The DCIT, Central Circle-1(3), Ahmedabad V. The Lok Prakashan Ltd., Ahmedabad

ITA 637/AHD/2011

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 9515 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 11 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-02-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 26-11-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 28-02-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Gift; Business income; Depreciation; Business expenditure; Salary income; Earning of tax free income; Source of fund; Proportionate interest; Retrospective amendment; Commercial expediency; Capital expenditure
• Section: 143(3); 14A; 147

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD B BENCH AHMEDABAD BEFORE S/SHRI RAJPAL YADAV, JM, & MANISH BORAD, AM. SL. NO. ITA NO. ASST. YEAR 1-3 637 -639/AHD/2011 2005-06 -2007-08 4-5 62 & 1659/AHD/2012 2008-09 & 2009-10 6-8 528 -530/AHD/2011 2005-06 -2007-08 9 3194/AHD/2011 2008-09 10 1510/AHD/2012 2009-10 1-3 DCIT, CEN.CIRCLE-1(3), AHMEDABAD. VS. LOK PRAKASHAN LTD., GUJARAT SAMACHAR BHAVAN, KHANPUR, AHMEDABAD. PAN AAACL 2742F 4-5 ACIT, CEN. CIR.1(3), AHMEDABAD. VS. LOK PRAKASHAN LTD., GUJARAT SAMACHAR BHAVAN, KHANPUR, AHMEDABAD. PAN AAACL 2742F 6-8 LOK PRAKASHAN LTD., GUJARAT SAMACHAR BHAVAN, KHANPUR, AHMEDABAD. PAN AAACL 2742F VS. ACIT, CEN.CIRCLE-1(3), AHMEDABAD. 9-10 LOK PRAKASHAN LTD., GUJARAT SAMACHAR BHAVAN, KHANPUR, AHMEDABAD. PAN AAACL 2742F VS. ACIT, CEN. CIR.1(3), AHMEDABAD. REVENUE BY SHRI JAGDISH, CIT, DR ASSESEE BY SHRI S. N. SOPARKAR, AR DATE OF HEARING: 26/11/2015 DATE OF PRONOUNCEMENT: 12/02/2016 O R D E R ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 2 PER MANISH BORAD, ACCOUNTANT MEMBER. ALL THESE APPEALS OF REVENUE & ASSESSEE CROSS APP EALS, ARE DIRECTED AGAINST THE ORDER OF LD. CIT(A) DATED 30.1 2.2010, FOR ASST. YEARS 2005-06 & 2006-07, DATED 31.12.2010 FOR ASST. YEAR 2007-08, DATED 21.10.2011 FOR ASST. YEAR 2008-09 DATED 8.6.2 012 FOR ASST. YEAR 2009-10. 2. FIRST WE TAKE REVENUES APPEALS IN ITA NOS. 637 TO 639/AHD/2011 FOR ASST. YEARS 2005-06 TO 2007-08 AND ITA NO.62 & 1659/AHD/2012 FOR ASST. YEARS 2008-09 & 2009-10. 3. BRIEFLY STATED FACTS ARE THAT THE ASSESSEE IS A LIMITED COMPANY ENGAGED IN THE BUSINESS OF PUBLICATION OF NEWS PAPE RS. THE RETURNS OF INCOME FOR THE ASST. YEARS 2005-06 TO 2009-10 WERE FILED WITHIN THE STATUTORY TIME LIME ALONG WITH AUDITED FINANCIAL ST ATEMENTS. THE ASSESSEES CASES WERE SELECTED FOR SCRUTINY ASSESSM ENTS AND NOTICES U/S 143(2) OF THE ACT WERE ISSUED AND ASSES SMENTS WERE FRAMED U/S 143(3) OF THE ACT ON 28.12.2007 FOR ASST . YEAR 2005-06, ON 30.12.2008 FOR ASST. YEAR 2006-07, ON 22.12.2009 FOR ASST. YEAR 2007-08, ON 29.11.2010 FOR ASST. YEAR 2008-09 & ON 28.12.2011 FOR ASST. YEAR 2009-10 AND MADE CERTAIN ADDITIONS. 4. GROUND NO.1 OF ITA NO.637, 638/AHD/2011 AND GROUND NO.3 OF ITA NO.639/AHD/2011, GROUND NO.2 OF ITA NO.62/AH D/2012 AND GROUND NO.1 OF ITA NO.1659 RELATE TO DELETION OF ADDITION OF ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 3 BUSINESS DEVELOPMENT EXPENSES BY LD. CIT(A) AND NOT HOLDING THEM AS CAPITAL EXPENSES. 5. THE LD. AO HAS DISALLOWED THE BUSINESS DEVELOPME NT EXPENSES AND TREATED THEM AS CAPITAL EXPENDITURE FOR FOLLOWI NG ASST. YEARS:- ASST. YEAR AMOUNT 2005 - 06 25,96,09,700/ - 2006 - 07 22,25, 22,761/ - 2007 - 08 19,56,96,676/ - 2008 - 09 19,32,98,364/ - 2009 - 10 9,89,60,372/ - 6. THE LD. DR SUPPORTED THE ORDERS OF ASSESSING OFF ICER. 7. AT THE OUTSET LD. AR OF THE ASSESSEE SUBMITTED T HAT SIMILAR GROUNDS RELATING TO BUSINESS DEVELOPMENT EXPENDITUR E BEING BUSINESS EXPENSES AND NOT CAPITAL EXPENDITURE HAD B EEN DECIDED BY THE TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO.479/A HD/2005 FOR ASST. YEAR 2001-02 AND OTHERS, VIDE ORDER DATED 19. 11.2010. 8 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED T HE MATERIAL ON RECORD. WE FIND THAT THE ISSUE RELATING TO BUSIN ESS DEVELOPMENT EXPENSES TO BE TREATED AS BUSINESS EXPENDITURE AND NOT CAPITAL EXPENDITURE, HAS BEEN DEALT AND DECIDED BY THE CO-O RDINATE BENCH IN ITA NO.479/AHD/2005 FOR ASST. YEAR 2001-02 AND OTHE RS, VIDE ORDER DATED 19.11.2010, BY OBSERVING AS UNDER :- ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 4 11. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABLE ON RECORD. WE FIND THAT THE ASSESSEE HAS CLAIMED BUSINESS DEVELOPMENT EXPENSES AS UNDER:- A.Y. AMOUNT 2001-02 64,22,000 2002-03 53,67,735 2003-04 56,79,197 THE AO DISALLOWED THE ABOVE EXPENDITURE BY TREATING THE SAME AS GRATUITOUS PAYMENT IN THE A.Y. 2001-02, CAPITAL EXPENDITURE IN THE A.Y. 2002-03, AND BOTH GRATUITOUS AND CAPITAL EXPENDITURE IN A.Y. 2003-04. ON APPEAL, THE CIT(A) DELETED THE ADDITIONS IN ALL THE 3 YEARS UNDER CONS IDERATION. WE FIND THAT THE ASSESSEE EXPLAINED BEFORE THE AO THAT IT HAS LAUNCH ED A SCHEME FOR DEVELOPMENT OF ITS NEWSPAPER STYLE AS 'LAVAJAM SCHEME'. UNDER T HIS SCHEME, THE SUBSCRIBERS WHO PAID ADVANCE SUBSCRIPTION FOR THE WHOLE YEAR WE RE GIVEN GIFTS BY THE ASSESSEE. THE EXPENDITURE IN QUESTION RELATES TO SU CH GIFTS OR BENEFIT GIVEN TO THE SUBSCRIBER. THE ASSESSEE SUBMITTED BEFORE THE AO TH AT THE ABOVE EXPENDITURE WAS INCURRED FOR BUSINESS PURPOSES. THE AO DID NOT ACCEPT THE ASSESSEE'S SUBMISSION BY HOLDING THAT THE ASSESSEE WAS NOT OBL IGED TO MAKE SUCH PAYMENTS TO THE SUBSCRIBERS AND THEREFORE, THE PAYMENTS WERE GRATUITOUS AND NOT WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS. THE A O ALSO OBSERVED IN A.Y. 2002- 03 THAT THE PAYMENTS UNDER THIS HEAD RESULTS IN THE BENEFIT TO THE ASSESSEE NOT ONLY DURING THE YEAR UNDER CONSIDERATION BUT ALSO I N THE SUBSEQUENT YEARS AND THEREFORE, TREATED THE EXPENDITURE AS CAPITAL IN NA TURE. IN THE A.Y. 2003-04, THE AO HAS MENTIONED BOTH THE REASONS I.E. GRATUITOUS A S WELL AS CAPITAL IN NATURE. WE FIND THAT GENUINENESS OF PAYMENTS WAS NOT DISPUT ED BY THE AO IN ALL THE 3 YEARS UNDER CONSIDERATION. THE ONLY DISPUTE WAS REG ARDING THE NATURE OF EXPENDITURE AS TO WHETHER CAPITAL OR REVENUE AND WH ETHER THE EXPENDITURE WAS INCURRED OUT OF COMMERCIAL EXPEDIENCY OR NOT. IT IS NOT IN DISPUTE THAT BY INCURRING THE EXPENDITURE UNDER CONSIDERATION, THE ASSESSEE HAS NOT ACQUIRED ANY NEW CAPITAL ASSET. THUS, IN OUR CONSIDERED VIEW , THE CONTENTION OF THE REVENUE THAT THE EXPENDITURE INCURRED WAS CAPITAL I N NATURE, IS WHOLLY UNSUSTAINABLE. ONLY BECAUSE AN EXPENDITURE MAY RESU LT IN SOME BENEFIT IN THE UNSPECIFIED SUBSEQUENT PERIOD, DOES NOT MAKE THE RE VENUE EXPENDITURE AS CAPITAL EXPENDITURE. THE OTHER REASON GIVEN BY THE AO THAT THERE IS NO DIRECT CO- RELATION BETWEEN THE AMOUNT OF EXPENDITURE AND NUMB ER OF SUBSCRIBERS, IS ALSO IRRELEVANT FOR DECIDING THE NATURE OF EXPENDITURE O R THE ALLOWABILITY OF THE EXPENDITURE. FOR AN EXPENDITURE BEING ALLOWABLE, IT IS NOT NECESSARY THAT THE EXPENDITURE MUST HAVE YIELDED IMMEDIATE OR QUANTIFI ABLE BENEFIT TO THE ASSESSEE. IN RESPECT OF THE OTHER ARGUMENT OF THE REVENUE THA T EXPENDITURE WAS INCURRED GRATUITOUSLY AND NOT EXCLUSIVELY FOR THE PURPOSES O F BUSINESS, WE FIND THAT IT IS NOT IN DISPUTE THAT THE EXPENDITURE WAS INCURRED FO R GIVING BENEFIT OR GIFT TO THE SUBSCRIBERS OF DAILY NEWSPAPER WHO PAID THE ENTIRE SUBSCRIPTION OF THE YEAR IN ADVANCE. THUS, WE FIND THAT THE EXPENDITURE HAD A C LOSE NEXUS WITH THE BUSINESS OF THE ASSESSEE. NO MATERIAL WAS BROUGHT ON RECORD BY THE REVENUE TO SHOW THAT THE EXPENDITURE IN QUESTION WAS INCURRED FOR ANY OT HER PURPOSE EXCEPT BUSINESS CONSIDERATION BY THE ASSESSEE. IT IS NOT THE CASE O F THE REVENUE THAT THE RECIPIENTS ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 5 OF BENEFIT WERE RELATIVES OF THE ASSESSEE. FURTHER, IN OUR CONSIDERED VIEW, A BUSINESS EXPENDITURE FOR BEING DEDUCTIBLE, IT IS NO T NECESSARY THAT THE SAME MUST HAVE BEEN INCURRED UNDER SOME COMPULSION. VOLUNTARY EXPENDITURES INCURRED OUT OF COMMERCIAL EXPEDIENCY ARE ALSO FULLY DEDUCTI BLE UNDER THE INCOME TAX ACT . WE THEREFORE FIND THAT THE ORDERS OF THE AO IN MA KING DISALLOWANCE FOR THE REASON MENTIONED IN THE ORDERS ARE NOT SUSTAINABLE FOR ALL THE 3 YEARS UNDER CONSIDERATION. AS THE GENUINENESS OF EXPENDITURES U NDER PRESENT APPEALS ARE NOT IN DISPUTE AND NO FURTHER INVESTIGATION OF ANY FACT IS REQUIRED TO BE MADE FOR DECIDING THE ISSUE UNDER CONSIDERATION, IN OUR CONS IDERED OPINION, ON THE FACTS INVOLVED IN THE YEARS UNDER APPEAL RESTORATION OF I SSUE WILL NOT BE JUSTIFIED AND THEREFORE, THE PLEA OF THE DEPARTMENT TO THIS EFFEC T CANNOT BE ACCEPTED. WE THEREFORE, CONFIRM THE ORDERS OF THE CIT(A) AND DIS MISS THIS GROUND OF APPEAL OF THE REVENUE, IN ALL THE 3 YEARS UNDER CONSIDERATION . 9. FROM GOING THROUGH THE DECISION OF THE CO-ORDINA TE BENCH WE FIND THAT THE ISSUE INVOLVED IN THESE APPE ALS IS SIMILAR TO THE ISSUE DECIDED BY THE CO-ORDINATE BEN CH. THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF T HE CO- ORDINATE BENCH IN THE ABOVE CASE, WE CONFIRM THE OR DER OF LD. CIT(A) AND DISMISS THE GROUNDS OF APPEALS OF RE VENUE IN ALL THE FIVE ASSESSMENT YEARS. 10 NOW WE TAKE UP GROUND NO.3 FOR ASST. YEARS 2005-06 AND 2006-07 RAISED BY THE REVENUE AGAINST THE ACTION OF LD. CIT(A) DELETING THE ADDITION OF DEPRECIATION OF RS.1,32,50 ,363/- FOR ASST. YEARS 2005-06 AND 2006-07 CLAIMED ON PLANT AND MACH INERY GIVEN TO RAJASTHAN STATE ELECTRICITY BOARD (IN SHORT RSEB) U NDER SALE AND LEASE BACK TRANSACTION. 11 LD. DR SUPPORTED THE ORDERS OF ASSESSING OFFICER ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 6 12 AT THE OUTSET THE LD. AR SUBMITTED THAT SIMILAR ISSUE HAS BEEN DEALT AND DECIDED IN FAVOUR OF THE ASSESSEE BY THE TRIBUNAL IN ITA NO.479/AHD/2005 FOR ASST. YEAR 2001-02 AND OTHERS, VIDE ORDER DATED 19.11.2010. 13 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. AFTER CONSIDERING THE FACTS OF THE CASE AND MATERIAL ON RECORD, WE FIND THAT THE ISSUE INVOLVED IN THIS GRO UND IS THAT THE ASSESSEE COMPANY BOUGHT CERTAIN ASSETS FROM RSEB IN PREVIOUS YEARS AND THE SAME WERE LEASED BACK TO RSEB. THE AS SESSEE HAS BEEN SHOWING INCOME FROM LEASE FROM RSEB AND ALSO C LAIMING DEPRECIATION ON THE ASSETS LEASED TO RSEB. THIS FAC T THAT DEPRECIATION HAS NOT BEEN CLAIMED BY RSEB AND ONLY CLAIMED BY ASSESSEE IS NOT CONTROVERTED BY THE REVENUE. FURTHE R ON PERUSAL OF THE RECORDS, WE FIND THAT THE CO-ORDINATE BENCH IN ASSESSEES OWN CASE HAS DECIDED SIMILAR ISSUE IN ITA NO.479/AHD/20 05 FOR ASST. YEAR 2001-02 AND OTHERS, VIDE ORDER DATED 19.11.2010 IN THE FOLLOWING MANNER:- 2. GROUND NO 1 IN THE APPEAL OF THE REVENUE FOR ASS ESSMENT YEAR 2001-02, GROUND NO 2 IN ASSESSMENT YEAR 2002-03, AND GROUND NO. 1 I N THE A.Y. 2004- 05 ARE DIRECTED AGAINST THE ORDER OF THE CIT(A) DELETING T HE DISALLOWANCE OF DEPRECIATION ` 9,04,59,142 IN A.Y. 2001-02, ` 6,78,44,356 IN A.Y . 2002-03 AND ` 1,76,67,150 IN A.Y. 2004-05. 3. AT THE OUTSET, THE LD. AR SUBMITTED THAT THIS IS SUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE CONSOLIDATED ORDER OF THIS TRIBUNAL DATED 17-7-2009 IN THE CASE OF THE ASSESSEE ITSELF IN A.Y. 1999-2000 AND 2000-01 I N ITA NOS. 1987 AND 3526/AHD/2003. THEREFORE, FOLLOWING THE SAME, THE G ROUND OF APPEAL OF THE REVENUE SHOULD BE DISMISSED. THE LD. A.R. ALSO SUBM ITTED THAT THE LEASED ASSETS ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 7 ARE THE SAME WHICH WERE LEASED OUT IN THE A.Y. 1999 -2000 AND 2000-01 AND THE LEASE RENTAL HAVE BEEN RECEIVED FROM THE VERY SAME PARTIES. 4. THE D.R. SUBMITTED THAT ALTHOUGH THE SUBMISSION MADE BY THE A.R. WAS CORRECT, BUT IN THE EARLIER YEARS, NOBODY EXAMINED THE ISSUE IN QUESTION WITH THE AGREEMENT FOR LEASE TRANSACTION TO ASCERTAIN WHETHE R THE LEASE IN QUESTION WAS A FINANCIAL LEASE OR OPERATIONAL LEASE. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABLE ON RECORD. THE AO HAS OBSERVED THAT THIS ISSUE WAS INVOLVED IN EARLIER A.YS AND WAS DISCUSSE D IN THE ASSESSMENT ORDER FOR THE YEAR 2003-04. THE ASSESSEE COMPANY HAD ENTERED INTO SALE AND LEASE BACK OF ASSETS WITH RSEB IN 1995 AND 1996. HE THUS RELIED U PON THE ASSESSMENT ORDER OF THE EARLIER YEARS PASSED BY HIM AND DISALLOWED THE CLAIM FOR DEPRECIATION. THE CIT (A) OBSERVING THAT THE ISSUE HAS BEEN CONTINUOU SLY EXAMINED BY THE TRIBUNAL AND HIS PREDECESSORS IN EARLIER YEARS AND THEREFORE , FOLLOWING THE ORDER OF THE TRIBUNAL FOR THE A.Y. 1996-97 WHICH WAS THE FIRST Y EAR OF THE LEASE TRANSACTION/AGREEMENTS AND ORDER OF HIS PREDECESSOR S FOR OTHER YEARS, HELD THAT THE ADDITION MADE BY THE AO WAS NOT JUSTIFIED AND T HEREBY DELETED THE SAME. 6. WE FIND THAT IN A.Y. 1999-2000 AND 2000-01, THE TRIBUNAL OBSERVED AS UNDER:- '4. THE ASSESSEE BOUGHT THE FOLLOWING ASSETS AND LE ASED BACK IT TO RAJASTHAN STATE ELECTRICITY BOARD ['RSEB' FOR SHORT] DURING THE A.Y . 1996- 97 AND 1997-98. 1. DISTRIBUTION & POWER TRANSFORMER ` 20,49,53,000 2. GAS TURBINE & ELECTRIC EQUIPMENT OF RAMGARH GTPP ` 61,99,31,000 3. DISTRI. OF TRANSFORMER & CIRCUIT BREAKERS ` 36,99,36,483 ========= IT CLAIMED DEPRECIATION ON THESE ASSETS ON THE GROU ND THAT IT IS THE REAL OWNER OF THE PROPERTY AND TITLE TO THE PROPERTY HAS BEEN TRA NSFERRED TO IT. AFTER LEASING OUT TO RSEB, IT RECEIVED LEASE RENT FROM RSEB WHICH HAS BEEN OFFERED TO TAX. THE ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 8 DETAILS OF LEASE RENT RECEIVED AND DEPRECIATION CLA IMED IN RESPECTIVE YEARS AS NOTED BY THE LD. CIT(A) ARE AS UNDER:- ASSTT. YEARS LEASE DEPRECIATION 1996-97 99,43,526 5,12,48,38,250 1997-98 8,02,87,259 28,58,95,559 1998-99 9,77,24,689 21,44,21,668 1999-00 11,63,31,388 16,08,16,251 2000-01 14,55,12,762 12,06,12,188 2001-02 19,40,03,963 9,04,59,142 2002-03 24,01,74,952 6,78,44,356 2003-04 26,69,24,757 5,08,83,267 2004-05 13,09,492 3,81,62,451 2005-06 11,87,844 2,47,74,630 2006-07 11,87,844 1,85,80,972 2007-08 5,87,535 1,39,35,729 TOTAL 1,15,51,76,011 1,13,76,24,463 4. THE AO DISALLOWED THE CLAIM ON GROUND THAT IT IS ONLY PAPER TRANSACTION. THE LD. CIT(A) ALLOWED THE CLAIM, FOLLOWING THE ORDER O F THE TRIBUNAL IN A.Y. 1996-97, FROM WHICH THE LD. CIT(A) HAS QUOTED PARA-4.1 AND 4 .2 IN HIS IMPUGNED ORDER. HE THEN REFERRED TO THE FINDINGS OF THE TRIBUNAL AS UNDER:- '(A) THE LD. CIT(A) ACCORDINGLY HELD THAT THE AO WA S NOT JUSTIFIED IN TREATING THE TRANSACTION BETWEEN THE ASSESSEE AND RSEB AS PAPER TRANSACTION. THE ABOVE FINDING OF THE CIT(A) HAS NOT BEEN CHALLENGED BY TH E REVENUE EITHER BY FILING AN APPEAL OR IN CROSS OBJECTION BEFORE THE TRIBUNAL AN D AS SUCH HAS BECOME FINAL. (B) WE HAVE PERUSED VARIOUS DOCUMENTS, VIZ. I) SALE DEED BY RSEB IN FAVOUR OF THE ASSESSEE EXECUTED ON 20-9-95 COPIES OF WHICH HAVE BEEN GIVEN TO US AT PAGE 1 TO 5 OF THE P APER BOOK. II) INVOICE CUM DELIVERY CHALLANS GIVEN AT PAGE 6 O F THE PAPER BOOK. III) NOTIFICATION ISSUED BY THE GOVT. OF RAJASTHAN DATED 18-3-95 WHEREIN THE RAJASTHAN GOVT. HAD EXEMPTED FROM SALES TAX THE SAL E OF PLANT AND MACHINERY BY RSEB TO THE ASSESSEE IN PUBLIC INTEREST ON THE COND ITION THAT THE PURCHASER ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 9 ENTERED INTO A LEASE AGREEMENT WITH RSEB WHICH WAS ENTERED INTO AS PER A COPY OF LEASE AGREEMENT GIVEN TO US AT PAGE 9 TO 31 OF THE PAPER BOOK. IV) CERTIFICATE FOR NON CLAIM OF DEPRECIATION GIVEN BY RSEB AT PAGE 32 OF THE PAPER BOOK. A PERUSAL OF THE ABOVE DOCUMENTS CLEARLY INDICATE T HAT THE PARTIES TO THE AGREEMENT HAVE THIS TRANSACTION AS TRANSACTION OF S ALE BY RSEB TO THE ASSESSEE AND ITS SUBSEQUENT LEASE BACK BY THE ASSESSEE TO RS EB THROUGH THE AGREEMENT OF LEASE AND NO MATERIAL HAS BEEN BROUGHT ON RECORD BY THE DEPARTMENTAL AUTHORITIES TO HOLD THAT WHAT IS APPARENTLY STATED IN THIS AGRE EMENT IS NOT REAL AND AS SUCH, WE ARE UNABLE TO AGREE WITH THE CONCLUSION OF THE A O AS UPHELD BY THE LD. CIT(A) THAT THE LEASE AGREEMENT IS IN ESSENCE A HIRE PURCH ASE AGREEMENT. (C) A TRANSACTION OF SALE AND LEASE BACK IS QUITE D ISTINCT AND DIFFERENT FROM A TRANSACTION OF HIRE PURCHASE BECAUSE BOTH THE TRANS ACTIONS ARE DISTINCT AND OPERATE IN DIFFERENT FIELDS AND THE AO AS WELL AS T HE CIT(A) WERE NOT JUSTIFIED IN MISCONSTRUING THE LEASE AGREEMENT ENTERED INTO BETW EEN THE ASSESSEE [LESSOR] AND RSEB [LESSEE] INTO A HIRE PURCHASE AGREEMENT. (D) IN THE PRESENT CASE, IT IS UNDISPUTED THAT RSEB THE LESSEE [WHO WILL BE THE HIRE PURCHASER IN CASE THE AGREEMENT OF LEASE ] HAS NOT CLAIMED ANY DEPRECIATION IN RESPECT OF THESE ASSETS. THEREFORE, IT WILL BE THE ASSESSEE WHO CONTINUES TO BE AN OWNER AS LONG AS THE HIRE PURCHASER DOES NOT COMPLY WITH ALL THE TERMS OF AGREEMENT, WHO WILL BE ENTITLED TO DEPRECIATION. TH EREFORE, TAKING INTO CONSIDERATION THE TOTALITY OF THE FACTS AND CIRCUMS TANCES OF THE CASE WE DIRECT THE AO TO ALLOW DEPRECIATION TO THE ASSESSEE IN RESPECT OF THE DISPUTED ASSETS IN ACCORDANCE WITH LAW. ACCORDINGLY, GROUND OF APPEAL NO. [1] IS ALLOWED.' FOLLOWING THE ABOVE ORDER OF THE TRIBUNAL, LD. CIT( A) ALLOWED THE CLAIM OF DEPRECIATION THIS YEAR ALSO. 6. LD. D.R. SUBMITTED THAT THESE TRANSACTIONS ARE O NLY PAPER TRANSACTION OR AT BEST A FINANCIAL TRANSACTION BECAUSE THE ASSETS HAVE NOT BEEN ACTUALLY TRANSFERRED FROM RSEB TO THE ASSESSEE. THEY ARE IN THE PREMISES OF T HE RSEB AND USED BY THE RSEB ITSELF PRIOR TO THE ARRANGEMENT AND THE SUBSEQ UENT TO ARRANGEMENT. AT BEST, IT IS ONLY A FINANCIAL TRANSACTION WHEREBY THE ASSE SSEE HAS PROVIDED MONEY TO THE RSEB THOUGH IN THE FORM OF LEASE. IF SALE AND LEASE BACK ARE IGNORED, THEN WHAT IS LEFT IS ONLY A FINANCIAL TRANSACTION. ON THE OTHER HAND, LD. AR SUBMITTED THAT NO NEW ASSETS HAVE BEEN PURCHASED THIS YEAR BY THE ASS ESSEE AND LEASED OUT TO RSEB. DEPRECIATION HAVE BEEN CLAIMED ONLY ON THE OLD ASSE TS, THEREFORE, DECISION TAKEN IN THE EARLIER YEARS HAS TO BE FOLLOWED FOR THE SAK E OF CONSISTENCY. SINCE NO NEW FACTS ARE BROUGHT ON RECORD BY THE REVENUE, QUESTIO N OF HOLDING THAT SALE AND LEASE BACK TRANSACTIONS ARE ONLY A FINANCIAL TRANSA CTION WOULD NOT BE PROPER. HE FURTHER SUBMITTED THAT HON. RAJASTHAN HIGH COURT IN CIT VS. RAJASTHAN STATE ELECTRICITY BOARD , 207 CTR 415 HAS HELD THAT SALE CUM LEASE BACK TRA NSACTION ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 10 ENTERED INTO BY RSEB WERE GENUINE AND RSEB IS ENTIT LED TO DEDUCTION OF LEASE RENT PAID BY IT. THUS, ACCORDING TO THE LD. AR IN T HE CASE OF RSEB THE MATTER IS SETTLED BY THE HON. RAJASTHAN HIGH COURT. THIS DECI SION OF THE HON. RAJASTHAN HIGH COURT HAS BEEN FOLLOWED BY THE HON. GUJARAT HI GH COURT IN THE CASE OF CIT VS. GUJARAT GAS COMPANY LTD. ['GGC ' IN SHORT] IN WHICH CASE ALSO SALE AND LEASE BACK TRANSACTIONS WERE ENTERED INTO BY GUJARAT GAS COMPANY LTD. AND RSEB AND HELD THAT TRANSACTIONS ENTERED INTO BY GGC LTD. WER E GENUINE AND THEREFORE THE ASSESSEE WAS ENTITLED TO DEPRECIATION. SINCE FACTS OF THE PRESENT CASE ARE SIMILAR TO THE FACTS IN THE CASE OF GUJARAT GAS CO. [SUPRA], T HERE IS NO REASON TO TAKE A DIFFERENT VIEW. HE SUBMITTED THAT ITAT 'C' BENCH IN THE CASE OF SANDESH LTD. VS. JCIT, IN ITA NO. 1946/AHD/2000 AND OTHERS AND HELD THAT TRANSACTION OF SALE AND LEASE BACK BY RSEB ARE GENUINE AND THE ASSESSEE IS ENTITLED TO DEPRECIATION. 7. WE HAVE HEARD LD. DR AND LD. AR AND PERUSED MATE RIAL ON RECORD. IN OUR VIEW ONCE THE ASSESSEE HAS NOT PURCHASED AND LEASED BACK ANY NEW ASSETS THIS YEAR AND DEPRECIATION HAS BEEN CLAIMED ONLY ON THE OLD ASSET S ON WHICH DEPRECIATION HAS BEEN ALLOWED IN EARLIER YEARS, WHICH WAS CONFIRMED BY THE TRIBUNAL, THEN TAKING A DIFFERENT VIEW THIS YEAR WOULD NOT BE LEGALLY CORRE CT. IF THE TRANSACTION OF SALE AND LEASE BACK HAVE BEEN HELD TO BE GENUINE IN EARLIER YEARS AND NOT AS FINANCIAL TRANSACTION, THE QUESTION OF HOLDING THEM AS FINANC IAL TRANSACTION THIS YEAR DOES NOT ARISE. FURTHER, TRANSACTIONS WITH RSEB BY THE A SSESSEE COMPANY, AND IN OTHER CASES LIKE GUJARAT GAS CO. AND SANDESH LTD. HAVE BE EN HELD TO BE GENUINE AND ACCORDINGLY, DEPRECIATION HAS BEEN ALLOWED TO THEM ON SALE AND LEASE BACK ASSETS, THEN SIMILAR TREATMENT HAS TO BE GIVEN TO THE SALE AND LEASE BACK OF ASSETS IN THE CASE OF PRESENT ASSESSEE. RESPECTFULLY FOLLOWING TH E ABOVE DECISION OF THE HON. RAJASTHAN HIGH COURT AND GUJARAT HIGH COURT AND ALS O THE DECISION OF THE TRIBUNAL, WE UPHOLD THE ORDER OF THE LD. CIT (A) AN D DISMISS THIS GROUND OF THE REVENUE.' 7. IN THE ASSESSMENT YEARS UNDER PRESENT APPEALS AL SO, DEPRECIATION IN QUESTION RELATES TO ASSETS WHICH WERE FOR THE FIRST TIME LEA SED OUT IN A.Y. 1996-97 AND WHICH HAS BEEN ON CONTINUOUS LEASE SINCE THEN. IT I S NOT IN DISPUTE THAT THE DEPRECIATION UNDER DISPUTE DOES NOT RELATE TO ANY N EW ASSET WHICH WAS ACQUIRED DURING THE YEARS UNDER APPEAL. FURTHER, IT IS ALSO NOT IN DISPUTE THAT THE ASSESSEE DERIVED SIMILAR LEASE RENTAL INCOME IN RESPECT OF A SSETS IN QUESTION IN ALL THE YEARS UNDER PRESENT APPEAL WHICH WERE DERIVED BY IT IN TH E A.YS 1999-2000 AND 2000- 01. AS THE TRIBUNAL HAS ALREADY ACCEPTED THE TRANSA CTIONS AS OPERATING LEASE IN RESPECT OF WHICH DEPRECIATION WAS ALLOWABLE TO THE ASSESSEE IN THE EARLIER YEARS, WE FIND NO ERROR IN THE ORDER OF CIT (A) IN ALLOWIN G DEPRECIATION IN RESPECT OF THESE ASSETS DURING THE YEARS UNDER APPEALS. WE THE REFORE, FIND THAT THE FACTS IN THE YEARS INVOLVED IN THE PRESENT APPEALS ARE IDENT ICAL TO THE FACTS OF THE CASE IN THE A.Y. 1999-2000 AND 2000- 01 WHEREIN THE TRIBUNA L CONFIRMED THE ORDER OF THE ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 11 CIT (A) VIDE ITS CONSOLIDATED ORDER DATED 12-7-2009 WHICH IS QUOTED ABOVE. THEREFORE, IN THE PRESENT YEARS OF APPEALS ALSO, WE CONFIRM THE ORDER OF THE CIT (A) IN VACATING THE DISALLOWANCE OF DEPRECIATION ON SALE AND LEASE BACK TRANSACTIONS AND DISMISS THE GROUNDS OF APPEAL OF T HE REVENUE FOR ALL THE YEARS UNDER CONSIDERATION. 14. RESPECTFULLY FOLLOWING THE DECISION OF THE CO-O RDINATE BENCH IN THE ABOVE CASE OF ASSESSEE, WE CONFIRM THE ORDER OF LD. CIT(A) AND DISMISS THE GROUNDS OF APPEALS OF REVENUE. 15. NOW WE TAKE UP GROUND NO.2 FOR ASST. YEAR, 2005-06, 2006- 07, 2007-08 AGAINST THE ORDER OF LD. CIT(A) GIVING RELIEF OF RS.4,71,12,297 FOR ASST. YEAR 2005-06, RS.1,62,85,0 00/- FOR ASST. YEAR 2006-07 AND RS.82,01,292/- FOR ASST. YEAR 2007 -08 DISALLOWED BY THE ASSESSING OFFICER U/S 14A OF THE ACT. WE TAKE UP THE ISSUE ON THE BASIS OF FACTS FOR ASST. YEAR 2 005-06 AND SHALL APPLY THE DECISION TO ASST. YEAR 2006-07 & ASST. YE AR 2007-08 AS THE GROUNDS ARE IDENTICAL. 16. DURING ASSESSMENT PROCEEDINGS FOR ASST. YEAR 20 05-06, ASSESSING OFFICER HAS OBSERVED THAT ASSESSEE COMPAN Y HAS MADE INVESTMENT OF APPROXIMATE OF RS.121.79 CRORES AS ON 31.3.2005 AND TOTAL INTEREST DEBITED TO PROFIT AND LOSS ACCOUNT F OR ASST. YEAR WAS SHOWN AT RS.9.49 CRORES WHICH INCLUDED RS.7.92 CROR ES GIVEN TO BANK AND RS.1.57 CRORES TO OTHERS. TOTAL INTEREST PAID A T RS.9.49 CRORES INCLUDED RS.1.49 CRORES PAID ON ACCOUNT OF APPLICAT ION MONEY FOR ACQUIRING EQUITY SHARES OF PUNJAB NATIONAL BANK IN IPO. ASSESSING OFFICER PROCEEDED AHEAD BY CALCULATING PROPORTIONAT E DISALLOWANCE OF ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 12 INTEREST EXPENDITURE U/S 14A ON THE INTEREST EXPEND ITURE OF RS.8 CRORES BY CALCULATING DISALLOWANCE AT RS.5,94 CRORE S BY USING FOLLOWING FORMULA 8 CRORES X 83.09 CRORES 111.79 CRORES 17 DURING APPELLATE PROCEEDINGS BEFORE LD. CIT(A) I T WAS CLEARLY BROUGHT ON RECORD THAT THERE WAS NO JUSTIFICATION T O DENOMINATOR FIGURE OF RS.111.79 CRORES AND THE SAME SHOULD BE REPLACED BY TOTAL VALUE OF ASSETS WHICH IN ASST. YEAR 2005-06 WAS RS.538.27 CRORES AND THE IMPUGNED REVISED DISALLOWABLE INTEREST CALCULATED W AS RS.1,23,49,193/-. 18. AGGRIEVED, ASSESSEE WENT IN APPEAL BEFORE LD. C IT(A). AFTER TAKING INTO CONSIDERATION THE SUBMISSIONS OF ASSESS EE, HE GAVE PART RELIEF TO THE ASSESSEE BY MENTIONING THAT PROPORTIO NATE DISALLOWANCE CAN BE ARRIVED AT AFTER DIVIDING INVESTMENT IN EQUI TY SHARES BY TOTAL ASSETS OF THE COMPANY, WHICH IN THE CASE OF ASSESSE E WAS AT RS.538.27 CRORES AND BY APPLYING THE FIGURE OF TOTA L ASSETS OF RS.538.27 CRORES THE DISALLOWANCE OF INTEREST ARRIV ED AT RS.1,23,49,193/- WHICH HAS BEEN COMPUTED AS UNDER : - 8 CRORES X 83.09 CRORE = 1,23,49,193 538.27 CRORES ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 13 19 AGGRIEVED, REVENUE IS NOW IN APPEAL BEFORE THE T RIBUNAL. 20 LD. DR RELIED ON THE ORDERS OF ASSESSING OFFICER . 21 LD. AR SUBMITTED THAT ASSESSEE COMPANY IS HAVING SUFFICIENT INTEREST FREE FUNDS IN THE FORM OF SHARE CAPITAL, R ESERVE AND SURPLUS WHICH ARE MUCH MORE THAN THE INVESTMENTS IN SHARES AND MUTUAL FUNDS. SO THERE SHOULD NOT BE ANY REASON FOR ANY DI SALLOWANCE OF INTEREST BECAUSE INTEREST EXPENDITURE IS SOLELY INC URRED FOR THE BUSINESS PURPOSE. 22 LD. AR FURTHER RELIED ON THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. TORRENT POWER LT D. (2014) 363 ITR 474 WHEREIN THEIR LORDSHIPS HAVE UPHELD THE DECISIO N OF THE TRIBUNAL DELETING THE DISALLOWANCE U/S 14A BY OBSERVING THAT ASSESSEE HAS SUFFICIENT FUNDS FOR MAKING INVESTMENT AND IT HAD N OT USED THE BORROWED FUNDS FOR SUCH PURPOSE. 23 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD AND GONE THROUGH THE DECISION RELIED UPON BY THE ASSESSEE. THE ISSUES BEFORE US ARE IN RELATION TO A SST. YEARS 2005- 06, 2006-07 & 2007-08 WHEREIN AS PER PROVISIONS OF SECTION 14A OF THE ACT THE DUTY IS CAST UPON THE ASSESSING OFFICER TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 14 24. WE FIND THAT THIS ISSUE HAS ALSO BEEN DECIDED B Y THE CO- ORDINATE BENCH IN ASSESSEES OWN CASE IN ITA NO.479 /AHD/2005 FOR ASST. YEAR 2001-02 AND OTHERS, VIDE ORDER DATED 19. 11.2010 IN THE FOLLOWING MANNER:- 37. GROUND NO.3 OF THE REVENUE'S APPEAL IN A.Y. 200 3-04 IS DIRECTED AGAINST THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (AP PEALS) RESTRICTING THE DISALLOWANCE UNDER SECTION 14A TO RS.24,70,456/- . 38. THE AMOUNT OF RS.24,70,456/- STATED IN THE ABOV E GROUND COMPRISES OF TWO ELEMENTS NAMELY RS.24,20,456/- ON ACCOUNT OF INTERE ST DISALLOWANCE AND RS.50,000/- ON ACCOUNT OF ADMINISTRATIVE EXPENSES. 39. IT IS OBSERVED IN REVENUE'S APPEAL FOR ASSESSME NT YEAR 2004-05 GROUND NO.2 ALSO RELATES TO RESTRICTING OF DISALLOWANCE UNDER T HE HEAD ADMINISTRATIVE TO RS.50,000/- IN PLACE OF RS.5,50,000/-. FURTHER, THE ASSESSEE'S APPEAL FOR THE ASSESSMENT YEAR 2002-03 IN GROUND NO.3 ALSO RELATES TO CONFIRMING OF THE DISALLOWANCE OF RS.3,60,000/- OUT OF ADMINISTRATIVE AND GENERAL EXPENSES U/S. 14 A OF THE ACT AND IN ASSESSMENT YEAR 2004-05 THE ASSESSEE IN GRO UND NO.4 HAS CHALLENGED THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) CONFIRMING THE DISALLOWANCE OF RS.50,000/- OUT OF A DMINISTRATIVE EXPENSES BY INVOKING SECTION 14A OF THE ACT. WE, THEREFORE, SHALL DECIDE ALL THE AB OVE GROUNDS TOGETHER RELATING TO DISALLOWANCE OUT OF ADMINISTRA TIVE EXPENSES BY INVOKING PROVISIONS OF SEC. 14A AND BEFORE THAT WE PROCEED O N TO DECIDE THE PART OF GROUND FOR THE ASSESSMENT YEAR 2003-04 WHICH RELATES TO TH E DISALLOWANCE OF INTEREST OF RS.24,20,456/- IN PLACE OF `.95,59,825/- BY INVOKIN G PROVISIONS OF SEC. 14A. 40. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSES SEE COMPANY MADE INVESTMENT OF RS.106.73 CRORES AS ON 31-3-2003 AS COMPARED TO RS. 99.79 CRORES AS ON 31-3- 2002. THE ENTIRE INVESTMENT EXCEPT RS.10 CRORES IN AHMEDABAD MUNICIPAL CORPORATION CITY BOND ` 40.00 CRORES IN SARDAR SARO VAR NARMADA NIGAM LIMITED TAX FREE BOND AND RS.2.50 CRORES IN FLEXI-BONDS OF IDBI, WERE IN SHARES OF MUTUAL FUND WHICH GAVE EITHER CAPITAL GAIN OR DIVIDEND INC OME. THE INTEREST INCOME ON TAX FREE BONDS WAS OFFERED FOR TAX. THE ASSESSEE DI D NOT SUBMIT DETAILS OF INVESTMENT IN SHARES AND MUTUAL FUND DURING THE YEA R UNDER CONSIDERATION NOR IT SUBSTANTIATED THAT ONLY INTEREST FREE FUNDS WERE US ED FOR MAKING THE INVESTMENT. IN ABSENCE OF THE DETAILS OF SOURCE OF INVESTMENT I N SHARES AND MUTUAL FUND, THE LEARNED ASSESSING OFFICER CONCLUDED THAT DURING THE YEAR ASSESSEE COMPANY INVESTED INTEREST BEARING FUNDS FOR MAKING INVESTME NT IN SHARES AND MUTUAL FUND. ACCORDINGLY, HE DISALLOWED PROPORTIONATE INTE REST EXPENDITURE OF ` 95, 59,825/-. 41. IN APPEAL, THE LEARNED COMMISSIONER OF INCOME T AX (APPEALS) RESTRICTED THE DISALLOWANCE OUT OF INTEREST EXPENSES TO RS.24,20,4 56/-. ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 15 42. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. IN THE INSTANT CASE, IN ASSESSMENT YEAR 200 3-04 THE LEARNED ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS MADE INVESTM ENT OF RS.106.73 CRORES AS ON 31-3-2003 FROM WHICH TAX FREE INCOME WAS EARNED BY THE ASSESSEE. THE LEARNED ASSESSING OFFICER THEREFORE DISALLOWED PROPORTIONAT E INTEREST EXPENDITURE WHICH HE WORKED OUT TO RS.95,59,825/-. ON APPEAL THE LEAR NED COMMISSIONER OF INCOME TAX (APPEALS) RESTRICTED THE DISALLOWANCE UN DER SECTION 14A IN ASSESSMENT YEAR 2003-04 BY OBSERVING AS UNDER: '4.3 I HAVE CONSIDERED THE SUBMISSION OF THE APPELL ANT AND THE FCTS OF THE CASE CAREFULLY. AS THE DIVIDEND WAS TAXABLE DURING THIS YEAR, WHICH HAS BEEN OFFERED FOR TAX, THE LEARNED ASSESSING OFFICER WAS NOT JUSTIFIED IN DISALLOWING THE INTEREST UNDER SECTION 14A ON THE INVESTMENTS WHICH WERE MADE TOWARDS SHARES FROM WHICH INCOME HAS BEEN SHOW N AS TAXABLE. UNDER THE PROVISIONS OF SECTION 14A , THE INTEREST WOULD BE DISALLOWED ONLY WHICH IS ATTRIBUTABLE FOR TAX EXEMPT INCOME. DURING THE YEAR, THE APPELLANT'S TAX FREE INCOME WAS FROM THE BONDS OF S ARDAR SAROVAR NARMADA NIGAM LIMITED SERIES-I AND BONDS OF AHMEDAB AD MUNICIPAL CORPORATION. IN BOTH THE BONDS, THE APPELLANT HAS I NVESTED RS.50 CRORES. THE APPELLANT WAS ARGUED THAT IT HAD SUFFICIENT FUN DS IN THE FORM OF SHARES CAPITAL AND RESERVES, THEREFORE, NO INTEREST CAN BE ATTRIBUTABLE FOR INVESTMENT IN THESE BONDS. HOWEVER, ON SPECIFIC EXA MINATION, IT WAS FOUND THAT THE INVESTMENT HAS BEEN MADE IN THESE BONDS FR OM C.C. ACCOUNT AND TRANSFERRED FROM THE LOAN AGAINST FIXED DEPOSITS, W HICH SHOWS THAT THE INVESTMENT WAS MADE FROM THE LOAN ACCOUNT AGAINST P LEDGE OF FIXED ACCOUNTS AND THE INVESTMENT WAS NOT FROM INTEREST F REE CAPITAL. THE APPELLANT'S ARGUMENTS THAT THE LOAN WAS TAKEN TO AV OID THE PREMATURE ENCASHMENT OF FDR AND THEREFORE THE INTEREST PAID O N THIS LOAN ACCOUNT SHOULD BE DEDUCTED FROM THE INTEREST ON FDR WHICH I S MUCH HIGHER IS NOT TENABLE BECAUSE THE INTEREST ON LOAN ACCOUNT HAS NO T BEEN PAID TO EARN INTEREST INCOME ON FDR BUT TO EARN INTEREST ON BOND S AND FOR OTHER SOURCES. THEREFORE, THIS ARGUMENT OF THE APPELLANT CANNOT BE ACCEPTED. FROM THE DETAILS OF INTEREST, IT IS NOTED THAT THE APPELLANT HAS PAID RS.1.91 CRORES AS INTEREST ON THE LOAN ACCOUNT AGAINST FIXE D DEPOSIT ACCOUNT AND THEREFORE THIS INTEREST IS TOBE APPORTIONED UNDER SECTION 14A TOWARDS THE INVESTMENT OF RS.50 CRORES WHICH HAS BEEN MADE FOR THE BONDS ON WHICH INTEREST FREE INCOME HAS BEEN EARNED. AS THE APPELL ANT'S ACCOUNTS ARE MIXED, PROPORTIONATE INTEREST WILL BE DISALLOWED FO LLOWING ITAT'S JUDGMENT IN THE CASE OF H.K.BHATT VS. ITO, 91 TTJ 3 11 (AHMEDABAD). IT IS ALSO NOTED THAT THE INVESTMENT OF RS.40 CRORES IN S ARDAR SAROVAR NARMADA NIGAM LTD. HAS BEEN MADE ON 20.09.2002 AND RS.10 CR ORES WAS INVESTED IN THE BONDS OF AMC ON 21.03.2002. DURING THIS ASSE SSMENT YEAR, DIVIDEND INCOME OF THE APPELLANT WAS TAXABLE AND TH EREFORE THE APPELLANT HAS OFFERED TOTAL INCOME OF DIVIDEND AMOUNTING TO R S.1,16,79,641/- AS TAXABLE. HOWEVER, THE INCOME WHICH WAS NOT TAXABLE DURING THIS YEAR, WHICH HAS BEEN SHOWN BY THE APPELLANT AS TAX FREE, IS INTEREST ON BONDS OF SARDR SAROVAR NARMADA NIGAM LTD., SERIES-I AND BOND S OF AHMEDABAD ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 16 MUNICIPAL CORPORATION. THE BASIC QUESTION WHICH IS TO BE DECIDED IS THE AMOUNT OF INTEREST WHICH IS RELATABLE TO THE INVEST MENT OF RS.50 CRORES IN THE BONDS. THE APPELLANT HAS MENTIONED THAT THE PRO PORTIONATE INTEREST WHICH IS TO BE DISALLOWED ON SUCH INVESTMENTS IS FO R THE PERIOD FOR WHICH THIS INVESTMENT HAS BEEN MADE DURING THE YEAR. THER EFORE, THE TOTAL DISALLOWANCE ON PRO-RATA BASIS WHICH IS TO BE DISAL LOWED UNDER SECTION 14A WILL BE FOR 7 MONTHS, WHICH WILL BE DETERMINED AS UNDER: INTEREST EXPENSES X INVESTMENT IN TAX FREE SECURITI ES TOTAL FUNDS WITH THE ASSESSEE COMPANY RS.1,91,89,061 X RS.50,00,00,000/- RS.2,31,22,95,019 = RS.41,49,354/- ON THIS AMOUNT, PRO-RATA DISALLOWANCE WILL BE AS UN DER: RS.41,49,354 X 7 MONTHS 12 MONTHS = RS.24,20,456/- 4.3.1 ACCORDINGLY OUT OF THE DISALLOWANCE OF RS.95, 59,825/-, ADDITION OF RS.24,20,456/- IS HEREBY CONFIRMED AND THE REMAININ G AMOUNT IS DELETED. AS FAR AS ADMINISTRATIVE EXPENSES OF RS.5,00,000/- IS CONCERNED, I FIND THAT CONSIDERING THE FACT THAT THE TAX FREE INCOME HAS BEEN RECEIVED ONLY FROM TWO BONDS, THE DISALLOWANCE MADE BY THE LEARNE D ASSESSING OFFICER OF RS.5,00,000/- TOWARDS COLLECTION OF THIS INTERES T IS TOO HIGH AND THEREFORE THE SAME RESTRICTED TO RS.50,000/- AND TH E REMAINING AMOUNT IS HEREBY DELETED. ACCORDINGLY, THIS GROUND IS PARTLY ALLOWED.' 25. TO EXAMINE THE APPLICABILITY OF PROVISIONS OF S EC.14A OF THE IT ACT AND APPLICABILITY OF DECISION OF THE CO-ORDINAT E BENCH TO THE CASE OF ASSESSEE LET US ANALYZE THE RELATED FIGURES FOR ASST. YEARS 2005-06 TO 2007-08 IN REGARD TO AVAILABILITY OF TAX FREE FU NDS :- SL.NO. PARTICULARS AY 2005-06 AY 2006-07 AY 2007-08 RS. IN CRORES RS. IN CRORES RS. IN CRORES 1. SHARE CAPITAL 0.16 0.16 0.16 2. RESERVE/SURPLUS 290.12 321.21 430.66 3. INVESTMENT 121.79 169.72 168.33 4. PROFIT FOR THE YEAR 30.50 65.60 131.99 5. OTHER INCOME 69.51 61.99 114.35 6. DIVIDEND 2.08 3.83 3.00 ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 17 7. PROFIT ON SALE OF INVESTMENT 43.20 43.06 68.85 8. SECURED LOAN 120.00 2.15 54.60 9. % OF INVESTMENT OF SHARE CAPITAL AND RESERVE & SURPLUS 42.% 53% 39% 26 FROM ANALYZING THE ABOVE FIGURES, WE FIND THAT A VERAGE INVESTMENTS OF THE ASSESSEE ARE APPROXIMATELY 40% O F THE TOTAL SHARE CAPITAL AND RESERVE & SURPLUS, ADDITION IN THE RESE RVE AND SURPLUS IS ARISING MAINLY DUE TO THE EXEMPTED INCOME EARNED BY THE ASSESSEE IN PREVIOUS YEARS AS WELL AS DURING ASST. YEARS 200 5-06 TO 2007-08 WHICH GIVES A HOLISTIC VIEW THAT THE COMPANYS MAIN BUSINESS ACTIVITIES OF SALE OF NEWSPAPERS AND PRINTING MATER IAL IS NOT GIVING CONSIDERABLE PROFITS TO THE COMPANY AND ITS OVERALL REVENUE FROM THE MAIN BUSINESS ACTIVITY IS ALSO GOING AT THE SAME PA CE WITHOUT ANY MAJOR INCREASE IN REVENUE AND THE MAJOR CONTRIBUTOR Y TO THE PROFITS OF THE COMPANY IS FROM PROFIT FROM SALE OF INVESTMENTS AND ALSO FROM GOING THROUGH THE ASSESSMENT ORDERS AND DETAILS OF CAPITAL GAINS WE FIND THAT A CONSIDERABLE AMOUNT OF PURCHASE AND SAL E ACTIVITIES OF EQUITY SHARES AND MUTUAL FUNDS HAVE BEEN UNDERTAKEN BY THE ASSESSEE. IN THE DECISION OF JURISDICTIONAL HIGH CO URT IN THE CASE OF CIT VS. TORRENT POWERS LTD. (SUPRA) REFERRED BY THE LD. AR INVESTMENTS STOOD AT RS.195.1 CRORES AGAINST THE SH ARE HOLDING FUNDS OF RS.2607.18 CRORES WHICH MEANS THAT ONLY 7% OF TH E AVAILABLE TAX FREE FUNDS WERE INVESTED WHEREAS IN THE CASE OF THE ASSESSEE THE INVESTMENT IS ALMOST AROUND 40% OF THE AVAILABLE FU NDS OF SHARE CAPITAL & RESERVE/SURPLUS AND FURTHER THE MAJOR ADD ITION IN EACH YEAR IN THE RESERVE AND SURPLUS IS ONLY ON ACCOUNT OF PR OFIT FROM SALE OF INVESTMENTS. ALSO THERE HAS BEEN A CONSIDERABLE MOV EMENTS OF FUNDS ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 18 FROM BANK ACCOUNT OF THE ASSESSEE AND THESE FUNDS A RE BEING USED FOR THE WORKING CAPITAL AS WELL AS FUNDS FOR THE PU RPOSE OF INVESTMENTS. THERE IS NO SEPARATE BANK ACCOUNT MAIN TAINED BY THE ASSESSEE TO SHOW THAT TAX FREE FUNDS HAVE ONLY BEEN USED FOR THE PURPOSE OF INVESTMENT AND FOR THIS REASON PROPORTIO NATE DISALLOWANCE WAS MADE BY THE ASSESSING OFFICER WHICH WAS CORRECT ED BY BY LD. CIT(A). 27. THEREFORE, APPLYING THE RATIO OF THE DECISION T AKEN BY THE CO- ORDINATE BENCH IN ASSESSEES OWN CASE UPHOLDING THE DECISION OF LD. CIT(A) AND LOOKING TO THE FACTS OF THE PRESENT CASE AS DISCUSSED ABOVE WE ARE OF THE OPINION THAT THERE IS NO REASON TO INTERFERE WITH THE ORDER OF LD. CIT(A). ACCORDINGLY, THESE GROUNDS OF APPEALS OF REVENUE ARE DISMISSED. 28 NOW WE TAKE UP GROUND NO.4 OF REVENUES APPEAL FOR ASST. YEARS 2005-06 & 2006-07 AND GROUND NO.1 FOR ASST. Y EAR 2007-08 AND 2008-09, AGAINST THE DECISION OF LD. CIT(A) DIR ECTING THE ASSESSING OFFICER TO TREAT THE SURPLUS DERIVED FROM TRANSACTION OF SHARES AND MUTUAL FUNDS BY NOT TREATING THEM AS BUSINESS INCOME. 29 FOLLOWING ADDITIONS WERE MADE BY ASSESSING OFFIC ER :- ASST. YEAR 2005-06 RS.11,76,00,463 ASST. YEAR 2006-07 RS.12,23,56,823 ASST. YEAR 2007-08 RS.4,82,03,338 ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 19 30. THE ASSESSEE COMPANY HAS BEEN DERIVING INCOME FROM SALE OF INVESTMENTS SINCE MANY YEARS. HOWEVER, ASSESSING OF FICER HAS FRAMED THE ASSESSMENTS BY TREATING SURPLUS FROM SAL E OF INVESTMENTS AS BUSINESS INCOME EXCEPT ALLOWING THE CLAIM OF LON G TERM CAPITAL GAIN FROM SALE OF SHARES WHEREAS LD. CIT(A) HAS PAR TLY GIVEN RELIEF TO THE ASSESSEE BY HOLDING THAT EXCEPT THE TRANSACTION S OF SALE OF SHARES WHICH HAVE BEEN HELD FOR MORE THAN ONE MONTH, REMAI NING TRANSACTIONS SHOULD BE TREATED AS SHORT TERM CAPITA L GAIN AND INCOME FROM MUTUAL FUNDS EARNED THROUGH THE RESERVES OF PO RTFOLIO MANAGER AS BUSINESS INCOME. 31. FROM GOING THROUGH THE ASSESSMENT ORDER FOR ASS T. YEAR 2005- 06 WE FIND THAT ASSESSING OFFICER HAS MENTIONED ABO UT HUGE TRANSACTIONS OF PURCHASE/SALES OF SHARES AS WELL AS ACQUISITION OF SHARES OF CERTAIN IPOS. WE ARE REPRODUCING BELOW SO ME PORTION OF THE ASSESSMENT ORDER :- 2. INCOME UNDER THE HEAD 'CAPITAL CAIN' 2.6 THE FACTS OF THE ASSESSEC'S CASE ARC DISC USSED WITH REFERENCE TO THE ABOVE TESTS HERCJUNDER: (I) THE SUBJECT MATTER OF REALISATION : AS MENTIONED IN PARA 2.1 ABOVE, THE DETAILS OF TURN OVER MADE IN SHARES AND MUTUAL FUND IS REPRODUCED HEREUNDER: CAPITAL GAIN I PURCHASE CO ST SALE VALUE PROFIT/LOSS STCG ON SHARES 25.43 CRORE 3 1 .66 CRORE 6.23 CRORE STCG ON MUTUAL FUNDS 195.52 CRORE 20 1.06 CRORE 5.53 CRORE FUTURE AND OPTION TRADING - (-) 0.07 CRORE ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 20 THUS THE SUBJECT MATTER OF REALISATION IS SHARES/MU TUAL FUNDS. CONSIDERING THE VOLUME INVOLVED, AS STATED ABOVE, IT CANNOT BE TREA TED AS INVESTMENT. ON THE FACTS OF THE CASE, THE SHARES AND UNITS OF MUTUAL FUND BECAME CO MMODITY FOR THE ASSESSEE. IN THE CASE OF H. MOHAMMED & CO. V. CIT 107 1TR 637 (GUJ), THE HON'BLE HIGH COURT HAS OBSERVED THAT A STOCK-IN-TRADE IS SOMETHING IN WHICH A TRADE R OR A BUSINESSMAN DEALS WHEREAS HIS CAPITAL ASSET IS SOMETHING WITH WHICH HE DEALS. IT WAS FURTHER HELD BY THE HON'BLE HIGH COURT THAT THE DISTINCTION BETWEEN STOCK-IN-TRADE A ND INVESTMENT IS THAT OF SELLING OUTRIGHT IN THE COURSE OF BUSINESS ACTIVITY AND DERIVING INC OME FROM EXPLOITATION OF ONE'S OWN ASSETS. FURTHER, ON THE FACTS OF THE CASE, THE HON' BLE SUPREME COURT IN THE CASE OF SARDARINDRASIGH AND SONS LTD. 24 ITR 415, IT WAS OB SERVED THAT THE PRINCIPLE APPLICABLE IN ALL SUCH CASES WAS WELL SETTLED AND THE QUESTION ALWAYS WAS WHETHER THE SALES WHICH PRODUCE THE SURPLUS WERE SO CONNECTED WITH THE CARR YING ON OF THE ASSESSEE'S BUSINESS THAT IT COULD FAIRLY BE SAID THAT THE SURPLUS WAS THE PR OFIT AND GAINS OF SUCH BUSINESS. ON THE FACTS OF THAT CASE, IT WAS HELD THAT THE SURPLUS RE SULTING FROM SALE OF SHARES AND SECURITIES CONSTITUTED BUSINESS INCOME. THUS APPLYING THE ABOVE TEST IT PROVES THAT TH E ASSESSEE IS A TRADER AND NOT INVESTOR IN SHARES AND MUTUAL FUNDS. (II) THE LENGTH OF THE PERIOD OF OWNERSHIP : ON GOING THROUGH THE DETAILS FILED, IT IS NOTICED THAT THE ASSESSEE HAS SOLD THE SHARES WITHI N A SHORT PERIOD. THE DETAILS ARE SUMMARIZED AS UNDER : NAME OF THE COMPANY NO. OF SHARES DATE OF PURCHASE DATE OF SALE APTECH 691116 15.01.2004 30.06.2004 DCM 2403 04.01.2005 __ 07.01.2005 DISHMANPHARMA 10900 20.04.2004 _ 07.10.2004 DATAMATICS 33775 08.05.2004 08.11.2004 GAIL 20000 03.06.2004 28.10.2004 ICICI BANK 42132 20.04.2004 31.12.2004 NTPC 50000 05.11.2004 08.11.2004 TCS 110111 23.08.2004 31.10.2004 TO 14.12.2004 ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 21 THE ABOVE DATA INDICATES THAT THE ASSESSEE'S PERIOD OF HOLDING REMAINED SHORT IN MOST OF THE CASES. THUS, THE RESULT OF THIS TEST IS NOT IN FAVOUR OF ASSESSEE. (III) THE FREQUENCY OR NUMBER OF TRANSACTION BY THE SAM E PERSON : IT CAN BE VERIFIED FROM THE DETAILS OF PURCHASE AND SALE OF SHARES AS MENTION/D IN PARA 2.1 ABOVE, THE ASSESSEE INDULGED INTO SIMILAR TRANSACTI ONS VERY FREQUENTLY SCRUTINY OF THE PROFIT AND LOSS ACCOUNT REVEALS THAT IF THE CAPITAL GAIN OF RS.43,19,73,163/- ON SALE OF SHARES/UNITS IS PUT OUTSIDE THEN THERE IS A LOSS OF RS. 13 CRORES IN THE BUSINESS OF PUBLICATION OF NEWSPAPERS. THUS, THE MAIN SOURCE OF INCOME REMAINS CAPITAL GAIN ON SALE OF SHARES/SECURITIES/MUTUAL FUND FOR THE YEAR UNDER CONSIDERATION. SIMILAR TREND IS OBSERVED IN EARLIER YEARS ALSO. THUS, IT IS CLEAR T HAT THE ASSESSEE IS A DEALER IN SHARES AND SECURITIES AND NOT AN INVESTOR. IN THE CASE OF THE CIT VS. ASSOCIATED INDUSTRIAL DE VELOPMENT CO. (1971) 82 ITR 586 (SC) THE HONORABLE APEX COURT HAS OBSERVED THAT THE MULTIPLICITY OF THE TRA NSACTIONS OCCURRING SUCCESSIVELY OVER THE YEARS SUPPORTED THE DEPARTMENTAL STAND THAT THE ASSESSEE HAD CEASED TO BE AN INVESTOR AND HAD BECOME A DEALE R. (IV) SUPPLEMENTARY WORK ON OR IN CONNECTION WITH THE PRO PERTY REALISED : NO SUPPLEMENTARY WORK IN RESPECT OF SHARES AND MUTU AL FUND FOUND TO HAVE BEEN CARRIED OUT BY THE ASSESSEE. (V) THE CIRCUMSTANCES THAT WERE RESPONSIBLE FOR THE REA LISATION : AS ADMITTED BY THE ASSESSEE, WHEN THE PRICES OF T HE SHARES AND MUTUAL FUNDS REACHED THE TARGETED PRICE, THE SAME HAVE BEEN SOLD. THER E WAS NO EMERGENCY OR OPPORTUNITY CALLING FOR READY MONEY, (VI) MOTIVE : (A) THE MOTIVE OF THE ASSESSEE IS ONLY TO EARN MAXI MUM PROFIT AND NOT THE INVESTMENTS. THE INTENTION TO HOLD THE SHARES FOR A LONGER PERIO D AND ENJOYING THE BENEFITS OF THE OWNERSHIP OF THE ASSETS IS MISSING. IN THE CASE OF G.VENKATA SWAMI NAIDU & CO. VS. CIT( 1959) 35 ITR 594, THE SUPREME COURT IN THIS CASE DISCUSSED THE TEST OF IN TENTION. IT HELD THAT IN CASES WHERE THE PURCHASE HAS BEEN MADE SOLELY AND EXCLUSI VELY WITH THE INTENTION OF RESALE AT A PROFIT AND THE PURCHASER HAS NO INTENTI ON OF HOLDING THE PROPERTY FOR HIMSELF OR OTHERWISE ENJOYING IT OR USING IT, THE P RESENCE OF SUCH INTENTION IS A RELEVANT FACTOR AND UNLESS IT IS OFF-SET BY THE PRE SENCE OF OTHER FACTORS, IT WOULD RAISE A STRONG PRESUMPTION THAT A TRANSACTION IS AN ADVENTURE IN THE NATURE OF TRADE. ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 22 (B) THE SHARES IN LARGE QUANTITY OF VARIOUS IPOS H AVE BEEN PURCHASED BY THE ASSESSEE FROM THE KEY OPERATORS WHO CORNERED THE SAID SHARES BY ILLEGAL MEANS. IT WAS FOUND TO BE A WELL- PLANNED, THOUGHT OF AND ORGANIZED ACTIVITY TO CORNE R LARGE QUANTITY OF SHARES IN IPOS AND EARN PROFIT AS MOST OF THE IPOS WERE LISTED ON PREMIUM. IN RESPECT OF IPO OF NTPC LTD, PUNJAB NATIONAL BANK AND TCS, 1360, 2675 AND 589 APPLICATI ONS, HAVE BEEN MADE BY SMTRUPALNARESHPANCHAL IN FICTITIOUS/BENAMI NAMES OU T OF THE FUNDS MADE AVAILABLE BY THE ASSESSEE. THE ASSESSEE ALSO MADE FUNDS AVAILABLE TO GANPATI, S.H. VORA, ETC. FOR MAKING MULTIPLE APPLICATIONS IN IPO OF TCS .RECORDS SHOWS THAT THE ASSESSEE HAS EMPLOYED TOTAL OF RS. 980205 137- IN IPO OF TCS. SIMILARLY, IN IPO OF PUNJAB NATIONAL BANK, DENA BANK, NTPC AND VISHAL EXPORTS, TOTAL FUND EMPLOYED BY THE ASSESSEE IS RS. 12,51,68,1007-, RS. 2,70,00,0007-, RS. 6,75,35,4017- AND RS. 54,00,0007 - RESPECTIVELY. THROUGH THIS ACTIVITY, THE ASSESSEE MANAGED TO BUY SHARES AT THE LOWEST POSSIB LE PRICE WITH A CLEAR CUT INTENTION TO SALE THEM AT PROFIT. BUYING OF SHARES AT THE TIME WHEN P RICE WAS LOW AND SELLING THEM ON PROFIT SUBSEQUENTLY IS CONSIDERED TO BE THE ACTIVITY AS AD VENTURE IN NATURE OF TRADE DALHOUSIE INVESTMENT TRUST CO. LTD. 68 ITR 486 (SC) (C) THE ASSESSEE TRANSFERRED THE FUNDS TO CERTAIN PERSONS JUST PRIOR TO THE DATE OF CLOSING OF THE IPOS WHO IN TURN TRANSFERRED THE SAID FUNDS TO THE PERSONS INVOLVED IN THE IPO SCAM. THE DETAILS ARE SUMMARIZED AS UNDER: NAME OF THE IPO DATE OF CLOSURE TO WHOM FUNDS TRANSFERRED BY THE ASSESSEE AMOUNT (RS.) DATE DISHMANPHARMA 07.04.2004 ZENET SOFTWARE LTD. 6 CRORE 7-8/04/2004 1CIC1 BANK 07.04.2004 -DO- TCS 04.08.2004 EXCELL MULTITECH LTD. 4.68 CRORE 04.08.2004 PNB 11.03.2005 -DO- 25 CRORE 11.03.2005 DATAMATICS 19.04.2004 TAURUS INFOSYS LTD. 2.6 CRORE 19.04.2004 TCS 05.08.2004 -DO- 7.938 CRORE 05.08.2004 THE ASSESSEE HAD RECEIVED BACK THE SHARES ALLOTTED AND THE AMOUNT OF REFUND IMMEDIATELY AFTER THE DATE OF ALLOTMENT OF THE RESPECTIVE IPOS. THE ASSESSEE SUBMITTED THAT IT HAS ADVANCED MONIES TO CERTAIN PERSONS AND WHILE RETURNING THE S AID ADVANCE, THOSE PERSONS HAVE GIVEN SHARES WHICH WERE ACCEPTED AND SHOWN IN THE BOOKS O F ACCOUNTS. HOWEVER, THE ABOVE CHART SHOWS THAT SUBSTANTIAL AMOUNTS WERE ADVANCED BY THE ASSESSEE JUST ON THE DATE OF CLOSURE OF THE IPOS WHICH PROVES THAT SUCH ADVANCES WERE ONLY FOR SUBSCRIBING THE RESPECTIVE IPOS. ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 23 (VII) UTILISATION OF BORROWED FUNDS FOR PURCHASE OF SHARES AND MUTUAL FUNDS : .AS MENTIONED IN PARA 2.1 OF THE SHOW-CAUSE NOTICE DATED 17.12.2007, THE ASSESSEE HAD UTILIZED BORROWED FUNDS FOR MAKING PURCHASING O F SHARES AND SECURITIES. THE ASSESSEE APPLIED FOR 5697975 SHARES OF PUNJAB NATIO NAL BANK. THE ISSUE PRICE WAS RS. 390 PER SHARE. THUS THE ASSESSEE HAS INVESTED RS. 222.22 CRORES BY OBTAINING LOAN. INTEREST OF RS 149041947-HAS BEEN DEBITED TO THE SUNDRY IN TEREST ACCOUNT. IT IS NOTED THAT THE ASSESSEE HAS OBTAINED OVERDRAFT FACILITY/ LOAN FROM VARIOUS FINANCIAL INSTITUTIONS/BANKS FOR ACQUIRING THE SHARES EITHE R IN IPOS OR PURCHASE THROUGH MARKET TRANSACTIONS AND ALSO PURCHASE OF UNITS OF MUTUAL FUNDS. THE INTEREST PAID HAS EITHER BEEN ADDED TO THE COST OF SHARES/UNITS OR DEBITED IN T HE INTEREST ACCOUNT. HON'BLE SUPREME COURT IN THE CASE OF DALHOUSIE INVESTMENT TRUST CO. LTD. (SUPRA) HAS OBSERVED THAT SHARES PURCHASED OUT OF BORROWED FUNDS ON INTEREST CANNOT BE FOR EARNING DIVIDEND WHICH WOULD BE VERY NOMINAL AS COMPARED TO THE INTEREST. THEREF ORE, THE PURCHASE OF SHARES MUST BE FOR PURPOSE OF EARNING PROFIT ON THEIR SALE AND HENCE THE TRANSACTION OF SUCH NATURE AMOUNTED TO ADVENTURE IN THE NATURE OF TRADE. SIN CE MULTIPLE APPLICATIONS HAVE BEEN MADE AND BORROWED FUNDS HAVE BEEN USED FOR ACQUIRIN G MAXIMUM NUMBER OF SHARES, THE ASSESSEE CANNOT BE AN INVESTOR BUT IS FOUND TO BE A TRADER. IN THE CASE OF H.MOHAMMAD & CO. VS. CIT (1977) 107 ITR 637, THE GUJARAT HIGH COURT OBSERVED THAT IT IS POSSIBLE THAT ONE AND THE SAME COMMODITY MAY IN THE CASE OF ONE ASSESSEE BE HIS STOCK-IN-TRADE, WHEREAS IN THE CASE OF ANOTHER ASSESSEE IT MAY BE HIS CAPITAL ASSET. FOR EXAMPLE, IN THE CASE OF AN ASSESSEE WHO CARRIE S ON THE BUSINESS OF BUYING AND SELLING LAND, LAND MAY BE HIS STOCK-IN-TRADE BUT IN THE CASE OF AN ASSESSEE WHO HAS INVESTED HIS SAVINGS IN LAND AND GETS INCOME FROM T HE LAND OR THE STRUCTURES PUT UP ON THE LAND, THE LAND IS HIS CAPITAL ASSET. THEREFORE, ONE OF THE INDICATIONS FOR DECIDING AS TO WHAT IS STOCK-IN-TRADE IS WHETHER A PARTICULAR A SSESSEE IS BUYING OR SELLING THE COMMODITY OR WHETHER HE HAS MERELY INVESTED HIS AMO UNT WITH A VIEW TO EARN FURTHER INCOME OR WITH A VIEW TO CARRY ON HIS OTHER BUSINESS. IT MAY BE P OINTED OUT THAT 'TRADE' MEANS THAT PARTICULAR BUSINESS ACTIVITY WHE RE THE PERSON ENGAGED IN THE PROFESSION BUYS OR SELLS. ALL BUSINESSES MAY BE CARRIED ON FOR THE PURPOSE OF EARNING A PROFIT BUT THAT PARTICULAR KIND OF BUSINESS WHERE T HE BUSINESSMAN BUYS AND SELLS A COMMODITY CAN ONLY BE DESIGNATED AS 'TRADE'. (VIII) THE DETAILS OF SHARES ACQUIRED BY THE ASS ESSEE IN VARIOUS IPOS ARE SUMMARISED AS UNDER: NAME OF THE CO- DATE OF ACQUISITION NO. OF SHARES NAME OF THE PERSON FROM WHOM PURCHASED DATE OF SALE PROFIT/LOSS (RS.) DISHMAN PHARMACEUTICAL S 20.04.2004 10900 ZENET SOFTWARE LIMITED 07.10.2004 3792687 DATA MALICS 06.05.2004 33775 -DO- 08.11.2004 301057 ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 24 GA1L 03.06.2004 20000 28.10.2004 604625 ICICI BANK 20.04.2004 200000 ZENET SOFTWARE LTD. 31.12.2004 (42132 SOLD, BALANCE IN STOCK) 3236455 NTPC 04.11.2004 646922 -DO- 08.11.2004 (50000 SHARES SOLD, BALANCE IN STOCK) 662882 ONGC 05.04.2004 70000 -DO- 28.10.2004 (5000 SHARES SOLD, BALANCE IN STOCK) 431500 TCS 23.08.2004 110111 TAURUS INFOSYS, EXCELLMULTITECH AND H.N. VORA (HUF) 31.10.2004 TO 14.12.2004 32555370 PNB 29.03.2005 109000 EXCELLMULTITECH LTD. STOCK 0 (IX) THE ASSESSEE HAS ALSO ACQUIRED CERTAIN S HARES IN SUMMARIZED AS UNDER: INI CATEGORY. THE DETAILS ARE NAME OF THE COMPANY TOTAL AMOUNT INVESTED (RS.) SOURCE OF FUND NO. SHARES ALLOTTED DATE OF SALE PROFIT ON SALE DENA BANK 27000000 OUT OF O.D. ACCOUNT 70142 - STOCK NTPC 294004,000 KOTAK 397348 - STOCK PNB 2222210250 J M LEASE FINANCE 210661 - STOCK TCS 3150,00.000 OUT OF O.D. ACCOUNT 18277 6138166 ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 25 (X) IT IS ALSO NOTED THAT THE ASSESSEE HAS INVESTED RS. 1 CRORE IN HSBC INDIA OPPORTUNITIES FUND, RS. 2.5 CRORE IN IDBI FLEXI BOND, RS. 62.78 C RORES IN PRINCIPAL GROWTH FUND, RS. 4.5 CRORE IN PRINCIPAL FLOATING RATE FUND, RS. 15 C RORE IN PRINCIPAL CASH MANAGEMENT FUND, RS. 22.7 CRORE IN GROWTH PLAN, RS. 31.47 CROR E IN RELIANCE VISION FUND AND GROWTH PLAN, RS. 30.64 CRORE IN RELIANCE VISION FUN D DIVIDEND PLAN AND RS. 10 CRORE IN WEST BENGAL INFRA DEVELOPMENT FINANCIAL CORPORATION . ON SUCH INVESTMENT, THE ASSESSEE HAS DECLARED SHORT TERM CAPITAL GAIN OF RS. 5,53,27 ,8147-. 2.7 ON GOING, THROUGH THE DETAILS OF MISC. EXPENSES FILED DURING THE COURSE OF PROCEEDINGS, IT IS NOTED (HAT THE ASSESSEE HAS CLAI MED SECURITIES SERVICE CHARGE OF RS. 14,5I,80I/- AS AN ALLOWABLE EXPENDITURE. THESE EXPE NSES ARE TOWARDS THE ACTIVITY OF PURCHASE AND SALE OF SHARCS/SEEUNTIES/MUTUAL FUND. THUS, ON ONE HAND THE ASSESSEE IS CLAIMING THE SURPLUS AS CAPITAL GAIN WHICH IS EITHE R EXEMPT FROM TAX OR TAXED AT A LOWER RATE AND ON THE OTHER HAND, THE EXPENSES HAVE BEEN CLAIMED FROM THE BUSINESS INCOME. THIS PROVES THAT THE SURPLUS ON SHORT TERM SHARE TR ANSACTIONS IS NOTHING BUT BUSINESS INCOME. AS THE SURPLUS ON SHARE TRADING IS BEING TA XED AS BUSINESS INCOME, THE SECURITIES SERVICE CHARGES ARE ALLOWED AS DEDUCTION. 2.8 APPLYING THE ABOVE TESTS TO THE TRANSACTIONS EN TERED INTO BY THE ASSESSEE AS DISCUSSED ABOVE, IT IS CLEAR THAT THE SURPLUS ARISING OUT OF SALE OF SHARES AND MUTUAL FUND IS NOTHING BUT THE BUSINESS INCOME AS THE ASSESSEE HELD THE SH ARES AS TRADING ASSETS. THIS VIEW ALSO FINDS SUPPORT FROM THE CBDT INSTRUCTION NO. 1827 DA TED 31.08.1989 AND SUPPLEMENTARY INSTRUCTIONS IN THE FORM OF CIRCULAR NO. 4 OF 2007 DATED 15.06.2007. THE MAGNITUDE OF THE ACTIVITY INDICATES THAT THE ASSESSEE CEASES TO BE AN INVESTOR AND BECOME TRADER. THE SHORT TERM CAPITAL GAIN ON SALE OF SHARES/SECURITIE S AND MUTUAL FUND AS DECLARED, FOR THE REASONS DISCUSSED IN DETAIL IN FOREGOING PARAS, IS TAXED AS BUSINESS INCOME OF THE ASSESSEE. I - - /:* 2.9 IN VIEW OF ABOVE STATED FACTS, THE SHORT TERM C APITAL GAIN OF RS. 622726487- ON SALE OF SHARES AND SHORT TERM CAPITAL GAIN OF RS. 55327815/ - ON SALE OF UNITS OF MUTUAL FUND IS TAXED AS BUSINESS INCOME OF THE ASSESSEE. IT IS FURTHER C LARIFIED THAT PROFIT ON SALE OF THE SHARES ACQUIRED IN VARIOUS IPOS EITHER THROUGH THE PERSONS INVOLVED IN IPO SCAM OR HNI CATEGORY AND NOT SOLD DURING THE YEAR WILL BE TAXED AS BUSIN ESS INCOME IN THE YEAR OF SALE OF SUCH SHARES. 32. AGGRIEVED, ASSESSEE WENT IN APPEAL BEFORE CIT(A ), WHO PARTLY ALLOWED THE ASSESSEES APPEAL BY FOLLOWING THE DECI SION OF THE TRIBUNAL IN THE CASE OF SUGAMCHAND C. SHAH VS. ACIT IN ITA NO.3554/AHD/2008 DATED 29 TH JANUARY, 2010 AND DECIDED THE PROFIT ON SALE OF SHARES WHEREIN SHARES ARE HELD FOR LESS THAN ONE MONTH TO BE TREATED AS INCOME FROM BUSINESS AND PROFESSION A ND REMAINING AMOUNT OF INCOME TO BE CONSIDERED AS CAPITAL GAIN. ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 26 33 IN THE SAME ORDER LD. CIT(A) HAS DIRECTED THE AS SESSING OFFICER TO TAX CAPITAL GAIN DERIVED FROM SALE OF FEW SCRIPT S AS INCOME FROM BUSINESS AND PROFESSION AND HAS ALSO DIRECTED TO TA X SHORT TERM CAPITAL GAIN OF RS.15563670/- EARNED ON PORTFOLIO M ANAGEMENT SERVICE AS INCOME FROM BUSINESS AND PROFESSION. IN BRIEF LD. CIT(A) HAS BIFURCATED INCOME FROM SALE OF INVESTMENTS INTO VARIOUS CATEGORIES OUT OF WHICH SOME HAS BEEN DIRECTED TO B E TREATED AS LONG TERM CAPITAL GAIN, SOME AS SHORT TERM CAPITAL GAIN AND SOME PART AS INCOME FROM BUSINESS AND PROFESSION AND HAS OBSERVE D THE FOLLOWING IN HIS APPELLATE ORDER FOR ASST. YEAR 2005-06 AND 2 006-07 RELEVANT PORTION ARE AS UNDER :- 10.7 I HAVE CAREFULLY CONSIDERED THE ASSESSMENT ORDER PA SSED BY ASSESSING OFFICER AND SUBMISSION MADE BY APPELLANT. IT IS NO TICED THAT THE ASSESSING OFFICER HAS NOT ACCEPTED THE CONTENTION OF THE APPELLANT TH AT THE IMPUGNED SURPLUS WAS CAPITAL GAINS MAINLY ON THE GROUND THAT THE VOLUME INVOLVED WAS LARGE AND, THEREFORE, ACCORDING TO HIM, IT BECAME COMMODITY FO R THE ASSESSEE IN WHICH IT IS TRADING. HE HAS FURTHER GONE BY THE CRITERIA THAT P ERIOD OF HOLDING IS SHORT AND FREQUENCY AND NUMBER OF TRANSACTIONS IS MORE. HE HA S THEREIN COME TO THE CONCLUSION THAT THE MOTIVE IS TO EARN MAXIMUM PROFI T AND NOT TO HAVE INVESTMENT THE ASSESSING OFFICER HAS ACCEPTED THE CONTENTION O F APPELLANT REGARDING LONG TERM CAPITAL GAIN SHOWN IN RETURN OF INCOME. 10.8 IN THE PRESENT CASE, THE ISSUE OF DETERMINATION IS AS TO WHETHER THE SURPLUS OF ARISING ON ACCOUNT .OF SALE OF SHARES AND MUTUAL FUNDS IS TO BE TAXED AS SHORT TERM CAPITAL GAIN OR THE SAME SHOULD BE TAXED AS BU SINESS INCOME AT NORMAL RATES. RECENTLY THE HON'BLE AHMEDABAD ITAT IN CASE OF SHRI SUGAMCHAND C. SHAH IN ITA NO. 3554/AHD/2008 VIDE ORDER DATED 29 TH JANUARY, 2010 ON ISSUE IDENTICAL TO THIS CASE, HAS HELD AS UNDER: '11 WHEN WE EXAMINE THE FACTS OF THE CASE, WE FIN D ASSESSEE HAS MAINTAINED THE BOOKS OF ACCOUNT IN RESPECT OF DEALI NG IN SHARES AND ASSESSEE HAS SHOWN THE TRANSACTIONS IN SHARES AS IN VESTMENT AND NOT AS STOCK-IN-TRADE. IT HAS BEEN SHOWN CONSISTENT LY FOR SEVERAL YEARS IN. THE PAST AND DEPARTMENT HAS NOT CHALLENGE D THE BOOK KEEPING OR ACCOUNTING 'OF SHARES' AS INVESTMENT. NO CONTRARY ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 27 MATERIAL OR FACTS HAVE BEEN POINTED OUT BY THE REVE NUE TO SHOW THAT FACTS IN THE CURRENT YEAR ARE DIFFERENT THAN T HE FACTS IN EARLIER YEARS. IT IS ALSO NOT POINTED OUT BY THE REVENUE TH AT FREQUENCY AND NUMBER OF TRANSACTIONS ARE ABNORMALLY HIGH IN THE C URRENT YEAR AS COMPARED TO WHAT WAS DONE IN EARLIER YEARS. 12 THERE IS ALSO NO MATERIAL TO COME TO THE CON CLUSION THAT THE VALUATION OF INVESTMENT HAS BEEN DONE ON COST OR NET RELIABLE VALUE WHICHEVER IS LOW. THE ASSERTION OF THE ASSESSEE IS THAT ENTIRE PORT- FOLIO HAS BEEN VALUED AT COST AS AT THE END OF ACCO UNTING YEAR WHICH REMAINED UNCHALLENGED 13 THE SHARES WHICH ARE SOLD OUT OF SUCH INVES TMENT THIS YEAR WERE MOSTLY PURCHASED A YEAR OR EARLIER SHOWING THAT THE ASSESSEE HAD INTENTION WHILE PURCHASING THEM TO HOLD THEM AND TH EY WERE REFLECTED IN THAT BALANCE-SHEET AS INVESTMENT. THE ASSESSEE HAS ENJOYED DIVIDEND INCOME AND DECLARED THE SAME IN TH E RETURN OF INCOME TRADING THE TRANSACTIONS AS INVESTMENT, EVEN IF FREQUENCY OF SELLING OF SHARES MAY BE MORE BUT IN RESPECT OF SHA RES HELD FOR A CONSIDERABLE LONGER PERIOD (FOR MORE THAN 366 DAYS) AS PER FINDING GIVEN BY THE LEARNED CIT(APPEALS). THIS FINDING REM AINED UNCONTROVERTED. THE ASSESSEE HAS EARNED GAIN OF RS. 37,52,281/-, OH SALE OF THOSE SHARES WHICH WERE HELD FOR MORE TH AN 366 DAYS AND UPTO 6832 DAYS. IN ANY CASE, WHEN THOSE SHARES WERE PURCHASED IT COULD NOT BE SAID THAT INTENTION OF TH E ASSESSEE WAS TO DEAL IN THEM AND NOT TO HOLD THEM AS INVESTMENT. EV EN IN THE CASE OF INVESTMENT IT IS FOR THE ASSESSEE TO DECIDE WHEN TO DISPOSE THEM OFF SO THAT TO GIVE MAXIMUM RETURN OUT OF THEM. THE RE IS NO THEORY THAT ASSET HELD ON LONG-TERM BASIS SHOULD BE SOLD O NLY AT THE TIME OF NEED OR IN EMERGENCY. HE CAN VERY WELL SALE THE INV ESTMENTS TO REAP THE BENEFIT WHEN PRICES OF SHARES ARE HIGH SO AS TO EARN BETTER GAINS AND MAKE INVESTMENT ELSEWHERE. IN OUR CONSIDE RED VIEW, IT IS THE DECISION OF THE ASSESSEE TO DISPOSE OF AN INVES TMENT, IF ACCORDING TO HIM, MARKET VALUE THEREOF HAVE REACHED A PLATEAU SO AS TO MAKE INVESTMENT IN OTHER ASSETS WHICH HAVE PO TENTIAL OF APPRECIATION IN MARKET VALUE. THIS DECISION TO SELL HIS INVESTMENT AT HIGH MARKET PRICE CANNOT CONVERT AN OTHERWISE INVES TMENT INTO TRADING. IF IN THE PAST, THE DEPARTMENT HAS ACCEPTE D THE SALE OF SHARES OF HOLDINGS OF MORE THAN A YEAR AS INVESTMEN T AND PROFITS THEREON HAS BEEN ASSESSED UNDER THE HEAD 'CAPITAL G AIN', THEN THERE IS NO REASON TO HOLD DIFFERENTLY THIS YEAR. W E ACCORDINGLY CONFIRM THE ORDER OF THE LEARNED CIT(APPEALS) IN RE SPECT OF HOLDING THAT PROFIT OF RS.37,52,281/- SHOULD BE ASSESSED AS 'LONG-TERM CAPITAL GAIN'. ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 28 14 IN RESPECT OF PROFIT OF RS.55,40,679/- BEIN G 'SHORT-TERM CAPITAL GAIN' AS CLAIMED BY THE ASSESSEE AND HELD AS PROFITS ASSE SSED UNDER THAT BUSINESS BY TWO AUTHORITIES, WE .FOUND THAT IN MANY CASES, THERE IS DELIVERY OF SHARES AND SHARE WERE REGISTER ED IN THE NAME OF THE ASSESSEE. THE HOLDING PERIOD OF THE SHARES IS F ROM '0' DAYS TO '366' DAYS. IN SOME CASES, THE FREQUENCY OF TRANSAC TIONS ARE APPARENTLY SUBSTANTIAL AS ON ONE DAY THE ASSESSEE H AS PURCHASED SEVERAL SCRIPTS AND SOLD SEVERAL OF THEM ON THE SAM E DAY. 15 THE QUESTION IS WHETHER THEREFORE, MERELY F ROM FREQUENCY OF THE TRANSACTIONS CARRIED ON BY THE ASSESSEE, HE IS TREA TED AS DEALER IN SHARES OR STILL HE IS HELD AS INVESTOR. AS FOUND IN THE CASE OF SAMATH INFRASTRUCTURE (P) LTD. VS. ASSTT. CIT (SUPR A) ALSO, ASSESSEE ADDUCED EVIDENCE TO SHOW THAT HIS HOLDINGS ARE FOR INVESTMENT AS RECORDED IN THE BOOKS OF ACCOUNT. THE HOLDINGS ARE VALUED AT COST, AND SUCH ACCOUNTING HAS BEEN ACCEPTED BY THE REVENU E IN EARLIER YEARS. THERE IS NO MATERIAL TO SHOW THAT ASSESSEE H AS DECLARED HIMSELF AS A TRADER IN SHARES AND LEGAL REQUIREMENT S THEREFORE HAVE BEEN COMPLIED WITH. IT IS ALSO A FACT THAT HE HAS N OT BORROWED ANY MONEY FOR INVESTING IN SHARES. MERELY BECAUSE, ASSE SSEE HAD SOME BORROWED FUNDS IT WOULD NOT BY ITSELF SHOW THA T THEY WERE DEPLOYED IN INVESTMENT. NOTWITHSTANDING, EVEN BORRO WING ARE REQUIRED TO SETTLE PAYMENTS OBLIGATIONS IN RESPECT OF INVESTMENTS, LIKE ONE TAKES LOAN FOR PURCHASING A HOUSE. IN ANY CASE, HIGH FREQUENCY TRANSACTIONS AND LOW PERIOD HOLDINGS INDI CATE TRADE, WHEREAS LOW FREQUENCY TRANSACTIONS AND HIGH PERIOD HOLDINGS INDICATE INVESTMENT. 16 IN THIS CASE, THE ASSESSEE HAS DISCHARGED T HE ONUS OF SHOWING THAT IT IS INVESTMENT BUT REVENUE IS ABLE TO SHOW THAT T HERE ARE HIGH FREQUENCIES AND LOW HOLDINGS IN MANY TRANSACTIONS O F SHARES INDICATING THAT ASSESSEE HAS SOME INTENTION OF PURC HASING AND SELLING SHARES AS A TRADER. THE CASE OF THE ASSESSE E IS SUPPORTED BY THE FACT THAT IT HAS ENTERED THE PURCHASES IN TH E BOOKS AS INVESTMENT, SHARES ARE VALUED AT COST AND REVENUE I S HOLDING SUCH ACCOUNTING TREATMENT AS INVESTMENT IN THE PAST. THU S, THERE CANNOT BE FIXED CRITERIA TO DECIDE AS IN THE PRESENT CASE WHETHER ASSESSEE HAS TRADED IN SHARES EVEN THOUGH ASSESSEE HELD THEM AS INVESTMENT. 17 THOUGH IT HAS BEEN HELD IN THE CASE OF SARNAT H INFRASTRUCTURE (P)LTD.(SUPRA) THAT DELIVERY OF SHARES IS AN IMPORT ANT CRITERIA FOR HOLDING THAT ASSESSEE IS INVESTING IN THEM BUT AFTE R DEMATIZATION WHERE SHARES ARE DELIVERED IN THE DEMAT ACCOUNT THE NEXT DAY, IT CANNOT BE HELD THAT IN ALL SUCH CASES, IT WOULD BE INVESTMENT AND NOT TRADING. IF THAT IS SO HELD, THEN ALL THOSE TRA DERS IN SHARES IN ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 29 WHOSE DEMAT ACCOUNTS SHARES ARE DELIVERED CAN BE SA ID TO HAVE EARNED CAPITAL GAINS AND NOT PROFITS. THEREFORE, ON LY ONE CRITERIA, I.E. DELIVERY OF SHARES ALONE WILL NOT BE SUFFICIENT TO DECIDE THE ISSUE. EVEN OTHERWISE, IN SARNATH INFRASTRUCTURE (P) LTD.( SUPRA) ITSELF IT HAS BEEN HELD THAT CUMULATIVE EFFECT OF SEVERAL FACTORS WILL DECIDE THE ISSUE. 18 CONSIDERING THE TOTALITY AND PECULIARITY OF THE FACTS OF THIS CASE, WE FIND THAT ASSESSEE IS NEITHER FULLY ACTING AS A TRA DER NOR AS FULLY INVESTOR. DEMARCATION IS QUITE HAZY; THOUGH IN THE BOOKS HE IS SHOWING ALL THE PURCHASES AS INVESTMENT BUT FREQUEN CY OF TRANSACTION IN SEVERAL CASES IS SO LARGE AND HOLDIN G PERIOD IN MANY CASES IS SO SMALL - FROM O TO A WEEK OR SO THAT ASS ESSEE IS DE FACTO SELLING AND PURCHASING SHARES AS TRADER. HE IS ALSO HOLDING SHARES FOR LONG PERIOD - INDICATING THAT THEY ARE HELD AS INVESTMENT. THEREFORE, A CRITERIA HAS TO BE FIXED FOR DETERMINI NG AS'TO WHEN HE IS ACTING AS TRADER AND WHEN AS INVESTOR. ACCORDINGLY, WE DECIDE FOLLOWING CRITERIA TO HOLD WHEN GAINS ARE TO BE TAX ED AS PROFIT TO BE EARNED UNDER THE BUSINESS OR TO BE TAXED AS S HORT TERM CAPITAL GAIN. WE HOLD THAT IF SHARES ARE NOT HELD E VEN SAY FOR A MONTH, THEN THE INTENTION IS CLEARLY TO REAP PROFIT BY ACTING AS A TRADER AND HE DID NOT INTEND TO HOLD THEM IN INVEST MENT PORT- FOLIO. WE BELIEVE THAT IF A PERSON INTENDS TO HOLD HIS PURCHASES OF SHARES AS INVESTMENT, HE WOULD WATCH THE FLUCTUA TION OF RATES IN THE MARKET FOR WHICH A MINIMUM TIME IS NEC ESSARY, WHICH WE ESTIMATE AT ONE MONTH. WHERE SHARES ARE HE LD FOR MORE THAN A MONTH, THEY SHOULD BE TREATED AS INVEST MENT AND ON THEIR SALE SHORT TERM CAPITAL GAIN SHOULD BE CHA RGED. WHEN SHARES ARE HELD FOR LESS THAN A MONTH, GAIN ON THEM SHOULD BE TREATED AS PROFIT FROM BUSINESS.' THE ASSESSING OFFICER HAS ALSO ACCEPTED INCOME FROM LONG TERM CAPITAL AS SUCH AND ONLY DISPUTE IS REGARDING TREATMENT GIVEN FROM SHARES AND MUTUAL FUNDS HELD FOR LESS THAN 365 DAYS AS INCOME FROM SHORT TERM CA PITAL GAIN. IN CASE OF INCOME SHOWN AS SHORT TERM CAPITAL GAIN, THE APPELLANT HAS ENTERED INTO FREQUENT TRANSACTIONS OF PURCHASE AND SALES AND IN MANY :CAS ES, THE PERIOD OF HOLDING IS EVEN LESS THAN A MONTH APPLYING THE RATIO OF DECISION OF AHMEDABAD ITAT REFERRED HEREIN ABOVE, PROFIT ON SALE OF SHARES WHE REIN SHARES ARE HELD FOR LESS THAN ONE MONTH IS TREATED AS INCOME FROM BUSIN ESS AND PROFESSION AND REMAINING AMOUNT OF INCOME IS CONSIDERED AS CAP ITAL GAIN. FROM THE DETAILS OF CAPITAL GAIN SUBMITTED BY APPELLANT, IT IS SEEN THAT IN BOTH THE ASSESSMENT YEARS UNDER APPEAL, THE APPELLANT HAS EA RNED CAPITAL GAIN FROM SALE OF SHARES AND MUTUAL FUNDS HELD FOR LESS THAN ONE MONTH. THE QUANTUM OF SUCH GAIN EARNED BY APPELLANT IN BOTH TH E YEARS WHEN THE HOLDING PERIOD IS LESS THAN ONE MONTH IS AS UNDER: ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 30 PARTICULARS A.Y 2005-06 AMOUNT (RS.) A.Y 2006-07 AMOUNT (RS.) STCG ON SHARES HAVING HOLDING PERIOD LESS THAN ONE MONTH(EXCLUDING PMS) 7,06,568/- 43,69,7507- STCG ON MUTUAL FUNDS HAVING HOLDING PERIOD LESS THAN ONE MONTH(EXCLUDING PMS) 1,08,12,619/- 1,14,9147- THUS APPLYING THE DECISION OF AHMEDABAD ITAT (SUPRA ), I DIRECT ASSESSING OFFICER TO TAX AFORESAID INCOME AS INCOME FROM BUSI NESS & PROFESSION SUBJECT TO VERIFICATION BY ASSESSING OFFICER. 10.9 FURTHER FROM THE ASSESSMENT ORDER FOR A.Y 2005-06, IT IS NOTICED THAT ASSESSING OFFICER HAS SPECIFICALLY OBSERVED UTILIZATION OF BO RROWED FUNDS FOR ACQUIRING SHARES OF NTPC AND PNB IN IPO. IT WAS OBSERVED THAT FINANCING IN THESE IPOS WAS THROUGH KOTAK AND J.M. LEASE FINANCE AND THE APPELLANT HAD ALSO PAID INTEREST OF RS. 1,49,04,1947- ON ACCOUNT OF APPLICATION MONEY FOR P UNJAB NATIONAL BANK IPO. SIMILARLY IN THE A.Y 2006-07 IT IS NOTICED THAT INT EREST EXPENDITURE HAS BEEN PAID ON ACCOUNT OF APPLICATION MONEY FOR IPO OF IDFC, SASKE N COMM. AND YES BANK. THEREFORE, THE POINT FOR DETERMINATION IS WHETHER S UCH A SYSTEMATIC ACTIVITY OF FINANCING AND MAKING APPLICATION IN THE IPO AND THE REBY, GETTING SHARES IN THE IPO, COULD BE TERMED AS BUSINESS OR ADVENTURE IN THE NAT URE OF TRADE. INCIDENTALLY, THE 'BUSINESS AS DEFINED IN SECTION 2(13), 'INCLUDES AN Y TRADE, COMMERCE OR MANUFACTURE OR ANY ADVENTURE OR CONCERN IN THE NATU RE OF TRADE, COMMERCE OR MANUFACTURE'. THE WORD 'ADVENTURE' IS DEFINED IN TH E SHORTER OXFORD DICTIONARY AS A PECUNIARY VENTURE................AND THE WORD PECUN IARY VENTURE, IN ITS TURN, IS DEFINED AS 'A COMMERCIAL ENTERPRISE IN WHICH THERE IS CONSIDER ABLE RISK OF LOSS AS WELL AS CHANCE OF GAIN.' IN THE PRESENT CASE, THE APPELLANT HAS OBTAINED FIN ANCE FORM CERTAIN CONCERNS FOR APPLYING IPOS OF COMPANIES. AFTER ALLOTMENT, THES E SHARES HAVE BEEN TRANSFERRED TO APPELLANT. SUCH AN ACTIVITY HAS TO BE TERMED AS AN ORGANIZED AND SYSTEMATIC ACTIVITY, CARRIED ON CONTINUOUSLY WITH A VIEW TO EARN PROFITS . THE SOLE INTENTION AT THE TIME OF ACQUISITION OF SHARES THROUGH SUCH MODE WAS TO SELL THESE SHARES AT A PROFIT. SUCH AN ACTIVITY HAS TO BE CONSTRUED AS ADVENTURE IN THE NATURE OF TRADE. IN SUCH A SITUATION, THE SURPLUS ARISING ON SALE OF SHARES AC QUIRED IN AFORESAID IPOS HAS TO BE TREATED AS INCOME FROM ADVENTURE IN THE NATURE OF T RADE AND THE SAME HAS TO BE TAXED AS BUSINESS INCOME. DURING THE COURSE OF APPE LLATE PROCEEDINGS, THE APPELLANT WAS ASKED TO SUBMIT DETAILS OF SURPLUS EARNED FROM THESE IPOS. IN RESPONSE TO WHICH, THE LEARNED COUNSEL OF APPELLANT SUBMITTED T HAT IN RESPECT OF THE ALLOTMENT MADE UNDER IPO OF SASKEN COMM., THE APPELLANT COMPA NY IS STILL HOLDING THESE SHARES AND NO SALE HAS BEEN EFFECTED IN RESPECT OF THE SAID SECURITIES FOR THE ASSESSMENT YEARS UNDER APPEAL. EVEN WITH REGARDS TO ISSUE OF PUNJAB NATIONAL BANK, ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 31 APPELLANT HAS BEEN HOLDING THE SHARES. IN RESPECT O F OTHERS, IT IS NOTICED THAT THE APPELLANT HAS EARNED CAPITAL GAIN AS UNDER: NAME OF SCRIPT AMOUNT OF CAPITAL GAIN (RS.) REMARKS NTPC 6,62,8807- STGG ARISING ON ACCOUNT OF SALE OF SHARES IN A.Y 2005-06 IDFC 43,69,7507- STCG ARISING ON ACCPUNT OF SALE OF SHARES IN A.Y 2006-07 YES BANK 19,69,5807- STCG ARISING ON ACCOUNT OF SALE OF SHARES IN A.Y 2006-07 IN RESPECT OF CAPITAL GAIN OF RS.43,69,7507- IN THE A.Y 2006-07 FROM SALE OF SHARES OF IDFC, IT IS NOTICED THAT THE HOLDING PERI OD IN RESPECT OF THE SAME WAS LESS THAN ONE MONTH, HENCE THE SAID PROFIT HAS ALRE ADY BEEN TAXED AS BUSINESS INCOME, IN VIEW OF THE FINDING GIVEN AT PARA 10.8 A BOVE. ACCORDINGLY, NO SEPARATE ADDITION IN RESPECT OF SAID RS.43,69,750/- IS DONE CASE OF APPELLANT. HOWEVER, IN RESPECT OF CAPITAL GAIN DERI VED FROM SALE OF OTHER SCRIPTS, THE ASSESSING OFFICER IS DIRECTED TO TAX T HE SAME AS INCOME FROM BUSINESS AND PROFESSION IN RESPECTIVE ASSESSMENT YE ARS. 10.10 FROM THE DETAILS SUBMITTED BY APPELLANT, IT IS NOTI CED THAT IN THE A.Y 2006- 07 THE APPELLANT EARNED SHORT TERM CAPITAL GAIN OF RS 1.55.63.670 - FROM PORTFOLIO MANAGEMENT. THE APPELLANT HAD APPOINTED KOTAK SECUR ITIES TO ACT AS ITS PORTFOLIO MANAGER AND WAS RECEIVING PROFIT & LOSS STATEMENT F ROM THEM ON REGULAR BASIS AND SAID KOTAK SECURITIES IS ALSO RECEIVING MANAGEM ENT FEES FROM THE APPELLANT. UNDER SUCH CIRCUMSTANCES, THE PROFIT EARNED BY APPELLANT CANNOT BE CONSIDERED TO BE OUT OF MERELY INVESTMENT ACTIVITIES, RATHER T HE TRANSACTIONS WERE CARRIED ON SYSTEMATIC BASIS WITH A PROFIT MOTIVE. ACCORDINGLY, I DIRECT THE ASSESSING OFFICER TO TAX THE SHORT TERM CAPITAL GAIN OF RS.1,55,63,67 07- EARNED ON PORTFOLIO MANAGEMENT SERVICES, AS INCOME FROM BUSINESS & PROF ESSION. . 34. FOR ASST. YEAR 2007-08 ALSO LD. CIT(A) HAS TAKE N THE SAME VIEW AS HAVE BEEN TAKEN FOR ASST. YEARS 2005-06 & 2 006-07. 35 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD AND ALSO REFERRED TO THE DECISIONS REFERR ED TO. THE ISSUES IN THESE GROUNDS ARE WHETHER PROFIT FROM SALE OF INVES TMENT SHOULD BE ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 32 TREATED AS BUSINESS INCOME OR CAPITAL GAINS OR PART LY BUSINESS OR PARTLY CAPITAL GAINS. 36. FROM PERUSAL OF THE OBSERVATIONS OF ASSESSING O FFICER AS WELL AS THE FINDING OF LD. CIT(A) FOR ASSTT. YEAR 2005-0 6, WE FIND THAT ASSESSING OFFICER HAS MADE DETAILED ANALYSIS IN REG ARD TO THE SHORT TERM CAPITAL GAIN AND LONG TERM CAPITAL GAIN SHOWN BY THE ASSESSEE UNDER THE HEAD SALE OF INVESTMENT SHOWN IN THE PR OFIT AND LOSS ACCOUNT. DURING ASST. YEAR 2005-06 TOTAL INCOME FRO M TRANSACTIONS RELATING TO SHARES AND INVESTMENT HAS BEEN SHOWN AT RS.44.39 CRORES AND THE RESPECTIVE HEADS OF SUCH INCOME ARE AS BELO W :- I) LONG TERM CAPITAL GAIN ON SHARES 32.5 6 CRORES II) SHORT TERM CAPITAL GAIN ON SHARES 6 .23 CRORES III) SHORT TERM CAPITAL GAIN ON MUTUAL FUNDS 5.5 3 CRORES IV) FUTURE OPTION TRADING 0.07 CRORES ----------------------- TOTAL 44.39 CRORES ---------- ---------------- OUT OF THE ABOVE, ASSESSING OFFICER HAS ACCEPTED TH E CLAIM OF LONG TERM CAPITAL GAIN MADE BY ASSESSEE FOR RS.32.56 CRO RES AND ONLY THE BALANCE INCOME FROM SHARES TRANSACTIONS ASSESSEE CO MPANY HAS ITSELF SHOWN PROFIT FROM FUTURE OPTION TRADING AS B USINESS INCOME OF RS.0.07 CRORES AND THE REMAINING INCOME FROM SHORT TERM CAPITAL GAIN ON SHARES AND MUTUAL FUNDS AT RS.11.76 CRORES (RS.6 .23 CRORES + RS.5.53 CRORES) HAS BEEN TREATED BY THE ASSESSING O FFICER AS BUSINESS INCOME. THE MAIN REASON FOR THE TREATMENT OF SHORT TERM CAPITAL GAIN FROM SALES OF SHARES AND MUTUAL FUNDS AS BUSINESS INCOME BY THE ASSESSING OFFICER WAS RESTING UPON TH E FACT THAT THERE ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 33 HAD BEEN CONSIDERABLE NUMBER OF TRANSACTIONS INVOLV ING HUGE AMOUNT INVOLVING PROFIT MOTIVE TO CORNER UPON EQUITY SHARE S ALLOTTED IN THE IPOS OF VARIOUS COMPANIES WHICH HAVE BEEN ACQUIRED IN HNI CATEGORY OR BY MAKING FUNDS AVAILABLE TO THE PERSON S WHO WERE INVOLVED IN MAKING MULTIPLE APPLICATIONS. ASSESSING OFFICER HAS MENTIONED NAMES OF VARIOUS COMPANIES AND INDICATED THE MOVEMENT OF FUNDS WHO WERE INVOLVED IN IPO SCAM NAMELY SMT. RUPAL NARESH PANCHAL, SUGANDH ESTATE PVT. LTD. WHEREIN INVESTIGA TING WING HAS OBSERVED THAT THESE TWO GROUPS HAD CORNERED IPO SH ARES RESERVED FOR RETAIL INVESTOR BY MAKING MULTIPLE APPLICATION IN THE RETAIL SEGMENTS THROUGH MEDIUM OF THOUSANDS OF FICTITIOUS/BENAMI AP PLICATIONS. ASSESSING OFFICER ALSO OBSERVED ON PAGE 15 OF HIS O RDER ON A CHART SHOWING TRANSFER OF FUNDS TO CERTAIN PERSONS JUST P RIOR TO THE DATE OF CLOSING OF THE IPOS TO THESE ACTIVITIES ASSESSEE MA NAGED TO BUY SHARES AT THE LOWER POSSIBLE PRICE WITH A CLEAR INT ENTION TO SALE THEM AT PROFIT. FURTHER ON PAGE 17 OF THE ASSESSMENT ORD ER LD. AO HAS PROVIDED DETAILS OF SHARES ACQUIRED IN VARIOUS IPOS SALES IN HNI CATEGORY. DUE TO THESE FACTS AND THE CONGLOMERATE O F VARIOUS TRANSACTIONS ENTERED INTO BY THE ASSESSEE COMPANY, ASSESSING OFFICER TREATED THE SHORT TERM CAPITAL GAIN FROM SA LE OF SHARES AND MUTUAL FUNDS AS BUSINESS INCOME. FURTHER LD. AR OF THE ASSESSEE HAS RELIED ON THE DECISION OF CO-ORDINATE BENCH IN THE CASE OF DIRECTOR, SMRUTI SHREYANS SHAH IN ITA NOS.3214/AHD/2009 AND O THERS WHEREIN IT HAS BEEN HELD THAT INCOME FROM PURCHASE AND SALE OF SHARES AS A CAPITAL GAIN INCOME AND NOT BUSINESS INCOME RELEVAN T PORTION OF THE DECISION OF CO-ORDINATE BENCH IS REPRODUCED BELOW:- ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 34 10. WE HAVE HEARD BOTH THE PARTIES AND GONE THR OUGH THE CASE FILE. THE CIT(A) HAS TREATED HOLDING PERIOD OF ONE MONTH AND USAGE OF BORROWED FUNDS IN THE IMPUGNED SHARE TRANSACTION AS BENCH M ARKS FOR PARTLY CONFIRMING THE ASSESSING OFFICER'S ACTION. A CO- ORDINATE BENCH IN ITA 2818/AHD/2011 KALPESH C. SHAH VS. ACIT HAS ALREAD Y DISAGREED WITH THE FORMER BENCH MARKING. THE HON'BLE JURISDICTIONA L HIGH COURT IN (2012) 347 ITR 149 CIT VS. NIRAJ A. SURTI HOLDS THAT USAG E OF BORROWED 'S IN SHARE TRANSACTION DOES GIVE THE RESULTANT PROFITS C OLOUR OF BUSINESS INCOME. THE CIT(A) TWIN REASONING STANDS OVERRULED ACCORDINGLY. THE SHORT QUESTION THAT ARISES FOR OUR DEPENDENT ADJUDICATION IN THESE APPEALS IS AS TO WHETHER THE ASSESSEES INCOME DER IVED FROM SALE OF SHARES/MUTUAL FUNDS IS TO BE TREATED AS SHORT TER M CAPITAL GAINS OR BUSINESS INCOME. IN OUR CONSIDERED OPINION, THIS IS A PERENNIAL ISSUE TO BE DECIDED AS PER FACTS OF EACH CASE. THE HON'BLE JURI SDICTIONAL HIGH COURT IN CASE TAX APPEAL NO.77 OF 2010 DECIDED ON 27.6.2012 CIT VS. VAIBHAV J. SHAH HOLDS THAT THE MOST IMPORTANT TEST FOR JUDGING NATURE OF PROFITS ARISING FROM SALE PURCHASE OF SHARES HAS TO BE BASE D ON VOLUME, FREQUENCY, CONTINUITY AND REGULARITY OF TRANSACTION S WITHHOLDING PERIOD, USAGE OF BORROWED FUNDS, ASSESSEE'S BOOKS MAINTAINE D ETC. IT TRANSPIRES THAT THE ASSESSEE HAD CHOSEN TO INVEST INTEREST AND NON INTEREST BEARING FUNDS ON SHARE INVESTMENTS ACQUIRED AT IPO STAGE IN HNI CATEGORY. THE ASSESSEES SALARY INCOME IS MORE THAN SHARE PROFITS IN THESE YEARS. THIS PROVES HER TO BE ONLY A PRUDENT INVESTOR INSTEAD OF A TRADER. THERE IS NO EVIDENCE IN THIS CASE FILE DEMONSTRATING THE ASSESS EE TO BE ENGAGED IN ANY ORGANIZED ACTIVITY OF SHARE TRADING. NO EVIDENCE OF ANY REPETITION OF HER SHARE TRANSACTIONS IN THE IMPUGNED ASSESSMENT YEAR OR REINVESTMENT OF THE CAPITAL GAIN IS FORTHCOMING. SHE HAS ALSO BEEN MAINTAI NING STOCK PORTFOLIO QUA SOME OF HER SHARE INVESTMENTS (SUPRA ). THESE PROFITS FROM SALE OF SHARES HAVE ARISEN FROM THE SHARES NOT FOR MING PART OF HER STOCK. ALL THE ASSESSEE HAD DONE IS TO SELL THE SHARES IN A PERIOD OF LESS THAN THREE MONTHS. RATHER ONE SCRIP SOLD WITHIN THREE DAYS IN THE FORMER ASSESSMENT YEAR. AND IN A SIMILAR SPAN OF HOLDING PERIOD IN THE LATT ER ASSESSMENT YEAR WHEREIN SHE PURCHASED IDFC, IL & F ; S SHARES ON 8.8.2005 AND 20.7.2005 AND SOLD THEM ON 18.8.2005 FOR PROFITS OF RS. 11,23,961/-. T HE CASE FILE REVEALS THAT THE ASSESSEE IN VAIBHAV SHAH CASE HAD ENTERED INTO 64 SALE TRANSACTION IN 27 SCRIPS AND 17 SALE TRANSACTIONS IN 11 SCRIPS IN TWO CONSECUTIVE ASSESSMENT YEARS WHICH HAD BEEN HELD TO HAVE RESULTED IN CAPIT AL GAINS INSTEAD OF BUSINESS INCOME. A CO-ORDINATE BENCH IN IDENTICAL C ASE OF HITESH DOSHI 46 SOT 336 (MUM.) HELD THAT WHEN AN ASSESSEE MAINTAINS SIMILAR NUMBER OF ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 35 COMPANIES AND ONLY NUMBER OF SHARES THEREIN INCREAS E OR DECREASE, HE IS ONLY A PRUDENT INVESTOR. WE TAKE INTO ACCOUNT ALL THE AB OVE-STATED FACTS, CIRCUMSTANCES AND CASE LAW QUOTED HEREINABOVE TO HO LD THAT THE ASSESSEE IS AN INVESTOR NOT ENGAGED IN THE BUSINESS OF SALE PUR CHASE OF SHARES AND MUTUAL FUNDS. THE QUESTION IS ACCORDINGLY DECIDED A GAINST THE REVENUE BOTH ASSESSMENT YEAR. THE ASSESSING OFFICER IS DIRECTED TO TREAT HER INCOME FROM SALE OF SHARES AND MUTUAL FUNDS IN THE TWO ASSESSME NT YEARS AS SHORT TERM CAPITAL GAINS AND PASS A CONSEQUENTIAL ORDER. THE A SSESSEE'S GROUNDS SUCCEED IN HER TWO APPEALS AND THAT OF THE REVENUE FAIL. 37. FROM GOING THROUGH THE FACTS OF THE CASE OF ASS ESSEE WE SEE THAT ASSESSING OFFICER HAS ACCEPTED THE LONG TERM C APITAL GAIN FROM SALE OF SHARES AND HAS NOT TREATED IT AS BUSINESS I NCOME. ASSESSING OFFICER HAS ONLY TREATED SHORT TERM CAPITAL GAIN FR OM SALE OF SHARES AND MUTUAL FUND AS BUSINESS INCOME DUE TO MULTIPLE NUMBER OF TRANSACTIONS INVOLVING HUGE FUNDS BUT THIS IS ALSO A FACT ON RECORD NOT CONTROVERTED BY REVENUE THAT ASSESSEE COMPANY HAS BEEN REGULARLY DERIVING INCOME FROM SHORT TERM AND LONG TERM CAPIT AL GAIN FROM SALE OF SHARES IN PAST MANY YEARS AND THE SAME HAVE BEEN ACCEPTED BY THE DEPARTMENT IN THE ASSESSMENT ORDERS FRAMED U/S 143(3) OF THE ACT. DDETAILS OF ACCEPTING TRANSACTIONS OF PURCHAS E/SALE ON SHARES AS SHORT TERM AND LONG TERM CAPITAL GAIN FOR ASST. YEA R 2001-02, 2003-04 & 2004-05 IS MENTIONED BELOW :- ASST. YEAR STCG/STCL LTCG/(LTCL) DATE OF ASST. ORDER U/S 143(3) 2001-02 (15,61,33,149) (52,28,340) 11.03.2004 2003-04 1,56,58,030 (72,68,961) 30.11.2005 2004-05 (7,63,08,132) 2,17,92,444 21.12.2006 ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 36 38. HOWEVER, LD. CIT(A) HAS TAKEN A VIEW OF BIFURCA TING THE TRANSACTIONS SHOWN BY THE ASSESSEE UNDER THE HEAD S HORT TERM CAPITAL GAIN FROM SALE OF SHARES AND MUTUAL FUNDS O N THE BASIS OF PERIOD OF HOLDING AND HAS HELD THAT SHARES HELD FOR MORE THAN 30 DAYS TO BE TREATED AS SHORT TERM CAPITAL GAIN AND THOSE LESS THAN 30 DAYS TO BE TREATED AS BUSINESS INCOME AND AS REGARDS INC OME FROM MUTUAL FUNDS EARNED BY THE ASSESSEE FROM ITS PORTFOLIO MAN AGEMENT BY ITS PORTFOLIO MANAGER HAS BEEN TREATED AS BUSINESS INCO ME. 39. VARIOUS DECISIONS HAVE BEEN REFERRED AND WE FIN D THAT THESE DECISIONS ARE BASED ON THE FACTS WHICH ARE DIFFEREN TIABLE FROM CASE TO CASE AND ONE SET PATTERN CANNOT BE APPLIED/FOLLOWE D FOR EACH CASE. ASSESSEE COMPANY WHOSE MAIN BUSINESS IS OF PRINTING NEWSPAPER AND INCOME FROM ADVERTISEMENT IS HAVING ITS BUSINES S ACTIVITY REGULARLY CARRIED ON AND THE BUSINESS TURNOVER HAS BEEN CONSISTENTLY ACHIEVED IN PAST MANY YEARS. ALONG WITH THE MAIN OB JECT OF CARRYING ON THE BUSINESS INCOME FROM INVESTMENTS HAS ALSO BE EN CONSISTENTLY EARNED BY THE ASSESSEE AND HAS BEEN ACCEPTED. TO OU R VIEW ONCE THIS FACT IS NOT IN DISPUTE THAT ASSESSEE IS REGULA RLY CARRYING ON CERTAIN BUSINESS ACTIVITY AND THE QUESTION IS OF TREATING T HE INCOME FROM INVESTMENT AS CAPITAL GAIN OR BUSINESS IS CONCERNED THEN EITHER WHOLE OF THIS ACTIVITY OF INVESTMENT IN SHARES AND MUTUAL FUND IS TO BE TREATED AS BUSINESS INCOME DUE TO INTENSITY OF TRAN SACTIONS COUPLED WITH PROFIT MOTIVE WITH AN ADVENTURE OF TRADING OR IT REMAINS IN THE FLAVOUR OF CAPITAL GAIN. IN ASSESSEES CASE BUSINES S IS ESTABLISHED AND REGULAR ACTIVITY HAS BEEN CARRIED ON, LONG TERM CAPITAL GAIN FROM SALE OF SHARES HAS BEEN DULY ACCEPTED BY THE ASSESS ING OFFICER IN ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 37 PAST AS WELL AS FOR THE YEAR UNDER APPEAL, SHORT TE RM CAPITAL GAIN/LOSS HAS BEEN CONSISTENTLY ACCEPTED IN THE PAST THEN THE RE HARDLY REMAINS ANY REASON FOR NOT ACCEPTING SOME PART OF PROFIT ON SALE OF INVESTMENT AS SHORT TERM CAPITAL GAIN FROM SALES OF SHARES AND MUTUAL FUND. ALSO IN SOME JUDICIAL PRONOUNCEMENTS IT HAS BEEN HELD TH AT IF ANY SHORT TERM CAPITAL GAIN IS ARRIVED FROM TRANSACTIONS OF M UTUAL FUNDS WITH THE HELP OF PORTFOLIO MANAGER THEN ALSO THE SAME HAS BE EN TREATED AS SHORT TERM CAPITAL GAIN. THEREFORE, IN OUR VIEW LOO KING TO THE REGULAR BUSINESS ACTIVITY CARRIED ON BY THE ASSESSEE, ACCEP TANCE OF LONG TERM CAPITAL GAIN FROM SALE OF SHARES BY ASSESSING OFFIC ER ACCEPTANCE OF SHORT TERM CAPITAL GAIN/LOSS FROM SHARES TRANSACTIO NS IN PAST THEN THE SHORT TERM CAPITAL GAIN FROM SALE OF SHARES AND MUT UAL FUNDS SHOULD BE TREATED AS SHORT TERM CAPITAL GAIN AND NOT BUSIN ESS INCOME AND NOR THERE IS ANY LOGIC TO BIFURCATE THE TRANSACTION S ON THE BASIS OF HOLDING PERIOD OF SHARES/MUTUAL FUNDS AS THE TERM O F HOLDING TRANSACTION AS SHORT TERM CAPITAL GAIN OR BUSINESS INCOME AS THE TEST OF HOLDING. ACCORDINGLY, THE GROUND OF REVENUE IS D ISMISSED. 40. NOW WE TAKE UP GROUND NO.2 OF REVENUES APPEAL IN ITA NO.1657/AHD/2012 FOR ASST. YEAR 2009-10 AGAINST THE ORDER OF LD. CIT(A) DELETING THE DISALLOWANCE OF RS..1,24,38,771 /- IN RESPECT OF OUTSTANDING CREDITORS U/S 41(1) OF THE ACT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS ON GOING THROUGH THE DETAILS OF SUNDRY CREDITORS REMAINING OUTSTANDING FOR MORE THAN 3 YEA RS, ASSESSING OFFICER TOOK A VIEW THAT AS MOST OF THE AMOUNTS ARE SMALL AMOUNTS AND THERE CAN BE NO REASON FOR THEM TO REMAIN OUTST ANDING FOR MORE THAN 3 YEARS AND THEREFORE, HE WENT AHEAD TO MAKE A DDITION OF ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 38 RS.1,24,38,771/- U/S 41(1) OF THE ACT FOR CESSATION OF LIABILITY. HOWEVER, IN THE ASSESSMENT ORDER NO SPECIFIC OBSERV ATIONS OF THE SUNDRY CREDITORS ABOUT THEIR WHEREABOUTS AND INABIL ITY OF THE CREDITORS TO PAY THE LIABILITY HAS BEEN RECORDED. 41. AGGRIEVED, ASSESSEE WENT IN APPEAL BEFORE CIT(A ) WHO HAS DELETED THE IMPUGNED DISALLOWANCE MADE U/S 41(1) OF THE ACT BY OBSERVING AS UNDER :- 10 DURING THE COURSE OF APPELLATE PROCEEDINGS, IT WAS STATED THAT THE LD. AO HAS NOT COME ACROSS ANY EVIDENCE TO PROVE THAT LIAB ILITIES HAVE CEASED TO EXIST AND NEITHER APPELLANT HAS WRITTEN OFF THE SAID AMOU NTS. IT WAS FURTHER STATED THAT MERELY BECAUSE THE LIABILITY HAS BECOME TIME BARRED IT IS NOT VALID FOR INVOKING PROVISIONS OF SEC.41(1). SEVERAL CASE LAWS WERE REL IED UPON IN SUPPORT OF THE ARGUMENT JUST BECAUSE THAT LIABILITY WAS OUTSTANDIN G FOR MORE THAN THREE YEARS WAS NOT SUFFICIENT GROUND FOR ADDITION U/S 41(1) FO R EXAMPLE : (I) RAJESH MUKUNDLAL SHAH VS. ITO (ITA NOS.424 AND 609/AHD/2006) - WHEREIN IT HAS BEEN HELD THAT THERE WAS NOTHING TO SUGGEST THAT THE ASSESSEE HAD OBTAINED ANY BENEFIT EITHER BY WAY OF CESSATION OF ANY LIABILITY WHEN THE LIABILITIES WERE CONTINUALLY ADM ITTED BY THE ASSESSEE IN THEIR BALANCE-SHEET. (II) ITO VS. RAINBOW HOUSING DEVELOPMENT & FINANCE CORPN.LTD. (ITA NO.4052/AHD/2007) WHEREIN ADDITION U/S 41 (1) WAS DELETED HOLDING THAT THE ASSESSEE COMPANY HAD SHOWN THE LIABILITY I N THE BALANCE SHEET AND NO EVIDENCE OF CESSATION OF LIABILITY HAD BEEN BROUGHT ON RECORD. 11. AFTER GOING THROUGH RIVAL SUBMISSIONS, IT IS SE EN THAT THE ADDITION U/S 41(1) HAS BEEN MADE IN A VERY VAGUE AND SWEEPING WAY. IT IS NOT CLEAR HOW DID THE AO ARRIVE AT THE FIGURE OF RS.1,24,38,772. THE ASSESSM ENT ORDER DOES NOT MENTION THE NAMES OF THE CREDITORS, NOR THE RESPECTIVE AMOU NTS OF SUCH CREDITORS WHICH THE AO HAS ADDED U/S 41(1). THE PRINTED ANNUAL REP ORT FOR AY 2008-09 OF THE APPELLANT COMPANY GIVES IN SCHEDULE D CURRENT LIAB ILITIES AND PROVISIONS OF AN AMOUNT TOTALING TO RS.193,73,42,231/-. OUT OF THIS SUNDRY CREDITORS (RS.58,87,465/-) AND OTHERS HAVE BEEN SHOWN AT A TO TAL FIGURE OF RS.65,88,34,387/-. NOW OUT OF THIS WHICH PARTICULAR CREDITORS THE AO HAS IN MIND WHILE MAKING THE ADDITION U/S 41(1) IS NOT AT ALL C LEAR FROM THE OTHER. THE CONSOLIDATED FIGURE OF RS.1,24,38,772/- HAS JUST BE EN GIVEN WITHOUT MENTIONING ABOUT ANY SINGLE CREDITOR OR AMOUNT. WHAT ARE THE C OMPONENTS OF THIS AMOUNT OF ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 39 RS.1,24,38,772/- SHOULD BE CLEAR FROM THE ASSESSMEN T ORDER, BUT NOTING IS CLEAR, BUT FOR THIS FIGURE WHICH STANDS MYSTERIOUSLY IN TH E ASSESSMENT ORDER. IN THIS BACKGROUND THE AO IS DIRECTED TO DELETE THE ADDITIO N OF RS.1,24,38,772/- U/S 41(1) AS IT HAS BEEN MADE IN A VERY VAGUE WAY, WITH OUT NARRATING THE NAMES OF THE PARTICULAR CREDITORS NOR THE SPECIFIC AMOUNTS, WITHOUT DISCUSSING ANY FACT ABOUT ANY ONE CREDITOR. HOW MANY ARE THERE NO BODY KNOWS. FURTHER THE CASE LAWS RELIED UPON BY THE APPELLANT GIVEN IN THE PREC EDING PARAGRAPH SUPPORT IS CASE. 42. AGGRIEVED, REVENUE IS NOW IN APPEAL BEFORE THE TRIBUNAL. THE LD. DR VEHEMENTLY SUPPORTED THE ORDER OF ASSESSING OFFICER. 43. ON THE OTHER HAND THE LD. AR OF THE ASSESSEE SU BMITTED THAT ASSESSING OFFICER HAS MADE LUMP SUM DISALLOWANCE JU ST ON THE BASIS OF AMOUNT NOT PAID FOR LAST THREE YEARS WITHOUT MEN TIONING ABOUT ANY SINGLE CREDITOR. LD. AR SUBMITTED THAT ASSESSEE COM PANY IS A LIMITED COMPANY AND ITS BOOKS OF ACCOUNTS ARE REGULARLY AUD ITED UNDER VARIOUS ACTS AND NO SPECIFIC DEFECTS HAVE BEEN POIN TED OUT IN THE BOOKS OF ACCOUNTS. LD. AR FURTHER RELIED ON THE DEC ISION OF HON. JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS.NIT IN S. GARG (2012) 22 TAXMANN.COM 59 (GUJ) WHEREIN ON SIMILAR GROUND REVE NUE LOST THE CASE. 44. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT ASSESSING OFFICER MADE DISA LLOWANCE OF RS.1,24,38,772/- U/S 41(1) OF THE ACT ON ACCOUNT OF CESSATION OF LIABILITY. WE FURTHER FIND THAT NO SPECIFIC OBSERVA TIONS HAVE BEEN MADE BY THE ASSESSING OFFICER NOR ANY FURTHER ACTION HAS BEEN TAKEN BY ASSESSING OFFICER BY WAY OF ISSUING NOTICES TO THE CREDITORS, COLLECTING OF EVIDENCES TO PROVE THAT THERE IS NO INABILITY ON THE PART OF THE ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 40 CREDITOR TO PAY. OVER AND ABOVE, ASSESSEE COMPANY H AS ITSELF NOT WRITTEN OFF THE LIABILITY AND SUBMITTED AUDITED BAL ANCE SHEET SHOWING SUNDRY CREDITORS STOOD AS PAYABLE. FURTHER AS REFER RED TO BY LD. AR WE HAVE GONE THROUGH THE DECISION OF JURISDICTIONAL HI GH COURT IN THE CASE OF CIT VS. NITIN S. GARH (SUPRA) WHEREIN THEIR LORDSHIPS HAVE HELD AS UNDER :- DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE A SSESSING OFFICER NOTICED FROM THE BALANCE SHEET OF ASSESSEE THAT VARIOUS CREDITOR S WERE VERY OLD AND NO INTEREST HAD BEEN PAID ON THOSE LOANS. HE GAVE VARIOUS OPPOR TUNITIES TO THE ASSESSEE TO FURNISH DETAILS OF SUCH CREDITORS, THE ASSESSEE FAI LED TO PRODUCE THE NECESSARY INFORMATION AND DETAILS IN THIS REGARD. THE ASSESSE E ALSO FAILED TO FURNISH THE POSTAL ADDRESSES, PAN, CONFIRMATIONS OF OUTSTANDIN G BALANCE ETC. ACCORDINGLY, THE ASSESSING OFFICER HELD THAT LIABILITY INCURRED IN REGARD TO THE PURCHASE FROM THE PARTIES AS CLAIMED, FOR THE EARLIER YEARS HAD S EIZED TO EXIST. ON APPEAL, THE COMMISSIONER (APPEALS) CONFIRMED THE ADDITION MADE BY THE ASSESSING OFFICER UNDER SECTION 41 (I) HOLDING THAT WHEN THE LIABILIT Y ITSELF WAS NOT TO BE PAID AS THE PARTY WAS NOT TRACEABLE, AND THE ASSESSEE HAD CLAIM ED THE EXPENSES IN THE EARLIER YEARS, THE SAME HAD TO BE TAXED UNDER SECTION 41. O N FURTHER APPEAL, THE TRIBUNAL DELETED THE ADDITION MADE BY THE ASSESSING OFFICER HOLDING THAT THE ASSESSEE CONTINUED TO SHOW THE ADMITTED AMOUNTS AS LIABILITY IN ITS BALANCE SHEET AND SUCH LIABILITIES REFLECTED IN THE BALANCE SHEET COULD NO T BE TREATED AS CESSATION OF LIABILITIES. THE TRIBUNAL WAS OF THE VIEW THAT MERE LY BECAUSE THE LIABILITIES WERE OUTSTANDING FOR A LONG TIME, IT COULD NOT BE INFERR ED THAT SUCH LIABILITIES HAD SEIZED TO EXIST. ON REVENUE'S APPEAL : IT HAD NOT BEEN ESTABLISHED THAT THE ASSESSEE HAD W RITTEN OFF THE OUTSTANDING LIABILITIES IN THE BOOKS OF ACCOUNT. THE TRIBUNAL WAS JUSTIFIED IN TAKING THE VIEW THAT THE ASSESSEE HAD CONTINUED TO SHOW THE ADMITTED AMOUNTS AS LIABILITIES IN ITS BALANCE SHEET, THE SAME COULD NOT BE TREATED AS CESSATION O F LIABILITIES. MERELY BECAUSE THE LIABILITIES WERE OUTSTANDING FOR LAST MANY YEARS, I T COULD NOT BE INFERRED THAT THE SAID LIABILITIES HAS CEASED TO EXIST. THE TRIBUNAL HAD R IGHTLY OBSERVED THAT THE ASSESSING OFFICER WOULD HAVE TO PROVE THAT THE ASSESSEE HAD O BTAINED THE BENEFITS IN RESPECT OF SUCH TRADING LIABILITIES BY WAY OF REMISSION OR CES SATION THEREOF. MERELY BECAUSE THE ASSESSEE OBTAINED BENEFIT OF REDUCTION IN THE EARLI ER YEARS AND BALANCE WAS CARRIED FORWARD IN THE SUBSEQUENT YEAR, IT WOULD NOT PROVE THAT THE TRADING LIABILITIES OF THE ASSESSEE HAD BECOME NON-EXISTENT. [PARA 15] IN VIEW OF AFORESAID, IMPUGNED ORDER PASSED BY THE TRIBUNAL WAS TO BE UPHELD. ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 41 45. RESPECTFULLY FOLLOWING THE DECISION OF HON. JUR ISDICTIONAL HIGH CURT, WE FIND THAT THE FACTS OF THE CASE OF ASSESSE E ARE QUITE SIMILAR TO THE FACTS BEING DISCUSSED IN THE ABOVE REFERRED DEC ISION WHEREIN IT HAS BEEN HELD THAT NO DISALLOWANCE U/S 41(1) OF THE ACT CAN BE MADE MERELY BECAUSE LIABILITIES WERE OUTSTANDING FOR LAS T MANY YEARS AND IT CANNOT BE INFERRED THAT SAID LIABILITIES CEASED TO EXIST FOR THE VERY REASON THAT ASSESSEE HAS DULY SHOWS ITS LIABILITY I N ITS BALANCE SHEET AND NO SPECIFIC FACT CONTROVERTING THE SAME HAS BEE N BROUGHT BEFORE US BY REVENUE. WE, THEREFORE, FIND NO REASON TO INT ERFERE WITH THE ORDER OF LD. CIT(A) ON THIS ISSUE AND ACCORDINGLY C ONFIRM THE SAME. THIS GROUND OF REVENUE IS DISMISSED. 46. REMAINING GROUND NOS. 5 & 6 IN APPEAL NO.637/AH D/2011,AND NO.638/AHD/2011, GROUND NOS.4 & 5 IN APPEAL NO.639/ AHD/2011, GROUND NOS. 3 & 4 IN APPEAL NO.62/AHD/2012 & APPEAL NO.1659/AHD/2012 ARE GENERAL IN NATURE, WHICH NEED NO ADJUDICATION. NOW WE TAKE UP CROSS APPEALS OF ASSESSEE 47. GROUND NO.4 IN ITA NO.528/AHD/2011 FOR ASSY. YEAR 2 005- 06, GROUND NO.2 IN ITA NO.529/AHD/2011 FOR ASST. YE AR 2006-07, GROUND NOS.2 & 3 IN ITA NO.530/AHD/2011 FOR ASST. Y EAR 2007-08, GROUND NO.2 IN ITA NO.3193/AHD/2011 FOR ASST. YEAR 2008-09 AND GROUND NO.2 IN ITA NO.1510/AHD/2012 FOR ASST. YEAR 2009-10 ARE AGAINST THE ORDERS OF LD. CIT(A) TREATING SOME PORT ION AS SHORT TERM CAPITAL GAIN FROM SALE OF SHARES AND MUTUAL FUNDS A S BUSINESS INCOME WHEREIN PERIOD OF HOLDING OF THE INVESTMENT IS LESS THAN 30 DAYS AND ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 42 ALSO IN RELATION TO ASST. YEAR 2006-07 WHEREIN INC OME FROM MUTUAL FUNDS BEING MANAGED BY PORTFOLIO MANAGER HAS BEEN T REATED AS BUSINESS INCOME. 48. AT THE OUTSET, WE WOULD LIKE TO MENTION THAT WH ILE DEALING WITH GROUNDS OF REVENUE RELATING TO TREATMENT OF CAPITAL GAINS INCOME AS BUSINESS INCOME, WE HAVE DISMISSED THE GROUNDS OF R EVENUE AS DISCUSSED IN PARA 39 ABOVE WHEREIN WE HAVE HELD THA T TRANSACTIONS OF PURCHASE AND SALES OF SHARES AND MUTUAL FUNDS CLAIM ED BY THE ASSESSEE AS LONG TERM CAPITAL GAINS AND SHORT TERM CAPITAL GAINS TO BE CORRECT AND HAVE ALSO DECIDED THAT TRANSACTIONS OF SHORT TERM CAPITAL GAIN NEED NOT BE BIFURCATED INTO TWO PORTIO NS BEING THOSE HELD FOR LESS THAN 30 DAYS AND OTHERS ON THE FACTS WHERE IN ASSESSEE COMPANY IS REGULARLY CARRYING ON THE BUSINESS ACTIV ITY OF PRINTING NEWSPAPER AND EARNING INCOME FROM ADVERTISEMENT REG ULARLY SINCE LAST MANY YEARS AND INCOME FROM CAPITAL GAIN AS LON G TERM / SHORT TERM FROM SHARES/MUTUAL FUNDS TRANSACTIONS HAVE BEE N CONSISTENTLY ACCEPTED BY THE DEPARTMENT IN PAST MANY YEARS AS LO NG TERM AND SHORT TERM CAPITAL GAINS AND EVEN IN THE BUNCH OF A PPEALS WE ARE DEALING IN ASSESSING OFFICER HAS ACCEPTED THE CLAIM OF LONG TERM CAPITAL GAIN FROM SALE OF SHARES MADE BY THE ASSESS EE IN ITS RETURN OF INCOME. IN VIEW OF OUR ABOVE DISCUSSIONS, THE GROUN DS OF ASSESSEE ARE ALLOWED. 49. NOW WE TAKE UP GROUND NO.2 OF ITA NO.528/AHD/2011 F OR ASST. YEAR 2005-06, GROUND NO.3 OF ITA NO.529/AHD/2 011 FOR ASST. YEAR 2006-07, GROUND NOS.4 & 5 OF ITA NO.530/ AHD/2011 FOR ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 43 ASST. YEAR 2007-08, GROUND NO.1 OF ITA NO.3194/AHD/ 2011 FOR ASST. YEAR 2008-09 AND GRUND NO. 2 OF ITA NO.1510/A HD/2012 FOR ASST. YEAR 2009-10 IN RELATION TO DISALLOWANCE U/S 14A OF THE ACT. 50. DURING THE COURSE OF ASSESSMENT PROCEEDINGS DIS ALLOWANCE U/S 14A OF THE ACT FOR ALL THE FIVE YEARS UNDER APPEAL HAVE BEEN MADE FOR PROPORTIONATE DISALLOWANCE OF INTEREST EXPENDITURE. IN THE CASE FOR ASST. YEAR 2007-08 FOR DISALLOWING ADMINISTRATIVE E XPENSES CALCULATED ON THE BASIS OF 0.5% VALUE OF INVESTMENT AND FOR ASST. YEAR 2008-09 & ASST. YEAR 2009-10 APPLYING THE METH OD MENTIONED IN RULE 8D OF THE IT RULES R.W.S. 14A OF THE ACT. 51. WHILE DEALING WITH THE REVENUES APPEALS WE HAV E DECIDED THAT ON THE BASIS OF CO-ORDINATE BENCH DECISION IN ASSES SEES OWN CASE THAT LD. CIT(A) HAS MADE NO ERROR IN CONFIRMING THE PROPORTIONATE DISALLOWANCE OF INTEREST EXPENDITURE U/S 14A OF THE ACT. IN VIEW OF OUR DECISION MADE IN THE REVENUES APPEALS DISCUSSED AT PARA 26 & 27 OF THIS ORDER, WE DISMISS THE GROUNDS OF ASSESSEE R ELATING TO DISALLOWANCE OF INTEREST EXPENDITURE U/S 14A OF THE ACT AND CONFIRM THE DECISION OF THE LD. CIT(A) ON THIS ISSUE FOR AL L THE FIVE ASST. YEARS FROM ASST. YEARS 2005-06 TO ASST. YEAR 2009-10. 52. HOWEVER, IN REGARD TO DISALLOWANCE OF ADMINISTR ATIVE EXPENSES FOR ASST. YEAR 2007-08 AT RS.84,51,292/- CALCULATED @ 0.5% OF AVERAGE VALUE OF INVESTMENT AT RS.169 CRORES, WE FI ND THAT ASSESSING OFFICER HAS MADE DISALLOWANCE BY COMPUTING THE SAME BY APPLYING THE METHOD MENTIONED IN RULE 8D OF IT RULES WHICH H AVE BEEN ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 44 INSERTED BY THE IT (VTH AMENDMENT) RULES, 2008 W.E. F. 24.3.2008 WHICH MEANS THAT THEY WERE NOT APPLICABLE FOR ASST. YEAR 2007-08 AND CAME INTO EFFECT FROM ASST. YEAR 2008-09. AS TH E AMENDMENT MADE IN THE ACT SHOULD BE READ AS PROSPECTIVE IN NA TURE FOR THE ASSESSEE, WE DO NOT DEEM IT PROPER THAT THE SAME SH OULD HAVE BEEN APPLIED ON THE ASSESSEE FOR ASST. YEAR 2007-08. IN CASE ASSESSING OFFICER HAS TO MAKE ANY DISALLOWANCE THEN SPECIFIC FINDING MUST HAVE BEEN GIVEN BY THE ASSESSING OFFICER AS EMANATING F ROM THE BOOKS OF ACCOUNTS OF THE ASSESSEE THAT CERTAIN EXPENSES ARE DIRECTLY INCURRED IN RELATION TO EARNING OF INCOME NOT CHARGEABLE TO TAX. FROM GOING THROUGH THE ASSESSMENT ORDER, WE FIND THAT ASSESSIN G OFFICER HAS NOT BROUGHT OUT ANY MATERIAL EVIDENCE TO PROVE THAT CER TAIN ADMINISTRATIVE EXPENSES NEED TO BE DISALLOWED. HOWEVER, ONE CANNOT IGNORE THE FACT THAT LOOKING TO THE QUANTUM OF TAX FREE INCOME EARN ED BY ASSESSEE SOME EXPENSES OUGHT TO HAVE BEEN INCURRED AND, THER EFORE, LD. CIT(A) HAS RIGHTLY CONFIRMED THE DISALLOWANCE OF RS .2,50,000/- OUT OF ADMINISTRATIVE EXPENSES. WE UPHOLD THE SAME AND DIS MISS THE GROUND OF ASSESSEE FOR ASST. YEAR 2007-08. 53. NOW WE TAKE UP THE DISALLOWANCE OF ADMINISTRATIVE EXPENSES OF RS.84,15,667/- U/S 14A READ WITH RESPEC T TO RULE 8D FOR ASST. YEAR 2009-10. FOR ASST. YEAR 2009-10 ASSESSING OFFICER HAS MADE DISALLOWANCE U/S 14A BY APPLYING THE METHO D MENTIONED RELEVANT TO RULE 8D OF IT RULES ACCORDINGLY MADE A DISALLOWANCE OF RS.4,70,136/- FOR INTEREST EXPENSES AND RS.84,16,55 7/- FOR ADMINISTRATIVE EXPENSES. WE HAVE ALREADY CONFIRMED THE ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 45 DISALLOWANCE OF PROPORTIONATE INTEREST INCOME AS DI SCUSSED ABOVE AND SO WILL DEAL WITH DISALLOWANCE OF ADMINISTRATIV E EXPENSES. 53.1 LD. CIT(A) HAS DISMISSED THIS GROUND OF ASSESS EE BY OBSERVING AS UNDER :- 4. GROUND NO.2 PERTAINS TO THE DISALLOWANCE MADE OF RS.88,86,693 U/S.14A. IN PARA 4.1 AND 4.2 OF THE ASSESSMENT ORDER, IT HAS BEEN STATED BY THE ASSESSING OFFICER THAT THE ASSESSEE HAD MADE HUGE I NVESTMENTS IN MUTUAL FUNDS AND SHARES AND HAS EARNED TAX FREE DIV IDEND AND INTEREST INCOME. INVESTMENT IN MUTUAL FUNDS RS.21 0,68,82,923 DIVIDEND INCOME EARNED RS.11, 98,42,1 50 INVESTMENT IN SHARES OF FUNDS / ACTUALLY TAX FREE BONDS. RS. 68,23,75,470 TAX FREE INTEREST RS. 3,80,00,000 TOTAL INVESTMENT RS.278,92,59,830 5. THE ASSESSING OFFICER HAS NOTED IN PARA 4.2 THAT AS PER BALANCE-SHEET (AS ON 31.3.2009), THE ASSESSEE HAS SECURED LOANS O F RS.3,56,36,111. HE HAS ALSO NOTED THAT THE ASSESSEE HAS DEBITED INTERE ST OF RS. 19,69,881 IN THE PROFIT AND LOSS ACCOUNT. HIS POINT IS THAT SECU RED FUNDS ON WHICH INTEREST HAS BEEN PAID, HAVE BEEN DIVERTED INTO MAK ING INVESTMENTS, ON WHICH TAX FREE INCOME , HAS BEEN EARNED. IN 4.3 OF THE ASSESSMENT ORDER, THE ASSESSING OFFICER HAS APPLIED RULE 8D FOR CALCU LATING DISALLOWANCE OF PROPORTIONATE EXPENDITURE WHICH HAS BEEN DEBITED IN THE PROFIT AND LOSS ACCOUNT IN THE FORM OF VARIOUS EXPENSES INCLUDING I NTEREST, INCURRED BY THE ASSESSEE ON EARNING TAX FREE INCOME. 6. DURING THE COURSE OF APPELLATE PROCEEDINGS, THE ID.ARS ARGUED THAT THE RESERVE AND SURPLUS AVAILABLE WITH THE APPELLANT AT THE BEGINNING OF THE YEAR I.E. 1.4.2008 WAS RS.507.67 CRORES AND AT THE END OF THE YEAR I.E. 31.03.2009 WAS RS.523.18 CRORES WHICH INCLUDES SHAR E CAPITAL ALSO. IT WAS ARGUED THAT AS INVESTMENT IN EARNING TAX FREE INCOM E WAS LESS THAN THE ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 46 AMOUNT OF INTEREST FREE FUNDS IN THE FORM OF SHARE CAPITAL, RESERVE AND SURPLUS, NO DISALLOWANCE U/S.14A WAS CALLED FOR. HO N'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES AND POWER LTD. (313 ITR 340) AND HON'BLE ITAT, AHMEDABAD BENCH 'A DECISION IN THE CASE OF ACIT VS. HIPOLIN LTD. (ITA NO.4259/AHD/2007) (AFFIRMED B Y HON'BLE GUJARAT HIGH COURT) WERE RELIED UPON IN SUPPORT OF THE ARGUMENT THAT NO DISALLOWANCE WAS CALLED FOR WHEN ENOUGH FUNDS IN THE FORM OF RES ERVE AND SURPLUS ARE AVAILABLE WITH THE APPELLANT. 7. AFTER GOING THROUGH RIVAL SUBMISSIONS, IT IS SEE N THAT THE APPELLANT HAS NOT BEEN ABLE TO ESTABLISH THE NEXUS(DATE AND AMOUN T-WISE) OF INTEREST FREE FUNDS AVAILABLE WITH THE APPELLANT, WITH SPECI FIC DATE AND AMOUNT-WISE INVESTMENT, MADE IN A PARTICULAR MUTUAL FUND OR SHA RES OF ANY COMPANY OR IN ANY TAX-FREE BOND. GENERAL STATEMENTS HAVE BEEN GIVEN BY THE APPELLANT THAT ENOUGH FUNDS ARE THERE, BUT EVEN THE BREAK-UP OF THE TYPE OF FUND AVAILABLE AND HOW MUCH OF IT HAS BEEN INVESTED , WHEN AND WHERE BY THE APPELLANT HAS NOT BEEN FURNISHED. IN .{HIS BACK GROUND HON'BLE BOMBAY HIGH COURT REPORTED IN 238 ITR 81 IN THE CASE OF GO DREJ & BOYCE IS APPLICABLE WHEREIN IT WAS HELD THAT RULE 8D FOR CAL CULATING THE PROPORTIONATE INTEREST DISALLOWANCE IS APPLICABLE F ROM AY 2008-09 ONWARDS. IN THIS CASE, THE ASSESSING OFFICER HAS AP PLIED RULE 8D AS THE YEAR UNDER CONSIDERATION IS AY 2009-10. AND AS EVEN DURING APPELLATE PROCEEDINGS THE NEXUS BETWEEN THE AVAILABILITY OF F UNDS AND THE SPECIFIC INVESTMENT MADE OF THE SAME , WHERE AND WHEN , HAS NOT BEEN ESTABLISHED, THE DISALLOWANCE MADE U/S.14A BY THE A SSESSING OFFICER OF RS.88,86,693 IS UPHELD SEEING TO THE FACT THAT INTE REST EXPENSES OF RS 19,69,881 AND OTHER EXPENSES OF RS 101,59,70,512 HA VE BEEN DEBITED IN THE P&L ACCOUNT OF THE APPELLANT AND IT CANNOT BE D ENIED IN THE GIVEN FACTS THAT A PART OF THE AFOREMENTIONED EXPENSES WERE IND EED INCURRED ON EARNING TAX-FREE INCOME. AND SUCH PROPORTIONATE EXP ENSES CAME TO RS 88,86,693 AS PER RULE 8D CALCULATION. IT IS EQUALLY IMPORTANT TO MENTION HERE THAT THE FORMULA OF RULE 8D CALCULATION ADOPTE D BY THE ASSESSING OFFICER AND THE FIGURES TAKEN BY HIM HAVE NOT BEEN DISPUTED BY THE APPELLANT. IT IS ALSO RELEVANT TO MENTION HERE THAT IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR THAT IS AY 2008-09, THE C IT(A)-III, AHMEDABAD VIDE HIS ORDER DATED 21.10.2011 IN THE CA SE OF THE APPELLANT HAS UPHELD SIMILAR DISALLOWANCE U/S.14A OF RS. 1,02 ,39,404. 54. LD. AR REFERRED AND RELIED ON THE DECISION OF H ONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF PRINCIPAL CIT-2 VS. INDIA GELATINE & CHEMICALS LTD. IN TAX APPEAL NO.276 & 27 7 OF 2015 WHEREIN THEIR LORDSHIPS HAVE CONFIRMED THE VIEW TAK EN BY THE ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 47 TRIBUNAL WHILE DELETING THE DISALLOWANCE OF INTERES T EXPENSES U/S 14A OF THE ACT BY OBSERVING AS UNDER :- [5.1] NOW, SO FAR AS THE DELETION OF DISALLOWANCE OF INTEREST EXPENSES UNDER SECTION 14A OF THE ACT BY THE LEARNED TRIBUNAL / CI T(A) IS CONCERNED, IT IS REQUIRED TO BE NOTED THAT THE AO MADE THE DISALLOWA NCE UNDER SECTION 14A OF THE ACT ON THE GROUND THAT THE ASSESSEE WAS NOT ABL E TO JUSTIFY THAT THE INVESTMENTS MADE IN THE SHARES AND MUTUAL FUNDS AMO UNTING TO RS.21,14,07,8507- WAS MADE OUT OF THE INTEREST: FRE E FUNDS. HOWEVER, IT IS REQUIRED TO BE NOTED THAT BOTH, THE LEARNED GIT (A) AS WELL AS THE LEARNED TRIBUNAL HAVE CATEGORICALLY FOUND ON THE BASIS OF T HE MATERIAL ON RECORD THAT AS SUCH THE ASSESSEE WAS HAVING INTEREST FREE FUNDS OU T OF WHICH THE INVESTMENT WAS MADE. THEREFORE, BY OBSERVING IN PARAS 6 TO 9 E XTRACTED HEREINBELOW, THE LEARNED TRIBUNAL HAS DELETED THE ENTIRE DISALLOWANC E OF RS.12,06,9347- MADE BY THE AO UNDER SECTION 14AOFTHE ACT. '6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF LOWER AUTHORITIES AND MATERIAL AVAILABLE ON RECORD. THE U NDISPUTED FACTS OF THE CASE ARE THAT THE ASSESSING OFFICER OBSERVED THAT THE AS SESSEE HAS MADE INVESTMENT OF RS.21,14,07,8507- AND THE ASSESSEE HAS PAID INTE REST ON BORROWED FUNDS OF RS.40,10,861/-. HE ALSO OBSERVED THAT THE ASSESSEE HAS NOT MADE DISALLOWANCE OF INTEREST EXPENDITURE ACCORDING TO SECTION 14A RE AD WITH RULE 8D OF THE ACT. HE THEREFORE COMPUTED THE PROPORTIONATE DISALLOWANC E OF INTEREST EXPENDITURE AT RS.5,84,706/- AND DISALLOWED THE SAME. BEFORE TH E COMMISSIONER OF INCOME TAX (APPEALS), THE ASSESSEE SUBMITTED THAT THE ASSE SSEE HAD BORROWED FUNDS FOR THE PURPOSES OF VEHICLE AND OLD LOAN OF RS.2005 /- FOR CAPTIVE POWER PLANT, AND THEREFORE NO BORROWED FUNDS WERE USED FOR NON-B USINESS PURPOSES. FURTHER, THE ASSESSEE RELIED UPON THE DECISION OF T HE HON'BLE SUPREME COURT IN THE CASE OF S A BUILDERS (SUPRA) AND MUNJAL SALES C ORPORATION (SUPRA) AND THE DECISION OF HON'BLE MUMBAI HIGH COURT IN THE CASE O F RELIANCE UTILITY & POWER LTD. (SUPRA) WHERE IT WAS HELD THAT IF THE IN TEREST FREE FUNDS OF THE ASSESSEE WERE SUFFICIENT FOR MAKING INVESTMENTS, NO DISALLOWANCE OF INTEREST EXPENDITURE WAS CALLED FOR. THE COMMISSIONER OF INC OME TAX (APPEALS) HELD THAT THE FINDING OF THE ASSESSING OFFICER WAS NOT C ORRECT THAT THE ASSESSEE HAS NOT CHARGED ANY INTEREST FREE LOAN TO ASSOCIATE CON CERNS. HE HELD THAT THE ASSESSEE IN FACT EARNED INTEREST INCOME AT THE RATE VARYING FROM 9% TO 12.5% FROM THE ASSOCIATED CONCERNS DEPENDING UPON THE AVA ILABILITY OF SURPLUS FUNDS AND THEREBY EARNED INTEREST INCOME OF APPROXIMATELY RS.50.74 LAKHS DURING THE YEAR. HE, THEREFORE, HELD THAT DISALLOWANCE MAD E BY THE ASSESSING OFFICER U/S.36(I)(III) WAS OF RS.40,10,861/- WAS NOT JUSTIF IED. 7. THE DEPARTMENTAL REPRESENTATIVE HAS MERELY RELIE D UPON THE ORDER OF THE ASSESSING OFFICER. HE HAS NOT POINTED OUT ANY SPECI FIC ERROR IN THE ORDER OF THE ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 48 COMMISSIONER OF INCOME TAX (APPEALS). HE COULD NOT BRING ANY MATERIAL ON RECORD TO SHOW THAT THE ASSESSEE COULD NOT HAVE ADV ANCED INTEREST FREE LOANS OR LOANS AT LOWER RATE OF INTEREST TO THE SISTER CO NCERNS OUT OF ITS INTEREST FREE FUNDS AVAILABLE WITH IT. THEREFORE, WE FIND NO INFI RMITY IN THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) WHICH IS CONFI RMED AND THE GROUND NO. 1 OF APPEAL OF THE REVENUE IS DISMISSED. 8. FURTHER, THE ASSESSING OFFICER ABO MADE DISALLOW ANCE OF RS.8,22,228/- OUT OF ADMINISTRATIVE EXPENSES, BUT HAD RESTRICTED THE DISALLOWANCE MADE TO RS.6,22,228/- AS THE ASSESSEE HIMSELF HAD MADE DISA LLOWANCE OF RS.2,00,000/- AS EXPENSES INCURRED FOR EARNING TAX FREE DIVIDED I NCOME. THE COMMISSIONER OF INCOME TAX (APPEALS) OBSERVED THAT THE SAID EXPE NSES MUST HAVE BEEN INCURRED BY THE ASSESSEE IN MAKING THE INVESTMENTS AND THEREFORE CONFIRMED THE DISALLOWANCE OF RS.6,22,228/- MADE BY THE ASSES SING OFFICER. THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAS EARNED DIVIDED INCOME OF RS.12,200/- AS WILL BE EVI DENCED FROM THE STATEMENT OF ACCOUNTS OF THE ASSESSEE AT PAVE 26 OF THE PAPER BOOK FOR WHICH DISALLOWANCE OF RS.6,22,228/- CANNOT BE MADE. 9. WE FIND THAT THE ASSESSING OFFICER AS WELL AS TH E COMMISSIONER OF INCOME TAX (APPEALS) COULD NOT PINPOINT ANY ERROR IN THE C OMPUTATION OF DISALLOWANCE MADE BY THE ASSESSEE OF RS.2,00,000/- IN EARNING TA X FREE DIVIDED INCOME. IN THE CIRCUMSTANCES, IN OUR CONSIDERED OPINION, DISAL LOWANCE OF RS.6,22,228/-- COULD NOT HAVE BEEN MADE BY THE ASSESSING OFFICER A ND CONFIRMED BY THE COMMISSIONER OF < INCOME TAX (APPEALS). OUR ABOVE VIEW FINDS SUPPORT FROM THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. CONSOLIDATED PHOTO & FINVESTLTD. (2012) 211 TAXMAN 184 (DEL). THEREFORE, WE SET ASIDE THE ORDERS OF LOWER AUTHORITIES AND DE LETE THE DISALLOWANCE OF RS.6,22,228/-. THUS, GROUND NO.L OF APPEAL OF THE A SSESSEE IS ALLOWED.' WE ARE IN COMPLETE AGREEMENT WITH THE VIEW TAKEN BY THE LEARNED TRIBUNAL AND THE REASONS GIVEN BY THE LEARNED TRIBUNAL WHILE DEL ETING THE DISALLOWANCE OF INTEREST EXPENSES UNDER SECTION 14A OF THE ACT. 55. ON THE OTHER HAND LD. DR SUPPORTED THE ORDERS O F LOWER AUTHORITIES. 56. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. FROM GOING THROUGH THE FACTS OF THE CASE , WE FIND THAT THE ASSESSEE HAS BEEN CONSISTENTLY EARNING TAX FREE INC OME IN THE FORM ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 49 OF DIVIDEND AND TAX FREE INTEREST AS WELL AS FREE I NCOME FROM LONG TERM CAPITAL GAIN FROM SALE OF SHARES AND IN FEW YEARS C ONSIDERABLE PORTION OF THE NET PROFIT WAS FROM TAX FREE INCOME FROM SUC H INVESTMENT. FURTHER GOING THROUGH THE BALANCE SHEET OF THE ASSE SSEE ALSO WE FIND THAT ON AN AVERAGE 30-40% OF THE TOTAL OF SHARE CAP ITAL AND RESERVE AND SURPLUS ARE BEING INVESTED IN INVESTMENTS IN TH E FORM OF GOVT. SECURITIES EQUITY SHARES AND MUTUAL FUND WHICH MAIN LY GIVES TAX FREE INCOME TO THE ASSESSEE. UPTO ASST. YEAR 2007-08 THE RE WAS NO METHODOLOGY AVAILABLE WITH THE ASSESSING OFFICER TO COMPUTE SUCH EXPENDITURE INCURRED BY ASSESSEE IN RESPECT OF EXEM PT INCOME IN A SITUATION WHEN THE COMMON BOOKS OF ACCOUNTS HAVE BE EN MAINTAINED AND MIXED FUNDS ARE BEING APPLIED FOR BUSINESS AS W ELL AS INVESTMENTS PURPOSES AND IT WAS INCUMBENT UPON THE ASSESSING OFFICER TO EXTRACT AS WELL AS BIFURCATE SUCH EXPEND ITURE AND MAKE PROPER SATISFACTION. CERTAINLY DISALLOWANCE U/S 14A OF THE ACT RESTS UPON THE FACTS AND CIRCUMSTANCES OF EACH CASE AND M OST OF THE TIMES DECISIONS ARE BASED ON THE FACT THAT EITHER EXEMPT INCOME IS TOO MEAGER OR SMALL PORTION OF INTEREST FREE FUNDS HAVE BEEN APPLIED IN INVESTMENTS OR ASSESSING OFFICER IS NOT ABLE TO SAT ISFY THE BASIS FOR DISALLOWANCE AND EXPENDITURE ON THE CONTRARY IN SOM E SITUATION CERTAIN INVESTMENTS ARE MADE IN A YEAR BUT THE FRUI TS IN THE SHAPE OF LONG TERM GAIN AND TAX FREE INCOME MAY ARISE IN THE FUTURE. 57. GOING THROUGH THE HISTORY OF SECTION 14A OF THE ACT, WE ARE ABLE TO GATHER THAT THE SAME HAS BEEN INCLUDED BY FINAN CE ACT 2001 WITH RETROSPECTIVE EFFECT FROM 1.4.1962 TO NULLIFY THE J UDGMENT OF HON. SUPREME COURT IN THE CASE OF RAJASTHAN STATE WARE H OUSING ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 50 CORPORATION VS. CIT 242 ITR 450 WHEREIN THEIR LORDS HIPS HAVE HELD AS UNDER :- IN COMPUTING `PROFITS AND GAINS OF BUSINESS OR PRO FESSION WHEN AN ASSESSEE IS CARRYING ON BUSINESS IN VARIOUS VENTURE S AND SOME AMONG THEM YIELD TAXABLE INCOME AND THE OTHERS DO NOT, TH E QUESTION OF ALLOWABILITY OF THE EXPENDITURE U/S. 37 OF THE ACT WILL DEPEND ON: (A) FULFILMENT OF REQUIREMENTS OF THAT PROVISION NOTED ABOVE; AND (B) ON THE FACT WHETHER ALL THE VENTURES CARRIED ON BY HIM CON STITUTED ONE INDIVISIBLE BUSINESS OR NOT; IF THEY DO, THE ENTIRE EXPENDITURE WILL BE A PERMISSIBLE DEDUCTION BUT IF THEY DO NOT, THE PRINCIPLE OF APPO RTIONMENT OF THE EXPENDITURE WILL APPLY BECAUSE THERE WILL BE NO NEX US BETWEEN THE EXPENDITURE ATTRIBUTABLE TO THE VENTURE NOT FORMING INTEGRAL PART OF THE BUSINESS AND THE EXPENDITURE SOUGHT TO BE DEDUCTED AS THE BUSINESS EXPENDITURE OF THE ASSESSEE. 58. HOWEVER, EVEN AFTER THE INSERTION OF SECTION 14 A OF THE ACT IT WAS INCUMBENT ON THE ASSESSING OFFICER TO CALCULATE SUCH DISALLOWANCE ON THE FACTS OF THE CASE AND AS TO GO DEEP INSIDE THE BOOKS OF ACCOUNT TO CULL OUT THE EVIDENCES AND BASI S FOR DISALLOWANCE. IN ORDER TO OVERCOME SUCH SITUATION AND FOR DETERMI NING AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME, SPECIAL METHOD WAS BROUGHT IN FORCE BY INSERTION OF RULE 8D OF IT RULES WHICH READS AS UNDER WITH RESPECT TO SECTION 14 OF THE ACT. SEC. 14A. EXPENDITURE INCURRED IN RELATION TO INCO ME NOT INCLUDIBLE IN TOTAL INCOME.(1)FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS C HAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOUN T OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, IF THE ASSESSING OFFIC ER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FO RM PART OF THE TOTAL INCOME UNDER THIS ACT. ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 51 (3) THE PROVISIONS OF SUB-SECTION (2) SHALL ALSO AP PLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT: PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHALL EMPOW ER THE ASSESSING OFFICER EITHER TO REASSESS UNDER SECTION 147 OR PASS AN ORDER ENHANCI NG THE ASSESSMENT OR REDUCING A REFUND ALREADY MADE OR OTHERWISE INCREASING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154, FOR ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL, 2001. 2. NEW RULE 8D : 2.1 IN EXERCISE OF THE POWERS GIVEN IN S. 14A(2) C. B.D.T. HAS ISSUED A NOTIFICATION NO. S.O. 547(E) ON 24-3-2008 (299 ITR (ST) 88). THIS NOTIFIC ATION AMENDS THE INCOME-TAX RULES BY INSERTION OF A NEW RULE 8D PROVIDING FOR A 'METHOD FOR DETERMINING AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME'. READING THIS RULE IT IS EVIDENT THAT THE RULE PROVIDES FOR DISALLOWANCE OF NOT ONLY DIRECT EXPEND ITURE INCURRED FOR EARNING THE EXEMPT INCOME BUT ALSO FOR DISALLOWANCE OF PROPORTIONATE INDIRECT EXPENDITURE. THIS IS CLEARLY CONTRARY TO THE MAIN OBJECTIVE WITH WHICH S. 14A WAS ENACTED. 2.2 BROADLY STATED, THE NEW RULE 8D PROVIDES AS UND ER : (I) THE METHOD PRESCRIBED IN THE RULE IS TO BE APPL IED ONLY IF THE AO IS NOT SATISFIED WITH : (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE INC URRED FOR EARNING THE EXEMPT INCOME MADE BY THE ASSESSEE OR (B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDIT URE HAS BEEN INCURRED FOR EARNING EXEMPT INCOME. (II) THE METHOD PRESCRIBED IN THE RULE STATES THAT THE EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME SHALL BE THE AGGREGATE OF THE FOLLOWING AMOUNTS : (A) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. (B) IN THE CASE OF INTEREST ON BORROWED FUNDS WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, THE AMOUNT COMPUTED IN ACCORDANC E WITH THIS FOLLOWING FORMULA : A X B C A = AMOUNT OF INTEREST, OTHER THAN THE AMOUNT OF IN TEREST WHICH IS DIRECTLY ATTRIBUTABLE TO THE EXEMPT INCOME STATED IN (A) ABOVE. B = THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE S HEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE RELEVANT ACCOUNTING YEAR. C = THE AVERAGE OF TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE RELEVANT ACCOUNTING YEA R. THE TERM TOTAL ASSETS MEANS TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET EXCLUDING THE INC REASE ON ACCOUNT OF REVALUATION OF ASSETS BUT INCLUDING THE DECREASE ON ACCOUNT OF REVALUATION OF ASSETS. (C) AN AMOUNT EQUAL TO % OF THE AVERAGE OF THE VA LUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SH EET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE RELEVANT ACCOUNTING YEAR. ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 52 59. GOING THROUGH THE FACTS OF THE CASE OF ASSESSEE WE FIND IT TO BE A FIT CASE FOR THE APPLICABILITY OF RULE 8D OF IT R ULES RELATING TO PROVISIONS OF SECTION 14A OF THE ACT BECAUSE HUGE F UNDS HAVE BEEN INVESTED IN THE SHARES AND SECURITIES SUBSTANTIVE I NCOME OF ASSESSEE IN PAST AND PRESENT HAVE BEEN EARNED FROM PROFIT ON SALE OF INVESTMENTS, REGULAR MOVEMENTS OF FUNDS FROM THE SO URCE OF INTEREST BEARING AS WELL AS INTEREST FREE FUNDS IN THE BOOKS OF ACCOUNTS RELEVANT TO INVESTMENT IN TAX FREE FUNDS AND ALSO I N THE CASE UNDER APPEAL IN ORDER TO SATISFY THE REQUIREMENTS OF SECT ION 14A SUB-SEC.(2) AS WELL AS REQUIREMENTS OF RULE 8D SUB RULE (1) ASS ESSING OFFICER HAS MADE SPECIFIC OBJECTIONS THAT HE IS NOT SATISFIED W ITH THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE TO WARDS EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCL UDIBLE TO TOTAL INCOME. 59.1 DURING THE COURSE OF ASSESSMENT PROCEEDINGS SP ECIFIC QUERY WAS RAISED BY THE ASSESSING OFFICER FOR PROVIDING D ETAILS OF SUCH EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME. IN REPLY TO THIS QUERY ASSESSEE SIMPLY DENIED AND SUBMITTED THAT NO SUCH E XPENDITURE HAS BEEN INCURRED IN RELATION TO EXEMPT INCOME EARNED I N THE FORM OF DIVIDEND AT RS.11.98 CRORES, TAX FREE INTEREST OF R S.3.8 CRORES AND OTHER INCOME EARNED FROM INVESTMENTS. FURTHER ASSES SING OFFICER FURTHER LOOKED INTO THE BALANCE SHEET OF THE ASSESS EE AND FOUND THAT THERE WAS AN INVESTMENT OF RS.278.92 CRORES IN MUTU AL FUNDS/SHARES/TAX-FREE BONDS. ONCE ASSESSEE HAS DENI ED TO HAVE INCURRED ANY SUCH EXPENDITURE LIABLE TO BE DISALLOW ED U/S 14A OF THE ACT ASSESSING OFFICER WAS SATISFIED THAT THERE IS NO CORRECTNESS IN THE ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 53 CLAIM MADE BY ASSESSEE LOOKING TO THE FACT OF INVES TMENT MADE AS WELL AS TAX FREE INCOME EARNED BY THE ASSESSEE AND ACCORDINGLY ASSESSING OFFICER PROCEEDED TOWARDS CALCULATION OF SUCH EXPENDITURE TO BE DISALLOWED U/S 14A OF THE ACT ON THE BASIS OF METHOD GIVEN IN RULE 8D OF IT RULES. WE FIND THAT LD. CIT(A) HAS RI GHTLY CONFIRMED THE SAME AND ACCORDINGLY WE DISMISS THIS GROUND OF ASSE SSEE FOR ASST. YEAR 2009-10. 60. NOW WE TAKE UP GROUND NO.3 OF ITA NO.528/AHD/2011 F OR ASST. YEAR 2005-06 AND GROUND NO.4 OF ITA NO.529/AH D/2011 FOR ASST. YEAR 2006-07 AGAINST THE ORDER OF LD. CIT(A) CONFIRMING THE DISALLOWANCE OF FOREIGN TRAVEL EXPENSES OF RS.23,74 ,188/- FOR ASST. YEAR 1005-06 AND RS.7,45,334/- FOR ASST,. YEAR 2006 -07. 61. FROM GOING THROUGH THE ORDERS OF LOWER AUTHORIT IES WE FIND THAT ASSESSEE HAS BEEN UNABLE TO SATISFY THE ASSESSING O FFICER AS WELL AS THE LD. CIT(A) BY JUSTIFYING THE FOREIGN TRAVEL EXP ENSES IN REGARD TO ASST. YEAR 2005-06 AND 2006-07. LD. CIT(A) HAS CONF IRMED THE ADDITION FOR ASST. YEAR 2005-06 AND 2006-07 RELATIN G TO DISALLOWANCE OF FOREIGN TRAVEL EXPENSES OF RS.23,74,188/- AND RS .7,45,334/- RESPECTIVELY, BY OBSERVING AS UNDER :- 8.2 I HAVE CONSIDERED THE ASSESSMENT ORDER AND THE ABOVE SUBMISSIONS. IT IS NOTICED THAT THE APPELLANT IN BOTH THE YEARS HAS ONLY FURNISHED PRIMARY DETAILS IN RESPECT OF FOREIGN TRAVEL EXPENDITURE. H OWEVER, AS OBSERVED BY THE ASSESSING OFFICER, THE BUSINESS EXPEDIENCY OF S UCH CLAIM WAS NOT JUSTIFIED BY APPELLANT, EVEN DURING THE COURSE OF A PPELLATE PROCEEDINGS ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 54 BEFORE ME, THE APPELLATE HAD FAILED TO BRING ON REC ORD ANY EVIDENCE TO SUPPORT ITS CONTENTION THAT THE EXPENDITURE HAS BEE N INCURRED FOR NEGOTIATING DEAL FOR IMPORT OF NEWSPAPER VIZ. PARTI ES WITH WHOM SUCH NEGOTIATIONS TOOK PLACE AS WELL THE DETAILS OF ANY IMPORT MADE AS A RESULT OF SUCH NEGOTIATIONS ETC. AND IN THE ABSENCE OF ANY SUCH DETAILS, THE APPELLANT CANNOT BE SAID TO HAVE DISCHARGED THE ONU S OF PROVING EXPENDITURE AS HAVING BEEN INCURRED FOR BUSINESS PU RPOSE. UNDER SUCH CIRCUMSTANCES, 1 FIND NO INFIRMITY IN THE DISALLOWA NCE MADE BY THE ASSESSING OFFICER. THE ADDITION MAD IN BOTH THE YE ARS IS ACCORDINGLY CONFIRMED. 62 AGGRIEVED, ASSESSEE IS NOW IN APPEAL BEFORE THE TRIBUNAL. 63. LD. AR OF THE ASSESSEE SUBMITTED THAT DETAILS O F FOREIGN TRAVEL EXPENSES HAVE BEEN DULY SUBMITTED BEFORE THE LOWER AUTHORITIES AND THEY HAVE BEEN AGAIN SHOWN AT PAGE 160 OF THE PAPER BOOK RELATING TO ASST. YEAR 2006-07 AND THE SAME HAVE BEEN INCURR ED FOR BUSINESS PURPOSES. 64. ON THE OTHER HAND, LD. DR SUPPORTED THE ORDERS OF LOWER AUTHORITIES. 65. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THIS GROUND RELATES TO FOREIGN TRAVEL EX PENSES CLAIMED TO BE INCURRED BY ASSESSEE FOR BUSINESS PURPOSES BUT T HEY HAVE BEEN DISALLOWED BY ASSESSING OFFICER FOR WANT OF PROPER DETAILS TO SPECIFICALLY PROVE THAT FOREIGN TRAVEL HAS BEEN MAD E FOR THE PURPOSE OF BUSINESS. ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 55 66. WE FURTHER FIND THAT ASSESSEE HAS ONLY PROVIDED THE DETAILS BEFORE US FOR ASST. YEAR 2006-07 AT SL. NO.7 OF THE PAPER BOOK AT PAGE NO.160 OF THE PAPER BOOK AND NO SUCH DETAILS I S AVAILABLE IN THE PAPER BOOK FOR ASST. YEAR 2005-06. IT SEEMS THAT EI THER ASSESSEE IS NOT HAVING PROPER DETAILS TO PROVE SUCH EXPENDITURE AS THE SAME HAVE NOT BEEN DONE SO FAR BEFORE LOWER AUTHORITIES ALSO AND AS REGARDS DETAILS FOR ASST. YEAR 2006-07 ARE CONCERNE D THEY DO NOT SPECIFICALLY EXHIBIT THE DETAILS OF PERSONS OR THE COMPANY TO WHOM THE REPRESENTATIVE OF THE ASSESSEE COMPANY HAS MET IN R ELATION TO BUSINESS AND WHAT KIND OF INFORMATION HAVE BEEN GAT HERED, WHICH CAN BE LINKED TO THE BUSINESS PURPOSE OF THE COMPAN Y. IN SUCH CIRCUMSTANCES WE FIND THAT ASSESSEE IS NOT HAVING A NY MATERIAL DETAILS TO SUPPORT ITS CLAIM OF FOREIGN TRAVEL EXPE NSES LOOKING TOWARDS THE PROCEEDINGS BEFORE THE LOWER AUTHORITIES AND EV EN BEFORE US AND, THEREFORE, WE REJECT THIS GROUND OF ASSESSEE AND CO NFIRM THE ORDER OF LD. CIT(A) ON THIS ISSUE. 67. GROUND NOS.1,5,6,7 & 8 OF ITA NO.538AHD/2011 FO R ASST. YEAR 2005-06, GROUND NOS.5 & 6 FOR APPEAL IN ITA NO.529 /AHD/2011 FOR ASST. YEAR 2006-07, GROUND NO.1,6,7 & 8 OF ITA NO.5 30/AHD/2011 AND GROUND NOS.3 & 5 FOR ITA NO.1510/AHD/2012 FOR ASST. YEAR 2009-10 ARE OF GENERAL NATURE WHICH NEED NOT BE ADJUCIATED. ITA NOS.528 TO 530, 637 TO 639 & OTHERS ASST. YEARS: 2005-06, 2006-07, 2007-08 & OTHERS 56 68. IN THE RESULT, REVENUES APPEALS ARE DISMISSED AND THE APPEALS OF ASSESSEE ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH FEBRUARY, 2016 SD/- SD/- (RAJPAL YADAV) JUDICIAL MEMBER (MANISH BORAD) ACCOUNTANT MEMBER DATED 12/02/2016 MAHATA/- COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, AHMEDABAD 1. DATE OF DICTATION: 02/02/2016 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE T HE DICTATING MEMBER: 12/02/2016 OTHER MEMBER: 3. DATE ON WHICH APPROVED DRAFT COMES TO THE SR. P. S./P.S.: 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE TH E DICTATING MEMBER FOR PRONOUNCEMENT: __________ 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE S R. P.S./P.S.: 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK: 12/2/2016 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK: 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER: 9. DATE OF DESPATCH OF THE ORDER: