IHP FINVEST LTD, MUMBAI V. DCIT (OSD) CIR 2(2), MUMBAI

ITA 6338/MUM/2011

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 5771 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 4 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-01-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 21-11-2013
• Assessment Year: misc
• Appeal Filed On: 14-09-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: O P SINGH
• Assessee Lawyers: PRASAD BAPAT
• Keywords: Business income; Rule of consistency; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH I , MUMBAI BEFORE SHRI R.C. SHARMA , ACCOUNTANT MEMBER AND SHRI SANJAY GARG , JUDICIAL MEMBER ITA NO. 6338/M/2011 ASSESSMENT YEAR: 2008 - 09 M/S. IHP FINVEST LTD. CONSTRUCTION HOUSE, 2 ND FLOOR, WALCHAND HI RANCHAND MARG, FORT, MUMBAI 400 001 PAN: AAACI5206P VS. DCIT (OSD) CIR. 2(2) 577, 5 TH FLOOR, AAYAKAR BHAVAN, CHURCHGATE, MUMBAI - 400020 (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI PRASAD BAPAT REVENUE BY : SHRI O.P. SINGH, D.R. DATE OF HEARING : 13.01 .201 4 DATE OF PRONOUNCEMENT : 17.01.2014 O R D E R PER SANJAY GARG, JUDICIAL MEMBER: THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER OF THE CIT(A) DATED 07.06.11 REL EVANT TO ASSESSMENT YEAR 2008 - 09. 2. THE GROUNDS OF APPEAL FOR THE SAKE OF CONVENIENCE ARE REPRODUCED AS UNDER: 1 ) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT (A) ERRED IN CONFIRMING THE ORDER OF THE LD. ASSESSING OFFICER TR EATING THE LONG TERM CAPITAL GAIN AS BUSINESS INCOME BY IGNORING THE BASIC FACT THAT THE SHARES WERE HELD IN INVESTMENT FOLIO WHICH WERE IDENTIFIED AND SEPARATELY SHOWN UNDER 'INVESTMENT' IN THE BALANCE SHEET RIGHT FROM THE BEGINNING IT (SHARES) WERE PURCH ASED. 2 ) ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW, THE LD. CIT (A) ERRED IN NOT ADJUDICATING UPON THE BASIC FACT, THOUGH BROUGHT TO HIS NOTICE, THAT THE LD. ASSESSING OFFICER HAD TREATED THE INVESTMENT IN SHARES AS 'STOCK IN TRADE' FOR TR EATING THE LONG TERM CAPITAL GAIN AS BUSINESS INCOME AND ON THE OTHER HAND WHILE MAKING THE ITA NO . 6338/M/2011 M/S. IHP FINVEST LTD. 2 DISALLOWANCE U/ S . 14A THE SAME INVESTMENT HAS BEEN TREATED AS 'INVESTMENT' AND ACCORDINGLY MADE DISALLOWANCE U / S 14A . 3 ) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN NOT APPRECIATING FACT THAT APPELLANT IS ALLOWED TO MAINTAIN TWO PORTFOLIOS, ONE FOR TRADING AND OTHER FOR INVESTMENT AND THE INCOME HAS TO BE ASSESSED ACCORDINGLY. 4 ) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT (A) ERRED IN CONFIRMING THE VIEW TAKEN BY THE LD. ASSESSING OFFICER THAT THE APPELLANT HAS TAKEN UNDUE BENEFIT OF THE AMENDED PROVISIONS OF THE I T. ACT , 1961 , OVERRIDING THE CONSTITUTIONAL RIGHT OF THE TAXPAYER TO ARRANGE HIS FINANC IAL AFFAIRS AS PER THE EXISTING AND AMENDED PROVISIONS OF LAW. 5) A) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT (A) ERRED IN CONFIRMING THE ORDER OF THE LD. ASSESSING OFFICER IN TREATING THE AMOUNT OF RS . 3,98,628/ - AS EXP ENSES INCURRED IN RELATION TO EARNING EXEMPT INCOME, WHEN THERE IS NO NEXUS BETWEEN THE EXEMPT DIVIDEND INCOME AND THE EXPENDITURE INCURRED WARRANTING ANY DISALLOWANCE U/S 14A. B) THE LD. CIT (A) ERRED IN CONFIRMING THE ORDER OF THE LD. ASSESSING OFFICE R WHO TREATED THE GROSS AMOUNT OF INVESTMENT AS SHOWN IN THE BALANCE SHEET IN THE BEGINNING AND AT THE END OF THE YEAR AS 'INVESTMENT' WITHOUT REDUCING THE INVESTMENTS ON WHICH NO EXEMPT INCOME WAS EARNED. THE LD. CIT (A) FAILED TO APPRECIATE THAT THE PRO VISIONS OF RULE 8D WERE NOT APPLICABLE TO THE YEAR UNDER APPEAL . D) THE LD CIT (A) ERRED BY OVERLOOKING FACT THAT THE DIVIDENDS ARE SUBJECT TO TAX AS PER THE SPECIFIC PROVISIONS OF SEC. 115 0 OF THE I . T. ACT AND HENCE ARE NOT EXEMPT INCOME. YOUR APP ELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR WITHDRAW ANY OF THE ABOVE GROUNDS OF APPEAL . GROUND NO.1 TO 4 3. THE GRIEVANCE RAISED BY THE ASSESSEE IN GROUND NO.1 TO 4 OF THE APPEAL IS RELATING TO THE ACTION OF THE LOWER AUTHORITIES IN TREATING LONG TER M CAPITAL GAINS ITA NO . 6338/M/2011 M/S. IHP FINVEST LTD. 3 ON SALE OF SHARES AS BUSINESS INCOME WHICH WERE HELD BY THE ASSESSEE IN INVESTMENT PORTFOLIO. 4. THE AO NOTICED THAT THE ASSESSEE HAD SHOWN NET LONG TERM CAPITAL GAINS OF RS. 52,65,561/ - APART FROM BUSINESS INCOME OF PURCHASE AND SALE OF TR ADING STOCK OF SHARES AND MUTUAL FUND SECURITIES. THE AO OBSERVED THAT IN TERMS OF VOLUME, HOLDING PERIOD AND FREQUENCY OF TRANSACTIONS AND IN VIEW OF ASSESSEES BUSINESS INTENTION , THE ASSESSEE IN FACT WAS A TRADER IN SHARES AND CAPITAL GAINS ON SHARE TR ANSACTION WAS ASSESSED AS BUSINESS INCOME. 5. IN FIRST APPEAL , THE LD. CIT(A) , WHEN FACED WITH SIMILAR FACTS AND CIRCUMSTANCES IN ASSESSEES APPEAL FOR ASSESSMENT YEAR 2006 - 07 , HAD DECIDED THE IDENTICAL ISSUE AGAINST THE ASSESSEE. SO FOLLOWING HIS FIND INGS GIVEN IN THE PRECEDING YEAR I.E. ASSESSMENT YEAR 2006 - 07, HE UPHELD THE ACTION OF THE AO IN TREATING THE LONG TERM GAINS CLAIMED TO BE BY THE ASSESSEE AS BUSINESS INCOME. 6. AT THE OUTSET, THE LD. A.R. HAS BROUGHT OUR ATTENTION TO THE FACT THAT IN FU RTHER APPEAL AGAINST THE ORDER OF THE LD. CIT(A) RELEVANT TO ASSESSMENT YEAR 2006 - 07 , THE CO - ORDINATE BENCH OF THE TRIBUNAL HAS DECIDED THE IDENTICAL ISSUE IN FAVOUR OF THE ASSESSEE. HE HAS PLACED ON THE FILE A COPY OF THE ORDER DATED 02.01.13 OF THE TRIB UNAL PASSED IN ITA NO.608/M/10 (ASSESSMENT YEAR 2006 - 07). THE CO - ORDINATE BENCH OF THE TRIBUNAL DEALING WITH THE IDENTICAL ISSUE IN THE OWN CASE OF THE ASSESSEE IN THE IMMEDIATE PRECEDING YEAR HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE SETTING ASIDE THE ORDER OF THE LOWER AUTHORITIES. THE RELEVANT FINDINGS RELATING TO THE ISSUE GIVEN BY THE CO - ORDINATE BENCH OF THE TRIBUNAL ARE REPRODUCED AS UNDER: 7. BEFORE US, SHRI H.P. MAHAJANI, LD COUNSEL FOR THE ASSESSEE TRACED THE FACTS OF THE CASE AND ARGUE D WITH ONLY 11 SCRIPS IN OPERATION, WITH ONLY 783 TRANSACTIONS AND WITH THE SHARES HELD BY THE ASSESSEE FOR A PERIOD OF LONGER THAN 12 MONTHS, THE AMOUNT OF LONG TERM CAPITAL GAINS CANNOT BE TREATED AS BUSINESS INCOME. FURTHER, LD COUNSEL ARGUED THAT THE ASSESSEE AT THE TIME OF ITA NO . 6338/M/2011 M/S. IHP FINVEST LTD. 4 PURCHASE ITSELF DECIDES WHETHER PARTICULAR SHARE MUST BE SHOWN IN THE BOOKS OF ACCOUNT AS STOCK - IN - TRADE OR INVESTMENT AND MAKES THE BOOK ENTRIES ACCORDINGLY. FURTHER, HE REFERRED TO THE UNDISPUTED FACT OF MAINTAINING TWO DISTINCTI VE ACCOUNTS ONE FOR THE TRADING PURPOSE AND THE OTHER FOR THE INVESTMENT PURPOSE. FURTHER, HE MENTIONED THAT ASSESSEE FOLLOWED THE METHOD OF ACCOUNTING OF COST OR MARKET VALUE WHICHEVER IS LESS IN RESPECT OF INVESTMENT IN SHARES AT THE TIME OF VALUATION OF THE STOCK - IN - TRADE. THIS REFLECTS THE INTENTION OF THE ASSESSEE RIGHT FROM THE POINT OF PURCHASE OF THE SHARES/UNITS TILL THE SHARES ARE SOLD FOR THE PURPOSE OF INVESTMENT AND FOR EARNING OF THE BUSINESS INCOME. HE ALSO MENTIONED THAT THE ASSESSEE NEVER S HIFTED THE SHARES ONE ACCOUNT TO THE OTHER OR VICE VERSA. ASSESSEE ALSO FILED COPIES OF THE ASSESSMENT ORDERS TO DEMONSTRATE THAT CONSISTENTLY ASSESSEE HAS BEEN SHOWING THE ABOVE AMOUNT IN THE BOOKS OF ACCOUNT, AND THEREFORE, THE ASSESSING OFFICER CANNOT DESCRIBE THE CLAIM OF THE ASSESSEE, WHEN THE FACTS ARE IDENTICAL. HE RELIED ON THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME - TAX VS GOPAL PUROHIT (BOM) 336 ITR 287. 8. ON THE OTHER HAND, LD DR RELIED ON THE ORDERS OF THE AO / CIT (A). 9. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE ORDERS OF THE REVENUE AND THE FACTS / DOCUMENTS PLACED BEFORE US. IT IS AN UNDISPUTED FACT THAT THE NUMBER OF TRANSACTIONS IS ONLY 783 WHICH INCLUDES BOTH PURCHASE AND SALES TRAN SACTION. THE SCRIPS INVOLVED ARE ONLY 11 AS EVIDENT FROM SCHEDULE - J PLACED BEFORE US. ASSESSEE EARNED DIVIDEND INCOME AMOUNTING TO RS. 1.13 CRORES. IT IS ALSO A FACT THAT ASSESSEE MAINTAINED TWO DISTINGUISHABLE ACCOUNTS FOR ACCOUNTING THE STOCK - IN - TRADE AS WELL AS INVESTMENTS SEPARATELY. THIS APPROACH OF THE ASSESSEE HAS THE SANCTION OF THE CBDT VIDE THE CIRCULAR NO.4 OF THE CBDT. IT IS ALSO A FACT THAT THE ASSESSEE VALUES THE STOCK AS PER THE STATED PRINCIPLE OF COST OR THE MARKET VALUE OF THE SHARE/UNI T WHICHEVER IS LESS AND IT IS THE METHOD OF VALUATION SET FOR THE SHARES TRADING STOCK AND NOT FOR THE INVESTMENTS, WHICH ARE ALWAYS VALUED AT COST. FURTHER, THERE IS NO DISPUTE ON THE FACT THAT THE CLAIM OF THE ASSESSEE WAS ACCEPTED IN THE PAST WITHOUT MA KING ANY DISCREPANCIES. THUS, THE REVENUE VIOLATED THE SET PRINCIPLE OF CONSISTENCY. FURTHER, IT IS NOT CASE OF THE REVENUE THAT THE ASSESSEE SHIFTED THE SHARES/UNITS FROM ONE ACCOUNT TO THE OTHER WITH THE MALA FIDE INTENTION OR TAX EVASION PLANNING. IN TH ESE CIRCUMSTANCES, WE ARE OF THE OPINION, THE CIT (A)S DECISION OF HOLDING AN AMOUNT OF RS.50,04,884/ - AS BUSINESS INCOME IS NOT PROPER AND THEREFORE, CIT (A)S DECISION ON THIS GROUND IS REVERSED. ACCORDINGLY, GROUND NO.1 IS ALLOWED . 7. SINCE THE FACT S AND CIRCUMSTANCES FOR THIS APPEAL ALSO ARE SIMILAR IN NATURE, HENCE, RESPECTFULLY FOLLOWING THE FINDING GIVEN BY THE CO - ORDINATE ITA NO . 6338/M/2011 M/S. IHP FINVEST LTD. 5 BENCH OF THE TRIBUNAL IN PRECEDING YEAR, THIS ISSUE IS ACCORDINGLY DECIDED IN FAVOUR OF THE ASSESSEE. GROUND NO.5 8. THE I SSUE RAISED VIDE GROUND NO.5 IS RELATING TO DISALLOWANCE BY THE AO UNDER SECTION 14A READ WITH RULE 8D IN RELATION TO EXEMPT INCOME. THE LD. A.R. HAS CONTENDED THAT THE ASSESSEE DID NOT INCUR ANY EXPENSES FOR EARNING THE EXEMPT INCOME. HE HAS FURTHER CON TENDED THAT RULE 8D IS NOT APPLICABLE FOR THE ASSESSMENT YEAR IN QUESTION. IT MAY BE OBSERVED THAT AS PER THE LAW LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN GODREJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT [(2010) 328 ITR 81 (BOM)] , RULE 8D IS APPLICABLE FROM ASSESSMENT YEAR 2008 - 09 ONWARDS. THE AO HAS CALCULATED THE DISALLOWANCE BY INVOKING RULE 8D OF THE INCOME TAX RULES READ WITH SECTION 14A OF THE INCOME TAX ACT. THE LD. A.R. COULD NOT POINT OUT AS TO HOW THE AO WAS NOT JUSTIFIED IN APPLYING RULE 8D IN THE CASE OF THE ASSESSEE. UNDER SUCH CIRCUMSTANCES, WE DO NOT FIND ANY MERIT IN THIS GROUND OF APPEAL AND THE SAME IS ACCORDINGLY DISMISSED. 9. IN VIEW OF OUR ABOVE OBSERVATIONS, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 17.01. 201 4 . SD/ - SD/ - ( R.C. SHARMA ) (SANJAY GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 17.01. 201 4 . * KISHORE COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT ( A) CONCERNED, MUMBAI ITA NO . 6338/M/2011 M/S. IHP FINVEST LTD. 6 THE DR C BENCH //TRUE COPY// [ BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.