ACIT 12(1), MUMBAI V. PRAKASH KANAL, MUMBAI

ITA 8757/MUM/2010

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 1696 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-03-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 17-01-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 15-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJADRSHI DWIVEDY
• Assessee Lawyers: NIMESH S BHIMANI
• Keywords: Business income; Opportunity of being heard; Rule of consistency; Earning of tax free income; Futures and options
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH C, MUMBAI BEFORE SHRI R.K. GUPTA, JUDICIAL MEMBER AND SHRI D. KARUNAKARA RAO, ACCOUNTAT MEMBER I.T.A. NO. 8757/M/2010 ASSESSMENT YEAR: 2007-2008 ACIT-12(1), ROOM NO. 117, AAYAKAR BHAVAN, M.K. MARG, MUMBAI 400 020. VS. SHRI PRAKASH KANAL, 114, SIR VITHALDAS CHAMBERS, 16, MUMBAI, FORT, MUMBAI 400 023. PAN: AABPK 1078 K (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI RAJADRSHI DWIVEDY, SR. DR RESPONDENT BY : SHRI NIMESH S BHIMANI DATE OF HEARING: 17.1.2013 DATE OF ORDER: 08.3.2013 O R D E R PER D. KARUNAKARA RAO, AM: THIS APPEAL FILED BY THE REVENUE ON 15.12.2010 IS A GAINST THE ORDER OF CIT (A)-23, MUMBAI DATED 24.9.2010 FOR THE ASSESSMENT Y EAR 2007-2008. 2. IN THIS APPEAL, REVENUE RAISED THE FOLLOWING GROU NDS WHICH READ AS UNDER: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD CIT (A) ERRED IN DIRECTING THE AO TO COMPUTE THE REASONABLE DISALLOWANCE U/S 14A FOLLOWING THE HONBLE BOMBAY HIGH COURT DECISION IN THE CASE OF GODREJ & BOYCE IGNORING THE FACT THAT THE DEPARTMEN T HAS PROPOSED TO FILE SLP AGAINST THIS DECISION OF HONBLE BOMBAY HIGH COURT. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LD CIT (A) ERRED IN DIRECTING THE AO TO TREAT THE PROFIT ARISING OUT OF SHARES AS CAPITAL GAIN INSTEAD OF BUSINESS INCOME. 2.(A). WHILE DOING SO, THE LD CIT (A) FAILED TO APP RECIATE THE FACT ASSESSEE HAS FREQUENTLY INDULGED IN SALE AND PURCHASE OF SHA RES WITH THE INTENTION OF PROFIT MOTIVE. 3. THE APPELLANT PRAYS THAT THE ORDER OF THE CIT (A ) ON THE ABOVE GROUND(S) BE SET ASIDE AND THAT OF THE ASSESSING OF FICER BE RESTORED. 3. GROUND NO.1 RELATES TO THE DISALLOWANCE U/S 14A OF THE ACT IN RESPECT OF THE AY PRIOR TO THE AMENDMENT TO RULE 8D. BRIEFLY STATE D, ASSESSEE FILED THE RETURN DECLARING TOTAL INCOME OF RS. 18,62,400/-. THE SAME WAS PROCESSED BY THE AO U/S 143(3) OF THE ACT, DETERMINING TOTAL INCOME AT RS. 57,60,636/-. DURING THE 2 ASSESSMENT PROCEEDINGS, AO NOTICED THAT IN ADDITION TO OTHER INCOME, ASSESSEE IS IN RECEIPT OF EXEMPT INCOME OF RS. 21,49,600/- IE BEIN G DIVIDEND INCOME OF RS. 6,50,150/-, LONG TERM CAPITAL GAIN OF RS. 20,13,818 /- AND OTHER TAX FREE INCOME OF RS. 1,61,927/-. CONSIDERING THE ASSESSEES FAILURE TO FURNISH THE PARTICULARS RELATING TO THE EXPENDITURE RELATABLE TO THE EARNING THE SAI D EXEMPT INCOME, AO MADE DISALLOWANCE OF RS. 1,26,216/- U/S 14A OF THE IT AC T. AGGRIEVED, ASSESSEE FILED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. 4. DURING THE PROCEEDINGS BEFORE THE FIRST APPELLAT E AUTHORITY, CIT (A) CONFIRMED THE ACTION OF THE ASSESSING OFFICER IN INVOKING THE PROVISIONS OF THE SECTION 14A OF THE ACT AND GIVEN A DIRECTION TO THE ASSESSING OFFICER TO RE-CO MPUTE REASONABLE DISALLOWANCE U/S 14A OF THE ACT, KEEPING IN VIEW T HE DIRECTION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF DCIT VS. G ODREJ & BOYCE MFG. CO. LTD. [2010] 328 ITR 81 AND THE RELEVANT PARA FROM THE CI T (A)S ORDER IS EXTRACTED HERE UNDER: THE APPELLANT HAS BEEN TRADING IN SHARES, SECURITIE S AND DEBENTURES AND HAS ALSO MADE TRANSACTIONS IN FUTURES & OPTIONS. D IVIDENDS HAVE ALSO ARISEN OUT OF SHARES PURCHASED. WHILE THE APPELLANT HAS C LAIMED THAT ALL THE EXPENSES WERE FOR ITS BUSINESS, IT IS ALSO A FACT T HAT EXPENSES HAVE BEEN INCURRED FOR MAKING AND MANAGING THE PURCHASES / SA LE OF SHARES ON WHICH DIVIDENDS WERE RECEIVED, THUS IT CAN BE CLEARLY CON CLUDED THAT THERE ARE EXPENSES INDIRECTLY USED FOR EARNING THE NON-TAXABL E INCOME, EVEN IF NO DIRECT EXPENSES ARE BOOKED. THE AOS ACTION IN INV OKING THE PROVISIONS OF SECTION 14A IS CONFIRMED. THUS, THE COMPOSITE EXPE NDITURE INCURRED TOWARDS BOTH TAXABLE AND TAX-FREE INCOME REQUIRES APPORTION MENT OF EXPENDITURE BETWEEN TAXABLE AND NON-TAXABLE INCOME, AND SUCH EX PENSES ACCORDINGLY APPORTIONED TOWARDS EARNING OF TAX FREE INCOME (DIV IDEND IN THE PRESENT CASE), WHICH IS DISALLOWABLE UNDER SECTION 14A. THE ASSESSING OFFICER IS DIRECTED TO COMPUTE REASONABLE DISALLOWANCE U/S 14A FOLLOWING DIRECTION OF THE BOMBAY HIGH COURT IN THE CASE OF GOD REJ & BOYCE AFTER GIVING THE APPELLANT AN OPPORTUNITY OF BEING HEARD. 5. ON THE OTHER HAND, LD DR RELIED ON THE ORDER OF AO. 6. WE NEED TO DECIDE IF THE ABOVE DIRECTION OF THE CIT(A) IS ERRONEOUS. IN THIS REGARD, WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES. WE ARE OF THE OPINION THAT THE CIT (A) WAS JUSTIFIED IN GIVING THE DIRECTION TO AO TO COMPUTE THE REASONABLE DISALLOWA NCE U/S 14A BY FOLLOWING THE 3 DIRECTIONS OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE (SUPRA) AND THE SAME DOES NOT CALL FOR ANY INTERFERENCE ON THIS ISSUES. ACCORDINGLY, GROUND NO.1 RAISED BY THE REVENUE IS DISMISSED. 7. GROUND NO. 2 & 2A RELATES TO CONCLUSIONS RELATIN G TO TREATING OF THE PROFITS ON SALE OF SHARES AS CAPITAL GAINS OR BUSINESS INCOME OF THE ASSESSEE. IT IS NOTICED THAT PARA 5 OF THE IMPUGNED ORDER WITH ITS SUB-PARAS IS RELEVANT IN THIS REGARD. CIT (A) DIRECTED THE AO TO TREAT THE SAME AS CAPITAL GAINS AS CLAIMED BY THE ASSESSEE. 8. THIS IS THE CASE WHERE THE PURCHASE VALUE OF THE SHARES INCLUDING SHORT TERM, LONG TERM AND FUTURES AND OPTIONS WORKS OUT TO RS. 5.16 CR AND THE SALE VALUE OF THE SAME IS RS. 5.92 CR. THIS IS THE CASE WHERE ASSESS EE PAID STT ALSO. ASSESSEE DEMONSTRATED BEFORE THE AO THAT THE BOOK ENTRIES WERE MADE IN THE BOOKS OF ACCOUNT HOLDING THE SAID ASSETS AS LONG TERM INVEST MENTS. THE CIT (A) FURTHER DISCUSSED THE CIRCULAR NO.4/2007 DATED 15.6.2007 IS SUED BY THE CBDT WHICH AUTHORIZES THE ASSESSEE WHO MAINTAINS TWO SEPARATE ACCOUNTS NAMELY INVESTMENT ACCOUNT AND THE JOBBING ACCOUNT. CIT (A) ALSO EXAM INED THE OBJECTIONS RAISED BY THE AO IN THE ASSESSMENT ORDER AND THE LOGIC THAT L EAD AO TO BELIEVE THAT THIS IS THE CASE OF BUSINESS TRANSACTIONS AND THE RELEVANT DISC USSION IS GIVEN IN PARA 7 OF THE IMPUGNED ORDER. THE CIT (A) ALSO MENTIONED THAT TH E INVESTMENT WAS DONE OUT OF THE SURPLUS FUNDS GENERATED BY THE ASSESSEES CORE ACTIVITY IE EXPORT BUSINESS. CIT (A) MENTIONED THAT ASSESSEE HAS NOT TAKEN ANY LOAN FOR CONDUCTING THESE TRANSACTIONS AND THE DISCUSSION IS GIVEN IN PARA 5. 2 OF THE IMPUGNED ORDER. FINALLY, THE CIT (A) CAME TO THE CONCLUSION THAT THE CLAIM O F THE ASSESSEE MUST BE UPHELD. AGGRIEVED WITH THE SAME, THE REVENUE IS IN APPEAL B EFORE THE TRIBUNAL. 9. DURING THE PROCEEDINGS BEFORE US, LD DR RELIED O N THE ORDER OF THE AO. 10. ON THE OTHER HAND, LD COUNSEL FOR THE ASSESSEE BROUGHT OUR ATTENTION TO THE DISCUSSION AND THE LOGIC GIVEN IN PARA 5.2 AND 5.3 OF THE IMPUGNED ORDER AND REQUESTED TO CONFIRM THE SAME. 4 11. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AS WELL AS THE PAPERS FILED BEFORE US. TO START WITH, WE REPRODUCE PARA 5.2 AND 5.3 OF THE IMPUGNED ORDER WHICH IS AS UNDER : 5.2. BEFORE ME THE APPELLANT SUBMITTED THAT THE SUR PLUS AMOUNT GENERATED FROM HIS EXPORT BUSINESS WAS UTILIZED IN INVESTMENT IN SECURITIES AS APPELLANT HAVING KNOWLEDGE OF SECURITY MARKET. HE STARTED TA KING POSITION IN FUTURES & OPTIONS. THE SAID ACTIVITY OF FUTURES & OPTIONS AS PER THE ACT IS TREATED AS INCOME FROM BUSINESS AND PROFESSION HENCE, APPELLAN T MAINTAINS SEPARATE ACCOUNT FOR EACH ACTIVITY OF BUSINESS AND PROFESSIO N WHICH ARE SUBJECT TO AUDIT. THE APPELLANT STATED THAT HIS HOLDING IN SE CURITIES OF INDIAN COMPANY FROM YEAR TO YEAR IS REFLECTED AS INVESTMENT IN SEC URITIES IN THE BALANCE SHEET. THE ENTIRE INVESTMENT IN SECURITIES IS DEBT FREE AND SHORT TERM AND LONG TERM GAIN HAS BEEN ACCEPTED FROM THE DATE HE S TARTED FILING HIS RETURN OF INCOME. THE MAGNITUDE OF TRANSACTION DOES NOT ALTE R THE NATURE OF THE TRANSACTION. THOUGH THE PRINCIPLE OF RES JUDICATGA DOES NOT APPLY TO THE INCOME TAX PROCEEDINGS AS EACH YEAR IS AN INDEPENDE NT YEAR OF ASSESSMENT BUT IN ORDER TO MAINTAIN CONSISTENCY, IT IS JUDICIA LLY ACCEPTED PRINCIPLE THAT SAME VIEW SHOULD BE ADOPTED FOR THE SUBSEQUENT YEA RS, UNLESS THERE IS A MATERIAL CHANGE IN THE FACTS. THE APPELLANT HAD AL READY PROVIDED EXPLANATION FOR TREATING THE INCOME AS INCOME FROM CAPITAL GAIN S IN THE LETTER DATED 16 TH DECEMBER, 2009. THERE ARE ONLY 73 TRANSACTIONS WHI CH HAVE BEEN UNDERTAKEN DURING THE ENTIRE YEAR. AS THE VOLUME O F TRANSACTIONS IS NOT VERY HIGH, IT CANNOT BE PRESUMED TO BE BUSINESS TRANSACT IONS. IN PARA 8.3D3 OF THE ASSESSMENT ORDER, IT IS STATED THAT THE TIME PE RIOD FOR WHICH STATES ARE HELD PLAYS A MAJOR ROLE IN DETERMINING WHETHER THE INCOME FROM SHARE TRANSACTIONS WILL BE TREATED AS CAPITAL GAINS OR BU SINESS AND PROFESSION. IT MENTIONS THAT IF SHARES ARE PURCHASED WITH AN INTEN TION TO OLD FOR MORE THAN 12 MONTHS, THEN THEY WILL BE TREATED AS LONG TEM AS SETS AND HENCE WILL BE CONSIDERED AS INVESTMENT. IN CASE OF THE APPELLANT , INCOME OF RS. 19,86,406/- PERTAINS TO INVESTMENTS WHICH WERE HELD FOR MORE THAN 12 MONTHS. ONLY INCOME OF RS. 71,017/- PERTAINS TO SH ARES WHICH WERE HELD FOR LESS THAN 12 MONTHS. THUS, IT SHOULD BE TREATED AS INVESTMENT AND NOT BUSINESS INCOME. INVESTMENTS IN SECURITIES ARE INDEPENDENT ACTIVITY , NOT INCIDENTAL TO ITS NORMAL BUSINESS. HE HAS NOT TAKE ANY LOAN FOR ACQU IRING SUCH SHARES. APPELLANT HAS SHOWN THE SECURITIES PURCHASED AS INV ESTMENTS IN THE BOOKS OF ACCOUNTS. THE APPELLANT DOES NOT HAVE ANY SEPARATE OFFICE OR OFFICE STAFF FOR CARRYING OUT SALE OR PURCHASE OF SECURITIES. THE A PPELLANT RELIED UPON THE DECISIONS IN JANAK S RANGWALLA VS. ACIT RANGE-12(2) IT 80, CIT VS. ASSOCIATED INDUSTRIAL DEVELOPMENT CO. (P). LTD. (19 71) (082 ITR 586), CIT VS. HOLCK LARSON (1986) (160 ITR 67), CIT VS. RAMAA MIRTHAM (2008) 306 ITR 239 (MAD), CIT VS. GOPAL PUROHIT (2010 TMI 3518 8 (BOM HC), CIT VS. NSS INVESTMENTS PVT. LTD. 277 ITR 149 (MADRAS), ACI T VS. KETAN KUMAR A. SHAH (2000) 242 ITR 83 (KERALA). THE APPELLANT ALS O RELIED UPON THE ORDER OF CIT (A) IN HIS OWN CASE FOR AY 2006-2007. 5.3. I FIND THAT IN AY 2006-2007, IT HAS BEEN HELD IN ORDER DATED 18.12.2009 IN APPEAL NO. CIT (A)-23/ACIT, 12(1)/IT- 364/08-09 THAT THE APPELLANT HAS USED THEIR OWN FUNDS, NO BORROWINGS H AVE BEEN MADE. THE APPELLANT HAD ALL ALONG DECLARED THE SHARES AS INVE STMENTS AND SALES THEREOF 5 WERE SHOWN AS CAPITAL GAINS OR LOSS. THIS ASPECT H AS BEEN ACCEPTED BY THE DEPARTMENT TILL AY 2005-2006. IN SUCH CIRCUMSTANCE S, THE ASSESSING OFFICER HAD NOT BROUGHT OUT ANY COMPELLING REASON TO DISTUR B THE ACCEPTED HISTORY. THE REASONING GIVEN BY THE AO IS NOT SUFFICIENT TO DISTURB THE CONSISTENT STAND TAKEN BY THE APPELLANT AND ACCEPTED BY THE DE PARTMENT OVER THE YEARS. THE FACTORS LISTED OUT BY THE ASSESSING OFF ICER HAVE BEEN HIGHLIGHTED IN ISOLATION WITHOUT TAKING INTO CONSIDERATION THE TOTALITY OF FACTS AND RECORD. THE INTENTION OF THE APPELLANT OF BEING AN INVESTOR AND NOT A TRADER HAD BEEN FOLLOWED AND ACTED UPON OVER THE YEARS IS EVIDENT F ROM THE RECORD. IN VIEW OF THE ABOVE, THE ASSESSING OFFICER IS DIRECTED TO TREAT THE PROFITS ARISING OUT OF TRANSFER OF SHARES AS CAPITAL GAINS AND NOT BUSI NESS INCOME. SINCE, THE FACTS AND CIRCUMSTANCES IN THE PRESENT APPEAL REMAIN THE SAME, THE FINDING GIVEN IN APPEAL ORDER FOR AY 2006 -07 IS REITERATED AND THE ASSESSING OFFICER IS DIRECTED TO TREAT THE PROFITS ARISING OUT OF TRANSFER OF SHARES AS CAPITAL GAINS AND NOT BUSINESS INCOME. 12. FROM THE ABOVE, IT IS EVIDENT THAT THE BARE FAC TS OF THE ASSESSEE IE (1) ENTRIES IN THE BOOKS OF ACCOUNTS SPEAKS OF THE INVESTMENT N ATURE OF THE ASSETS AND SHOWS THE ORIGINAL INTENTION OF THE ASSESSEE TO RECORD TH EM AS INVESTMENTS; (2) THE PURCHASE VALUE OF THE SHARES IS RS 5.16 CR AND THE SALE VALUE IS RS. 5.29 CR DO NOT BY ANY MEANS SHOW THAT THEY CAN BE CONSIDERED OF HI GH VOLUME OR HIGH MAGNITURE; (3) BORROWED FUNDS WERE NOT UTILIZED FOR THE PURPOS E OF THIS INVESTMENT AND THE SURPLUS FUNDS OF THE ASSESSEE WAS APPLIED TO THE IN VESTMENT ACTIVITY; (4) MOST OF THE SHARES WERE HELD LONGER THAN THE PERIOD OF 12 MONTH S; (5) ASSESSEES MAINTENANCE OF SEPARATE ACCOUNT FOR EACH ACTIVITY; (6) THERE A RE ONLY 73 TRANSACTIONS IN THE ENTIRE YEAR; (7) VALUATION OF THE SHARES IE AS PER THE COST ONLY, SHOWS THE MANNER OF ACCOUNTING APPLICABLE TO THE INVESTMENT ACTIVITIES; (8) CLAIMS OF THE ASSESSEE IN THIS REGARD, WAS ACCEPTED IN THE AY 2005-06 AND THUS, AO HAS NOT FOLLOWED THE PRINCIPLE OF CONSISTENCY TOO. THE REASONING GIVEN BY THE CIT (A) IS FAIR AND IT SHOWS THE REASONABLE VIEW. CONSIDERING THE ABOVE, IN OUR OPIN ION, THE ORDER OF THE CIT (A) DOES NOT CALL FOR ANY INTERFERENCE. ACCORDINGLY, G ROUND NO.2, AND 2(A) AND GROUND 3 BEING GENERAL, RAISED BY THE REVENUE ARE DISMISSED . 13. IN THE RESULT, APPEAL FILED BY THE REVENUE IS DI SMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 8 TH DAY OF MARCH, 2013. SD/- SD/- (R.K. GUPTA) (D. KARUNAKARA R AO) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE : 08.3.2013 6 AT :MUMBAI OKK COPY TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (A), CONCERNED. 4. THE CIT CONCERNED. 5. THE DR C, BENCH, ITAT, MUMBAI. 6. GUARD FILE. // TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI