VAHANVATI CONSULTANTS P. LTD, MUMBAI V. DCIT 2(3), MUMBAI

ITA 8700/MUM/2011

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 2958 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 6 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-06-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: F
• Next Hearing Date: 10-06-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 23-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S SENTHILL KUMARAN
• Assessee Lawyers: MANISH V SHAH
• Keywords: Capital asset; Business income; Earning of tax free income
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL F BENCH, MUM BAI BEFORE SHRI G.S. PANNU, AM AND SHRI SANJAY GARG, JM ./ I.T.A. NO. 8700/MUM/2011 ( / / / / ASSESSMENT YEAR: 2008-09) M/S VAHANVATI CONSULTANTS P LTD 3 RD FLOOR, CRESCENT CHAMBERS, 56 TAMARIND LANE, FORT, MUMBAI-400 023. / VS. DCIT 2(3) ROOM NO.555, 5 TH FLOOR, AAYKAR BHAVAN, MAHARSHI KARVE ROAD, CHURCHGATE, MUMBAI-400 020. ./ ./PAN/GIR NO. AABCV0361M ( /APPELLANT ) : ( / RESPONDENT ) / APPELLANT BY : SHRI MANISH V SHAH / RESPONDENT BY : SHRI S. SENTHILL KUMARAN / // / DATE OF HEARING : 08/06/2016 / DATE OF PRONOUNCEMENT : 29.06.2016 / O R D E R PER SANJAY GARG, JUDICIAL MEMBER : THE PRESENT APPEAL HAS BEEN PREFERRED BY THE ASSESS EE AGAINST THE ORDER DATED 26.09.2011 OF THE COMMISSIONER OF INCOME TAX (APPEALS) - 6, [HEREINAFTER REFERRED TO AS THE CIT(A)] RELEVANT TO ASSESSMENT Y EAR 2008-09. 2. THE ASSESSEE HAS TAKEN THE FOLLOWING GROUNDS OF APPEAL: I. INAPPROPRIATENESS OF CONFIRMING ADDITIONS THAT THE AO MADE BY TREATING SHORT TERM CAPITAL GAIN AS BUSINESS INCOME. THE LEARNED CIT(A) ERRED IN FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW IN CONFIRMING ADDITION THAT THE AO HAD MADE BY TREA TING THE SHORT TERM CAPITAL GAIN AS BUSINESS INCOME. 2 ITA NO. 8700/MUM/2011 M/S. VAHANVATI CONSULTANTS P. LTD. VS. DCIT II. INAPPROPRIATENESS OF GRANTING ONLY PART RELIEF OF A DDITION THAT THE AO MADE U/S 14A APPLYING RULE 8D. THE LEARNED CIT(A) ERRED IN FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW IN GRANTING ONLY PART RELIEF OF ADDITIONS THAT THE AO MADE U/S 14A APPLYING RULE 8D. REASONS GIVEN BY CIT(A) IN CONFIRMING ADDITIONS THA T THE AO MADE BY TREATING SHORT TERM CAPITAL GAIN AS BUISNESS INCOME AND NOT GRANTING FULL RELIEF ON ADDITIONS THAT THE AO MADE U/S 14A ARE WRONG, INSUFFICIENT AND CONTRARY TO FACTS AND EVIDENCE ON RECORD AND IN LAW. GROUND NO. 1 3. THE ASSESSEE HAS RAISED TWO EFFECTIVE GROUNDS OF APPEAL. THE ISSUE RAISED IN GROUND NO.1 BY THE ASSESSEE IS WHETHER THE INCOME E ARNED FROM THE SALE AND PURCHASE OF SHARES IS TO BE ASSESSED AS SHORT TERM CAPITAL GAINS OR AS BUSINESS INCOME. 4. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E COMPANY IS ENGAGED IN THE BUSINESS OF PROVIDING CONSULTANCY SERVICES TO PRIVA TE AND PUBLIC SECTOR UNDERTAKINGS IN INDIA AND ABROAD IN THE FIELDS OF F INANCIAL, COMMERCIAL, COMPUTER, LEGAL, GENERAL OFFICE AND ESTABLISHMENTS, ETC. FURT HER THE COMPANY ALSO UNDERTAKES TO ADVANCE OR LEND MONEY TO SUCH PERSONS OR COMPANI ES ON SUCH TERMS AS IT MAY DEEM APPROPRIATE IN ORDER TO EARN INTEREST INCOME, COMMISSION INCOME ETC. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE COMPANY MADE TRANSACTIONS OF SALE AND PURCHASE OF SHARES AND EARNED AN INCOME OF RS.4,06, 72,768/-. ASSESSEE CLAIMED THE SAID INCOME IN ITS RETURN OF INCOME AS SHORT TERM C APITAL GAIN. DURING THE ASSESSMENT PROCEEDINGS BEFORE THE AO, THE ASSESSEE EXPLAINED THAT THE COMPANY HAD MADE INVESTMENTS IN THE SHARES AND THE SAME WER E REFLECTED UNDER THE HEAD INVESTMENTS IN BALANCE SHEET. THE COMPANY HAD MA DE TRANSACTIONS OF SALE AND PURCHASE OF SHARES AND EARNED CAPITAL GAINS OF RS.4 ,06,72,768/-. THE AO, HOWEVER, 3 ITA NO. 8700/MUM/2011 M/S. VAHANVATI CONSULTANTS P. LTD. VS. DCIT OBSERVED THAT DURING THE YEAR, THE ASSESSEE COMPANY HAD DONE THE ONLY ACTIVITY OF SALE AND PURCHASE OF SHARES AND THAT NO OTHER BUSIN ESS ACTIVITY WAS CARRIED OUT. THE TRANSACTIONS OF PURCHASE AND SALE OF SHARES CARRIED OUT BY THE ASSESSEE WERE TO THE TUNE OF MORE THAN RS.4 CRORES, WHEREAS THE DIVIDEND INCOME EARNED WAS ONLY RS.46,218/-; THAT THE ASSESSEE HAD CARRIED NUMEROUS SHARE TRANSACTIONS AND THAT THE HOLDING PERIOD OF THE INVESTMENTS WAS NOT SUBSTANTI AL. HE, THEREFORE, HELD THAT THE MOTIVE OF THE ASSESSEE FOR PURCHASE OF SHARES WAS N OT INVESTMENT BUT TRADING IN SHARES. HE ACCORDINGLY TREATED THE INCOME EARNED BY THE ASSESSEE FROM SHARE TRANSACTIONS AS BUSINESS INCOME OF THE ASSESSEE. 5. BEING AGGRIEVED BY THE ABOVE ACTION OF THE AO, THE ASSESSEE FILED APPEAL BEFORE THE LD. CIT(A). IN APPEAL, THE LD. CIT(A), VIDE IMPUGNED ORDER, OBS ERVED THAT THE ASSESSEE DURING THE YEAR HAD DONE ONLY ACTIVITIES O F SHARE TRANSACTIONS AND HENCE SHARE TRANSACTION WAS MAIN BUSINESS ACTIVITIES OF T HE ASSESSEE. THE ASSESSEE HAD USED THE BORROWED FUNDS FOR THE PURPOSE OF PURCHASI NG THE SHARES. THE FUND POSITION OF THE ASSESSEE FROM THE BALANCE SHEET SHO WED THAT OUT OF TOTAL FUND OF RS.18.43 CRORES, RS.14.71 CRORES WERE UNSECURED LOA NS; THAT THE NUMBER OF SHARES PURCHASED AND THE VOLUME INVESTED WAS VERY HIGH. HE , THEREFORE, UPHELD THE FINDING OF THE AO, TREATING THE INCOME FROM THE SHA RE TRANSACTIONS AS BUSINESS INCOME OF THE ASSESSEE. 6. BEING AGGRIEVED BY THE ORDER OF CIT(A), THE ASSE SSEE HAS COME IN APPEAL BEFORE US. WE HAVE HEARD THE RIVAL CONTENTIONS. THE LD. AR OF THE ASSESSEE HAS INVITED OUR ATTENTION TO PG. 10 OF THE PAPER BOOK T O SHOW THAT THE ASSESSEE HAD INVESTED ONLY IN 13 SCRIPTS DURING THE YEAR. HE HAS FURTHER SUBMITTED THAT MAJORITY OF FUNDS OF THE ASSESSEE WERE INVESTED IN MUTUAL FU NDS THAT THE AVERAGE HOLDING PERIOD OF THE ASSESSEE FOR THE SHARES WAS MORE THAN 4 MONTHS. HE HAS FURTHER 4 ITA NO. 8700/MUM/2011 M/S. VAHANVATI CONSULTANTS P. LTD. VS. DCIT SUBMITTED THAT THE INCOME EARNED BY THE ASSESSEE FR OM THE SHARE TRANSACTION WAS FURTHER INVESTED IN PROPERTY AND NOT IN SHARES AND THAT THERE WAS NO CHURNING OF THE PORTFOLIOS. HE HAS FURTHER STATED THAT IN THE EARLI ER ASSESSMENT YEAR 06-07, DURING THE SCRUTINY ASSESSMENT PROCEEDING U/S 143(3) OF TH E ACT, THE ASSESSEE HAS BEEN TREATED AS INVESTOR AND THE INCOME OF THE ASSESSEE FROM THE SHARE TRANSACTION HAS BEEN ACCEPTED AS CAPITAL GAINS. LD. AR HAS FURTHER STATED THAT EVEN IN THE SUBSEQUENT ASSESSMENT YEAR A.Y. 2010-11, THE ASSESS EE AGAIN HAS BEEN TREATED AS INVESTOR. HE, THEREFORE, HAS STATED THAT THE DEPART MENT HAS CHANGED ITS STAND DURING THE YEAR UNDER CONSIDERATION. SO FAR AS THE USE OF BORROWED FUNDS WAS CONCERNED, THE LD. AR HAS STATED THAT THE ASSESSEE IS IN THE B USINESS ACTIVITY OF LENDING AND BORROWING AND SURPLUS BORROWED FUNDS WERE INVESTED IN SHARE TRANSACTION. THAT THE ASSESSEE, OTHERWISE, HAS ITS OWN SUFFICIENT CAPITAL THAT THE INVESTMENT WAS NOT ONLY MADE IN SHARES BUT ALSO IN MUTUAL FUNDS AND IN FIXE D ASSETS SUCH AS LANDED PROPERTY WHERE THE NOTICE OF WHICH EARNING OF PROFITS WAS NO T INVOLVED BUT THE ACTIVITIES OF THE ASSESSEE SUGGEST THAT HE WAS AN INVESTOR. LD. D R ON THE OTHER HAND HAS STRONGLY RELIED UPON THE FINDINGS OF THE LOWER AUTHORITIES A ND HAS CONTENDED THAT OUT OF TOTAL FUNDS OF RS.18.43CRORES, THE ASSESSEE HAS RS.14.71 AS UNSECURED LOANS. THUS, THE FACT REVEALS THAT THE ASSESSEE USED THE BORROWED FU ND FOR THE PURPOSE OF MAKING SHARE TRANSACTION. HE, THEREFORE, SUBMITTED THAT T HE LOWER AUTHORITIES HAVE RIGHTLY TREATED THE INCOME OF ASSESSEE FROM THE SHARE TRANS ACTION AS BUSINESS INCOME OF THE ASSESSEE. 7. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND HAV E ALSO GONE THROUGH THE RECORDS. WE FIND THAT THOUGH THE VALUE OF INVESTMEN T IN SHARES IS HIGH, HOWEVER, THE NUMBER OF SCRIPTS INVESTED IN IS ONLY 13. THE A SSESSEE HAS SHOWN IN THE BALANCE SHEET THE ABOVE SHARES AS INVESTMENTS. THE ASSESSEE IN THE PAST AS WELL AS IN THE 5 ITA NO. 8700/MUM/2011 M/S. VAHANVATI CONSULTANTS P. LTD. VS. DCIT SUBSEQUENT YEAR HAS CONSISTENTLY BEEN TREATED AS AN INVESTOR. THE DEPARTMENTS CONDUCT OF CHANGING ITS STAND IN EVERY YEAR IS NOT APPRECIABLE AS IT WOULD NOT ONLY CREATE UNCERTAINTY EACH YEAR ABOUT THE HEAD OF SU CH INCOME BUT MAY DEPRIVE THE ASSESSEE FROM CLAIMING SET OFF OF CAPITAL LOSSES OF A PREVIOUS YEAR IN THE SUBSEQUENT YEAR BECAUSE OF CHANGE OF HEAD OF SUCH INCOME. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. GOPAL PUROHIT (2011) 336 I TR 287 (BOM.) HAS HELD THAT THOUGH PRINCIPLE OF RESADJUDICATA IS NOT APPLICABLE TO INCOME TAX PROCEEDINGS, AS EACH YEAR IS A SEPARATE YEAR, HOWEVER, THE PRINCIPL E OF CONSISTENCY IS TO BE FOLLOWED, IF THERE IS NO CHANGE IN FACT AND CIRCUMS TANCES IN THE SUBSEQUENT YEAR. SO FAR AS THE CONTENTION OF THE DEPARTMENT THAT BOR ROWED FUNDS WERE USED FOR INVESTMENTS, WE FIND THAT LENDING AND BORROWING BEI NG BUSINESS OF ASSESSEE AND THE ASSESSEE HAVING SURPLUS BORROWED FUNDS HAVING INVES TED IN THE SHARE TRANSACTION WOULD NOT CHANGE THE STATUS OF THE ASSESSEE FROM AN INVESTOR TO A TRADER IN RELATION TO SHARE TRANSACTIONS CARRIED OUT BY IT. THE HONBL E KARNATAKA HIGH COURT IN THE CASE OF CIT VS. KANPUR INVESTMENTS PRIVATE LIMITED [2015] 61 TAXMANN.COM 91 (KARNATAKA) HELD THAT THE INCOME TAX ACT DOES NOT P ROHIBIT THE ASSESSEE FROM MAKING INVESTMENTS IN CAPITAL ASSETS AFTER USING BO RROWED FUNDS AND THAT EVEN IF THE ASSESSEE HAS INVESTED THE BORROWED FUNDS IN SHA RE TRANSACTION THAT WOULD NOT MEAN THAT THE SAME WOULD BECOME BUSINESS ACTIVITY O F THE ASSESSEE. THERE IS ANOTHER PECULIAR FACT OF THE CASE THAT THERE IS NOT REPETITIVE TRANSACTION AND EVEN THE ASSESSEE FROM THE INCOME EARNED FROM THE SHARES HAS INVESTED THE SAME IN PROPERTY. THE MAJOR PART OF THE FUNDS OF THE ASSESSEE BEING I NVESTED EITHER IN MUTUAL FUND OR IN THE PROPERTY; OVER ALL ACTIVITY OF THE ASSESSEE SUGGEST THAT THE FUNDS HAVE BEEN USED BY THE ASSESSEE FOR INVESTMENT PURPOSES ONLY. WE DO NOT FOUND ANY JUSTIFICATION ON THE PART OF THE LOWER AUTHORITIES IN TREATING THE ASSESSEE AS A TRADER IN RELATION TO THE SHARE TRANSACTION WHEN IN THE EA RLIER AS WELL AS IN SUBSEQUENT YEAR, 6 ITA NO. 8700/MUM/2011 M/S. VAHANVATI CONSULTANTS P. LTD. VS. DCIT THE ASSESSEE HAS BEEN TREATED AS INVESTOR IN THE SH ARES. WE ACCORDINGLY DIRECT THE AO TO TREAT THE INCOME OF THE ASSESSEE FROM SHARE T RANSACTION AS CAPITAL GAINS AND NOT AS BUSINESS INCOME OF THE ASSESSEE. GROUND NO.2 8. THE ASSESSEE IN THIS GROUND HAS CONTESTED THE CO NFIRMATION OF DISALLOWANCE MADE BY THE AO U/S 14A R.W. RULE 8D ON ACCOUNT OF D ISALLOWANCE OF EXPENDITURE INCURRED FOR THE PURPOSE OF EARNING THE TAX EXEMPT INCOME. LD. AR OF THE ASSESSEE AT THE OUTSET HAD STATED THAT THOUGH THE DIVIDEND I NCOME EARNED BY THE ASSESSEE OUT OF THE INVESTMENT ACTIVITIES WAS ONLY 46,218/-. HOW EVER THE AO APPLIED RULE 8D OF THE INCOME TAX RULES AND HAS COMPUTED THE DISALLOWA NCE AT RS.63,29,768/-. THOUGH THE LD. CIT(A) HAS GIVEN A PART RELIEF IN DI RECTING THE AO NOT TO TREAT THE SUM OF RS.96,596/- INCURRED ON ACCOUNT OF DEMAT EXP ENDITURE AS DIRECTLY RELATING TO EARNING OF EXEMPT INCOME AND FURTHER TO EXCLUDE THE INVESTMENT IN PROPERTY OF RS.5,47,21,652/- FOR COMPUTATION OF DISALLOWANCE UN DER RULE 8D. HOWEVER, THE LD. CIT(A) HAS WRONGLY CONFIRMED THE REMAINING DISALLOW ANCE MADE BY THE AO. THE LD. AR OF THE ASSESSEE HAS RELIED UPON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF JOINT INVESTMENTS PRIVATE LTD. VS. CIT ITA NO. 117/2015 DECIDED ON 25.02.2015 AND FURTHER IN THE CASE OF AC B INDIA LIMITED VS. ACIT ITA NO.615/MUM/2014 DECIDED ON 24.03.2015 TO CONTEND TH AT THE DISALLOWANCE UNDER RULE 8D(2)(III) CANNOT BE MADE ON THE BASIS OF ENTI RE INVESTMENTS BUT SHOULD BE WORKED OUT BY TAKING ONLY THOSE INVESTMENTS WHICH Y IELDED DIVIDEND DURING THE YEAR. HE HAS FURTHER RELIED IN THIS RESPECT ON THE DECISION OF THE CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF M/S AMRIT DIAMOND TR ADE VS. ACIT, ITA NO.2642/MUM/13 VIDE ORDER DATED 15.01.2016. LD. DR ON THE OTHER HAND HAS RELIED UPON THE FINDING OF THE LOWER AUTHORITIES. 7 ITA NO. 8700/MUM/2011 M/S. VAHANVATI CONSULTANTS P. LTD. VS. DCIT 9. WE HAVE CONSIDERED RIVAL CONTENTIONS AND HAVE AL SO GONE THROUGH THE RECORDS. WE FIND THAT THE HONBLE DELHI HIGH COURT IN THE CASE OF JOINT INVESTMENT PRIVATE LIMITED (SUPRA) HAS HELD THAT SECTION 14 OF THE ACT OR RULE 8D CAN NOT BE INTERPRETED SO AS TO MEAN THAT THE ENTIRE TAX EXEMP T INCOME OF THE ASSESSEE IS TO BE DISALLOWED. THAT THE WINDOW FOR DISALLOWANCE IS IN DICATED IN SECTION 14A, AND IS ONLY TO THE EXTENT OF DISALLOWING EXPENDITURE INCUR RED BY THE ASSESSEE IN RELATION TO THE TAX EXEMPT INCOME. THIS PROPORTION OR PORTION O F THE TAX EXEMPT INCOME SURELY CANNOT SWALLOW THE ENTIRE AMOUNT OF TAX EXEMPT INCO ME. THE HONBLE DELHI HIGH COURT IN THE CASE OF CHEM INVESTMENTS VS. CIT (20 15) 61 TAXMAN.COM 118 HAS HELD THAT SECTION 14A WILL NOT APPLY IF NO EXEMPT I NCOME IS RECEIVED OR RECEIVABLE DURING THE RELEVANT PREVIOUS YEAR AND THAT THE EXPR ESSION DOES NOT FORM PART OF THE TOTAL INCOME, IN SECTION 14A OF THE ACT ENVISAGES THAT THERE SHOULD BE AN ACTUAL RECEIPT OF INCOME WHICH IS NOT INCLUDED IN THE TOTA L INCOME DURING THE RELEVANT PREVIOUS YEAR FOR THE PURPOSE OF DISALLOWING ANY EX PENDITURE INCURRED IN RELATION TO THE SAID INCOME. ALMOST IDENTICAL ISSUE HAS BEEN T AKEN BY THE HONBLE ALLAHABAD HIGH COURT IN THE CASE OF CIT KANPUR VS. M/S. SHIV AM MOTORS PVT. LTD. IN ITA NO.88 OF 2014 VIDE ORDER DATED 05.05.2014; BY THE H ONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. CORRTECTH ENERGY PVT. LTD. IN ITA NO.239 OF 2014 VIDE ORDER DATED 24.03.2014 AND BY THE HONBLE BOMBAY HIGH COU RT IN THE CASE OF CIT VS. M/S. DELITE ENTERPRISES IN ITA NO.110 OF 2009 VIDE ORDER DATED 26.02.09. 10. LD. AR OF THE ASSESSEE HAS FAIRLY STATED AT BAR THAT THE ASSESSEE WILL BE SATISFIED IF THE DISALLOWANCE OF 14A IS RESTRICTED TO THE EXEMPT INCOME EARNED BY THE ASSESSEE DURING THE YEAR. IN VIEW OF THE ABOVE STATEMENT OF THE LD. AR AND IN VIEW OF THE VARIOUS DECISIONS AS DISCUSSED ABOVE, D ISALLOWANCE U/S 14A IS 8 ITA NO. 8700/MUM/2011 M/S. VAHANVATI CONSULTANTS P. LTD. VS. DCIT RESTRICTED TO THE DIVIDEND INCOME EARNED OF RS.46,2 60/- ONLY. IN VIEW OF OUR FINDINGS GIVEN ABOVE, THE APPEAL OF THE ASSESSEE IS TREATED AS PARTLY ALLOWED. 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS HE REBY PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 29 JUNE, 2016 SD/- SD/- (G.S. PANNU) (SANJAY GARG ) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI; DATED : 29.06.2016 PS. ASHWINI / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. ( ) / THE CIT(A) 4. / CIT - CONCERNED 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE / BY ORDER, / // / (DY./ASSTT. REGISTRAR) , , , , / ITAT, MUMBAI