY OF TRANSA CTIONS AND ALSO THE PAST ASSESSMENT HISTORY OF THE ASSESSEE, WE DO NOT FIND ANY REASON AS TO ITA NO. 627/M/2011 7 WHY THE PROFIT SHOULD NOT BE TAXED UNDER THE HEAD S HORT TERM CAPITAL GAIN AS RETURNED BY THE ASSESSEE. WE, THEREFORE, SET AS IDE THE FINDINGS OF THE LD. CIT(A) AND DIRECT THE AO TO TAX THE PROFIT ARIS ING FROM THE SALE OF SHARES UNDER THE HEAD SHORT TERM CAPITAL GAIN AS SHOWN BY THE ASSESSEE. GROUND NO. 1 & 2 ARE ACCORDINGLY ALLOWED. 9. GROUND NO. 3 RELATES TO THE DISALLOWANCE U/S. 14 A R.W. RULE 8D. 10. THE LD. CIT(A) HAS CONSIDERED THIS GRIEVANCE A T PARA-3 ON PAGE- 13 OF HIS ORDER. 11. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE DRE W OUR ATTENTION TO THE COMPUTATION OF INCOME FOR THE YEAR AND POINTED OUT THAT INTEREST PAID BY THE ASSESSEE IS ON THE BORROWINGS MADE IN EARLIE R YEARS EXCLUSIVELY FOR INVESTMENT IN SHARE CAPITAL IN VARIOUS FIRMS AND AL SO TOWARDS LENDING TO K. AMISHKUMAR TRADING PVT. LTD. IT IS THE SAY OF T HE LD. COUNSEL THAT NO BORROWED FUNDS HAVE BEEN USED FOR EARNING THE EXEMP T INCOME. THEREFORE, NO DISALLOWANCE NEEDS TO BE MADE U/S. 14 A OF THE ACT. THE LD. COUNSEL STATED THAT RULE 8D IS NOT APPLICABLE F OR THE YEAR UNDER CONSIDERATION. 12. PER CONTRA, THE LD. DR SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 13. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE LOW ER AUTHORITIES AND THE RELEVANT MATERIAL EVIDENCE BROUGHT ON RECORD BE FORE US. A PERUSAL OF THE BALANCE SHEET OF THE ASSESSEE SHOWS THAT THE AS SESSEE HAS OWN CAPITAL OF RS. 6.31 CRORES. COMPUTATION OF INCOME OF THE ASSESSEE SHOW THAT THE ASSESSEE HAS EARNED INTEREST AT RS. 44.20 LAKHS OUT OF WHICH INTEREST PAID ITA NO. 627/M/2011 8 CLAIMED AS DEDUCTION AT RS. 21.36 LAKHS. DIVIDEND INCOME RECEIVED BY THE ASSESSEE IS RS. 7.19 LAKHS. LONG TERM CAPITAL GAIN IS AT RS. 9.19 LAKHS AND SHARE OF PROFIT FROM FIRMS IS AT RS. 36.8 5 LAKHS. THESE INCOMES HAVE BEEN CLAIMED TO BE EXEMPT FROM TAX. IT IS A S ETTLED LAW THAT RULE 8D IS APPLICABLE FROM A.Y. 2008-09 AS PER THE DECISION OF THE HONBLE HIGH COURT OF MUMBAI IN THE CASE OF GODREJ & BOYCEE MANU FACTURING CO. LTD. VS DCIT 328 ITR 81. HOWEVER, AT THE SAME TIM E REASONABLE DISALLOWANCE NEEDS TO BE MADE. 13.1. CONSIDERING THE FACTS OF THE CASE IN TOTALITY , IN OUR CONSIDERED VIEW, DISALLOWANCE OF 5% OF THE EXEMPT INCOME SHOULD MEET THE ENDS OF JUSTICE. WE, THEREFORE, DIRECT THE AO TO RESTRICT THE DISALLOWANCE AT RS. 2.65 LAKHS. THE ASSESSEE WILL GET A RELIEF OF RS. 4,79,797/-. GROUND NO. 3 IS PARTLY ALLOWED. 14. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH MAY, 2014 . 3 . 2& $ 4 56 27.5.2014 2 . 7 SD/- SD/- (I.P. BANSAL ) (N.K. BILLAIYA) /JUDICIAL MEMBER $ / ACCOUNTANT MEMBER MUMBAI; 5 DATED 27 TH MAY, 2014 . . ./ RJ , SR. PS ITA NO. 627/M/2011 9 3 3 3 3 . .. . +/ +/ +/ +/ 8 &/ 8 &/ 8 &/ 8 &/ / COPY OF THE ORDER FORWARDED TO : 1. '* / THE APPELLANT 2. +,'* / THE RESPONDENT. 3. 9 ( ) / THE CIT(A)- 4. 9 / CIT 5. :7 +/ , , / DR, ITAT, MUMBAI 6. 7; < / GUARD FILE. 3 3 3 3 / BY ORDER, , / +/ //TRUE COPY// = == = / > > > > ( ( ( ( (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI