KARODIA CONSTRUCTION PVT. LTD., MUMBAI V. D.C.I.T. 9(2), MUMBAI

ITA 7306/MUM/2012

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 3975 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 4 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-04-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 24-03-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 10-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Capital asset; Business income
• Section: 143(3); 14A

Judgement Text

1 INCOME TAX APPELLATE TRIBUNAL,MUMBAI- A,BENCH , , BEFORE S/SH.JOGINDER SINGH,JUDICIAL MEMBER & RAJENDRA,ACCOUNTANT MEMBER / ITA NO./7306/MUM/2012 / ASSESSMENT YEAR: 2008-09 KORADIA CONSTRUCTION PVT. LTD. C-402, GOKUL DIVINE, IRLA S.V.ROAD, VILE PARLE (W) MUMBAI-400 056. PAN:AAACK 9154 E VS. THE DCIT, RANGE-9(2) AAYAKAR BHAVAN, M.K. ROAD CHURCHGATE , MUMBAI-20 ( /APPELLANT ) ( / RESPONDENT) REVENUE BY: MR. ARVIND KUMAR ASSESSEE BY: SHRI VIMAL PUNMIYA / DATE OF HEARING: 07.04.2016 / DATE OF PRONOUNCEMENT: 13.04.2016 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA A.M. - CHALLENGING THE ORDER DT.4.10.2012 OF CIT(A), MUMBA I THE ASSESSEE HAS FILED THE FOLLOWING GROUNDS OF APPEAL: 1.THE LD. CIT(A) HAS ERRED IN FACT AND IN LAW IN C ONFIRMING THE ADDITION OF RS.73,64,757/- AS BUSINESS INCOME INSTEAD OF SHORT TERM CAPITAL GAIN ON ACCOUNT OF SHARE TRANSACTIONS. 2. THE CIT(A) HAS ERRED IN FACT AND IN LAW IN CONFI RMING THE ADDITION OF RS.1,74,580/- U/S. 14A. BRIEF FACTS: 2. ASSESSEE-COMPANY,ENGAGED IN THE BUSINESS OF REAL ES TATE AND DEALING IN SHARES,FILED ITS RETURN OF INCOME,ON 30.9.2008,DECLARING TOTAL INCOM E AT 73.57 LACS.THE ASSESSING OFFICER (AO)COMPLETED THE ASSESSMENT,U/S. 143(3) OF THE AC T,ON 01.12.12,DETERMINING ITS INCOME AT RS.75,39,340/-.WHILE FINALISING THE ASSESSMENT,THE AO MADE ADDITION OF RS.73.64 LACS UNDER THE HEAD BUSINESS INCOME.HE FURTHER MADE A DISALLOW ANCE U/S. 14A OF THE ACT OF RS. 1.74 LACS.AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE PREFERRED AN APPEAL BEFORE THE FAA, WHO UPHELD THE ORDER OF THE AO. 3. DURING THE COURSE OF HEARING,REPRESENTATIVES OF BOT H THE SIDES AGREED THAT IDENTICAL ISSUES HAD ARISEN IN THE EARLIER YEAR ALSO AND THAT THE TR IBUNAL HAD DECIDED THE ISSUES ON 05.09. 2013 (ITA/1074/MUM/ 2011).WE FIND THAT WHILE ADJUDICATIN G THE SIMILAR GROUNDS OF APPEAL,FOR THE PREVIOUS YEAR,THE TRIBUNAL HAD DELIBERATED AND HAD DECIDED THEM AS UNDER: 2. THE ASSESSEE HAS RAISED 4 SUBSTANTIVE GROUNDS OF APPEAL. GROUND NO. 1 & 2 ARE INTERLINKED AND RELATE TO THE TREATMENT OF CAPITAL GAINS, SHORT TERM AND LONG TERM, AS BUSINESS INCOME. 3. THE ASSESSEE IS A PRIVATE LIMITED COMPANY WHICH WAS INCORPORATED ON 12.12.1995. THE COMPANY IS IN THE BUSINESS OF DEVELOPMENT OF REAL E STATES AND IN CONSTRUCTION OF INDUSTRIAL GALAS. THE RETURN OF INCOME FOR THE YEAR UNDER CONS IDERATION WAS FILED ON 31.10.2007 DECLARING TOTAL INCOME AT RS. 7,37,80,200/-. THE RE TURN WAS SELECTED FOR SCRUTINY ASSESSMENT AND ACCORDINGLY STATUTORY NOTICES WERE ISSUED AND S ERVED UPON THE ASSESSEE. THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS CLAIMED INCO ME LONG TERM CAPITAL GAINS TO THE TUNE OF RS. 1,00,445/- AND CLAIMED THE SAME AS EXEMPT U/S. 10(34) OF THE ACT. THE AO SOUGHT 7306/12-KORADIA 2 CLARIFICATION FROM THE ASSESSEE VIDE ORDER SHEET NO TING DT. 10.8.2009 ASKING THE ASSESSEE TO EXPLAIN AS TO WHY INCOME ARISING FROM SHORT TERM CA PITAL GAIN AND LONG TERM CAPITAL GAIN FROM SHARES SHOULD NOT BE TREATED AS BUSINESS INCOM E. 3.1. THE ASSESSEE FILED A DETAILED REPLY DT. 8.12.2 009 AND EXPLAINED THAT IT WAS ONLY AN INVESTOR AND NOT A TRADER. THE SUBMISSIONS OF THE A SSESSEE DID NOT FIND ANY FAVOUR FROM THE AO. THE AO WAS OF THE OPINION THAT THE ASSESSEE HAS TRANSACTED MORE THAN 200 TIMES DURING THE YEAR UNDER CONSIDERATION. THE AO FURTHER OBSERV ED THAT THE TOTAL VALUE OF SHARE TRANSACTION MADE DURING THE YEAR ARE TO THE TUNE OF RS. 62,96,94,792/-. THE AO FURTHER OBSERVED THAT THE ASSESSEE WAS ALSO HAVING BORROWED FUNDS AT THE BEGINNING OF THE YEAR. THE AO WAS OF THE OPINION THAT CONSIDERING THE VOLUME A ND THE FREQUENCY AND THE FACT THAT THE ASSESSEE HAS BORROWED FUNDS, THE ASSESSEE IS A HABI TUAL DEALER IN SHARES. THE AO WAS OF THE FIRM BELIEF THAT THE ASSESSEE IS CONTINUOUSLY ENGAG ED IN THE ACTIVITY OF BUYING AND SELLING OF THE SHARES THEREFORE, THE NATURAL CONCLUSION WOULD BE THAT THE SHARES WERE NOT PURCHASED AS AN INVESTMENTS BUT WITH THE OBJECTIVE OF SELLING TH EM SUBSEQUENTLY AT A PROFIT. THE AO WENT ON TO TREAT THE ENTIRE ACTIVITY OF PURCHASE AND SALE O F SHARES AS BUSINESS ACTIVITY AND PROFITS THERE FROM WAS ASSESSED AS BUSINESS INCOME. 4. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. C IT(A) AND REITERATED ITS STAND THAT IT IS ONLY AN INVESTOR AND NOT A TRADER. THE LD. CIT(A) REJECT ED THE SUBMISSIONS MADE BY THE ASSESSEE AND CONFIRMED THE FINDINGS OF THE AO. 5. AGGRIEVED BY THIS FINDING OF THE LD. CIT(A), ASS ESSEE IS BEFORE US. 6. THE LD. COUNSEL FOR THE ASSESSEE ARGUED THAT BOT H THE LOWER AUTHORITIES HAVE TREATED THE CAPITAL GAINS FROM SHARES AS BUSINESS INCOME ONLY O N THE BASIS OF THE VOLUME OF TRANSACTIONS ENTERED BY THE ASSESSEE, THE FREQUENCY OF TRANSACTI ON MADE AND THERE BEING BORROWED FUNDS. IT IS THE SAY OF THE LD. COUNSEL THAT MERELY ON THE BA SIS OF THESE ALLEGATIONS, THE NATURE OF TRANSACTION CANNOT BE CHANGED FROM INVESTMENT TO BU SINESS ACTIVITY. THE LD. COUNSEL FOR THE ASSESSEE FURTHER ARGUED THAT DURING THE YEAR THE AS SESSEE HAS TRANSACTED ONLY 24 SCRIPS . THE ASSESSEE HAS SHOWN THE INVESTMENT IN THE BALANCE SH EET UNDER THE HEAD INVESTMENT. THE LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED THAT THE ASSESSEE HAS ITSELF BIFURCATED THE INCOME IN ITS PROFIT AND LOSS ACCOUNT UNDER THE HEAD PROFITS FROM FUTURE AND OPTIONS, SPECULATION TRANSACTION AND INVESTMENT IN SHARES. THE LD. COUNS EL ALSO RELIED UPON THE CIRCULAR OF THE CBDT NO. 4/2007 DT. 15.6.2007 AND SUBMITTED THAT EV EN THE CBDT HAS RECOGNIZED THAT A TAX PAYER CAN HAVE TWO PORTFOLIOS I.E. AN INVESTMENT PO RTFOLIO AND TRADING PORTFOLIO. 7. PER CONTRA, LD. DEPARTMENTAL REPRESENTATIVE STRO NGLY SUPPORTED THE FINDINGS OF THE LOWER AUTHORITIES. 8. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES. THE DISPUTE IS REGARDING THE NATURE OF INCOME ON SALE AND PURCHASE OF SHARES BY THE ASSESSEE. THE ISSUE, WHETHER THE INCOME FROM SA LE AND PURCHASE OF SHARES IN A PARTICULAR CASE SHOULD BE TREATED AS CAPITAL GAIN OR AS BUSINE SS INCOME HAS BEEN A DEBATABLE ISSUE AND THERE ARE CONFLICTING DECISIONS OF THE TRIBUNAL ON THIS ISSUE. EACH CASE IS, THEREFORE, TO BE BASED ON ITS OWN FACTUAL SITUATION. A PERUSAL OF TH E PROFIT AND LOSS ACCOUNT OF THE ASSESSEE SHOWS THAT THE ASSESSEE HAS SEPARATELY SHOWN SHARE TRADING PROFIT, LONG TERM CAPITAL GAINS ON SHARES AND PROFIT FROM BUSINESS. IN THE BALANCE SHE ET, THE ASSESSEE HAS SHOWN SHARES UNDER THE HEAD INVESTMENT. THESE INVESTMENT SHARES HAVE BEEN VALUED AT COST . THE HONBLE SUPREME COURT IN THE CASE OF CIT ASSOCIATED INDUSTR IAL DEVELOPMENT CO PVT. LTD. 82 ITR 586, WHICH DECISION HAS ALSO BEEN CONSIDERED BY THE CBDT IN ITS CIRCULAR NO. 4/2007 DT. 15.6.2007, HAS OBSERVED THAT : WHETHER A PARTICULAR HOLDING OF SHARES IS BY WAY O F INVESTMENT OR FORMS PART OF THE STOCK-IN- TRADE IS A MATTER WHICH IS WITHIN THE KNOWLEDGE OF THE ASSESSEE WHO HOLDS THE SHARES AND IT 7306/12-KORADIA 3 SHOULD, IN NORMAL CIRCUMSTANCES, BE IN A POSITION T O PRODUCE EVIDENCE FROM ITS RECORDS AS TO WHETHER IT HAS MAINTAINED ANY DISTINCTION BETWEEN T HOSE SHARES WHICH ARE ITS STOCK-IN-TRADE AND THOSE WHICH ARE HELD BY WAY OF INVESTMENT THE CBDT HAS ALSO MENTIONED IN ITS CIRCULAR THAT IT IS POSSIBLE FOR A TAX PAYER TO HAVE TWO PORTFOLIOS I.E. AN INVESTMENT PORTFOLIO AND TRADING PORTFOLIO. THIS VIEW HAS ALSO BEEN FORTIFIED BY THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS GOPAL PUROHIT 336 ITR 287. 9. THE ASSESSEE HAD OPENING INVESTMENT AT RS. 4,01, 49,296/- AND THE INVESTMENT AS ON 31.3.2007 WAS AT RS. 3,97,99,072/-. THIS CLEARLY SH OWS THAT THE ASSESSEE HAD BROUGHT FORWARD INVESTMENT IN SHARES. THE BORROWED CAPITAL OF RS. 1 ,36,23,246/- HAS COME DOWN TO RS. 2,396/- AT THE CLOSE OF THE CURRENT FINANCIAL YEAR. THE ALL EGATION OF THE REVENUE AUTHORITIES IS THAT THE ASSESSEE HAS INDULGED INTO HIGH FREQUENCY TRANSACTI ON. THIS IN ITSELF COULD NOT MEAN THAT TRADING ACTIVITIES HAVE BEEN CARRIED OUT. A PRUDENT INVESTOR ALWAYS KEEP A WATCH ON THE VOLATILITY OF THE MARKET AND MAKES SOUND INVESTMENT DECISION IN ACCORDANCE WITH SUCH MARKET FLUCTUATION AND HAS THE LIBERTY TO LIQUIDATE ITS IN VESTMENTS IN SHARES AS AND WHEN NECESSARY. THE LAW ITSELF HAS RECOGNIZED THIS FACT BY TREATING THE SAME AS SHORT TERM CAPITAL GAINS FOR SHARES HELD LESS THAN 12 MONTHS AND LONG TERM CAPIT AL GAINS WHERE THE SHARES ARE HELD FOR MORE THAN 12 MONTHS. HAD THIS BEEN NOT THE CASE, AL L THE GAINS ON SHARES WOULD HAVE BEEN CONSIDERED AS BUSINESS INCOME ONLY. THE FACT THAT T HE LAW RECOGNIZES SUCH VOLATILITY AND HAS SPECIFICALLY PROVIDED A SEPARATE HOLDING PERIOD IN RESPECT OF SUCH SHARES MAKES IT VERY CLEAR THAT GAINS ON SUCH SHARES HAVING A HOLDING PERIOD O F LESS THAN 12 MONTHS AND HELD AS INVESTMENT WOULD BE CONSIDERED AS SHORT TERM CAPITA L GAINS ONLY. THUS THE ASSESSEES CLAIM CANNOT BE NEGATED ON THE BASIS OF FREQUENCY OF TRAN SACTION AS HELD IN THE CASE OF GOPAL PUROHIT (SUPRA). 9.1. AS REGARDS THE ALLEGATION THAT THE BORROWED FU NDS HAD BEEN APPLIED FOR INVESTMENT IN SHARES, IT HAS BEEN HELD BY THE TRIBUNAL, DELHI BEN CH IN THE CASE OF NARENDRA GEHLAUT VS JCIT 21 TAXMANN .COM 82 THAT IT CANNOT CONSTITUTE A FACTOR AS IN NONE OF THE CASE LAWS OR CBDT CIRCULAR IT HAS BEEN HELD THAT BORROWINGS WILL NOT BE ALLOWED IN IN VESTMENT TRANSACTIONS. THE INVESTMENT IN CAPITAL ASSETS CAN ALSO BE CARRIED OU T BY WAY OF BORROWED FUNDS, THERE BEING NO BAR NOTIFIED BY THE LAW, JUDICIAL PRONOUNC EMENT OR CBDT CIRCULAR. 9.2. CONSIDERING THE ENTIRE FACTS IN TOTALITY IN T HE LIGHT OF THE JUDICIAL DECISION DISCUSSED HERE IN ABOVE,WE FIND THAT IT HAS NOT BEEN DISPUTED THAT THE ASSESSEE HAS SHOWN SHARES AS INVESTMENT RIGHT FROM THE DATE OF PURCHASE AND THAT WAS SHOWN AS SUCH IN THE BALANCE SHEET OF THE ASSESSEE WHICH WAS FILED BEFORE THE AO. IN OUR HUMBLE OPINION, THE SHARES HAVE TO BE TREATED AS AN INVESTMENT AND THEREFORE ANY PROFIT E ARNED ON THE SALE THEREOF IS TO BE TREATED AS CAPITAL GAIN. FINDINGS OF THE LD. CIT(A) ARE REVERS ED. THE AO IS DIRECTED TO TREAT THE PROFITS ON SALE OF SHARES AS CAPITAL GAIN, SHORT TERM OR LO NG TERM AS THE CASE MAY BE. GROUND NO. 1 & 2 ARE ACCORDINGLY ALLOWED. 10. GROUND NO. 3 RELATES TO THE ADDITION OF RS. 2,2 3,900/- U/S. 14A OF THE ACT. 11. THE AO OBSERVED THAT THE ASSESSEE HAS RECEIVED DIVIDEND INCOME OF RS. 4,52,588/- WHICH WAS CLAIMED TO BE EXEMPT FROM TAX. THE ASSESSEE WAS ASKED TO EXPLAIN WHY PROVISIONS OF SEC. 14A R.W. RULE 8D SHOULD NOT BE INVOKED SINCE DIVIDE ND INCOME IS SHOWN AS EXEMPT. THE ASSESSEE STATED THAT NO EXPENDITURE HAS BEEN INCURR ED FOR EARNING THE DIVIDEND INCOME. THE AO DID NOT ACCEPT THIS CONTENTION OF THE ASSESSEE A ND WENT ON THE RELY UPON THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL MUMBAI BENCH IN I TA NO. 8057/M/03 IN THE CASE OF DAGA CAPITAL MANAGEMENT AND COMPUTED THE DISALLOWANCE U/ S. 14A R.W. RULE 8D AT RS. 2,23,900/-. 7306/12-KORADIA 4 12. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A) AND SUBMITTED THAT APPLICABILITY OF RULE 8D HAS BEEN HELD TO BE PROSPECTIVE FROM A.Y. 2 008-09 BY THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MAN UFACTURING CO. LTD. 328 ITR 81. THE LD. CIT(A) WAS CONVINCED THAT RULE 8D IS NOT APPLIC ABLE FOR THE YEAR UNDER CONSIDERATION. HOWEVER, CONFIRMED THE DISALLOWANCE MADE BY THE AO HOLDING THAT THERE IS NO OTHER PARAMETER OR YARDSTICK, THEREFORE, METHOD PRESCRIBE D UNDER RULE 8D IS CORRECT EVEN THOUGH THE SAME IS NOT APPLICABLE TO THE CURRENT YEAR. 13. AGGRIEVED BY THIS, ASSESSEE IS BEFORE US. AS TH E ISSUE IS WELL SETTLED THAT APPLICABILITY OF RULE 8D IS FROM A.Y. 2008-09, WE THEREFORE DO NOT F IND ANY MERIT IN THE OBSERVATIONS OF THE LD. CIT(A). HOWEVER, IN THE INTEREST OF JUSTICE AND FAIR PLAY, WE RESTORE THIS ISSUE BACK TO THE FILES OF THE AO. THE AO IS DIRECTED TO RE-COMPUTE T HE DISALLOWANCE, IF ANY, U/S. 14A WITHOUT INVOKING RULE 8D. GROUND NO. 3 IS ALLOWED FOR STATI STICAL PURPOSE. RESPECTFULLY,FOLLOWING THE ABOVE ORDER,WE DECIDE GR OUND NO.1 IN FAVOUR OF THE ASSESSEE. GROUND NO.2 IS ALLOWED IN FAVOUR OF THE ASSESSEE,IN PART.THE AO IS DIRECTED TO RE-COMPUTE THE DISALLOWANCE AFTER HEARING THE ASSESSEE. AS A RESULT,APPEAL FIL ED BY THE ASSESSEE STANDS PARTLY ALLOWED. . ORDER PRONOUNCED IN THE OPEN COURT ON 13 TH APRIL, 2016. 13 , 2016 SD/- SD/- /JOGINDER SINGH) ( / RAJENDRA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 13 .04.2016. JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR A BENCH, ITAT, MUMBAI / , A , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.