VIKSIT ENGINEERING LTD, RAIGAD V. ADDL CIT RG 7(3), MUMBAI

ITA 950/MUM/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 93167 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 4 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-07-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 02-07-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 10-02-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: RONAK G DOSHI
• Keywords: Business income; Opportunity of being heard; Earning of tax free income
• Section: 143(3); 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL F BENCH, MUMBAI . . , , , BEFORE SHRI A.D. JAIN , JUDICIAL MEMBER AND SHRI N.K . BILLAIYA, A CCOUNTANT M EMBER / I .T.A. NO . 950/M/2012 ( / ASSESSMENT YEAR : 2008 - 09 M/S. VIKSIT ENGINEERING LTD., A - 9, MIDC INDL. ESTATE, TALOJA, DIST. RAIGAD - 410 208 / VS. THE ACIT, RANGE - 7(3), MUMBAI ./ ./ PAN/GIR NO. : AAACV 1796P ( / APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY: SHRI RONAKG. DOSHI / RESPONDENT BY : SHRI G.M. DOSS / DATE OF HEARING : 02 . 0 7 .2015 / DATE OF PRONOUNCEMENT :08 .0 7 .2015 / O R D E R PER N.K. BILLAIYA, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A) - 1 3 , MUMBAI DT. 07.09.2011 PERTAINING TO ASSESSMENT YEAR 200 8 - 0 9 . 2. THE FIRST GROUND RELATES TO THE TREATMENT OF SHORT TERM CAPITAL GAIN OF RS. 9,42,92,175/ - AS BUSINESS INCOME. ITA. NO. 950/M/2012 2 2.1. WHILE SCRUTINIZING THE RETURN OF INCOME, THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS EARNED SHORT TERM CAPITAL GAIN OF RS. 9,42,92,175/ - . THE ASSESSEE WAS ASKED TO EXPLAIN WHY THE PROFIT EARNED ON THE SHARES SHOULD NOT BE TREATED UNDER THE HEAD BUSINESS INCOME. THE ASSESSEE EXPLAINED THAT THE MAIN OBJECT IS TO C ARRY OUT MERCHANDIZING ACTIVITIES OF ENGINEERING GOODS AND OTHER METALS AND COMMODITIES. IT WAS EXPLAINED THAT THE ASSESSEE HAS SUBSTANTIAL INVESTMENTS WHICH HAS BEEN CARRYING FOR LAST 10 TO 15 YEARS. IT WAS FURTHER STATED THAT ALL THE INVESTMENTS HAVE B EEN MADE OUT OF OWN FUNDS AND THERE ARE NO LOANS/BORROWINGS. 2.2. THE SUBMISSIONS MADE BY THE ASSESSEE DID NOT FIND ANY FAVOUR WITH THE AO. THE AO WAS OF THE OPINION THAT THE ASSESSEE HAS CARRIED OUT HUGE TRANSACTIONS. FURTHER, THE HOLDING PERIOD IN A LMOST ALL THE SCR I PS WERE LESS THAN 90 DAYS. THE AO FURTHER OBSERVED THAT ALL THE SCR I PS HAVE BEEN PURCHASED AND SOLD DURING THE YEAR ITSELF AND NO SCR I P WHICH WAS HELD AS INVESTMENT IN THE LAST YEAR. THE AO WAS OF THE FIRM BELIEF THAT ONLY OBJECTIVE OF THE ASSESSEE IS TO CARRY OUT TRADING IN SHARES AND TO EARN SHARE TRADING PROFITS. AFTER RELYING ON CERTAIN JUDICIAL DECISIONS, THE AO TREATED THE SHORT TERM CAPITAL GAIN AS BUSINESS INCOME OF THE ASSESSEE. 3. AGGRIEVED BY THIS, THE ASSESSEE CARRIED THE M ATTER BEFORE THE LD. CIT(A) BUT WITHOUT ANY SUCCESS. 4. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED A DETAILED CHART EXPLAINING THAT THE ASSESSEE HAS BEEN ACCEPTED AS AN INVESTOR IN EARLIER YEARS AND ALSO IN THE SUBSEQUENT YEARS. IT IS THE SAY OF THE LD. COUNSEL THAT IN ATLEAST 3 TO 4 ASSESSMENT YEARS, THE ASSESSMENT HAS BEEN MADE U/S. 143(3) OF THE ACT. THE LD. COUNSEL FURTHER STATED THAT BOTH THE REVENUE AUTHORITIES HAVE ERRED IN HOLDING THAT THE ASSESSEE HAS BORROWED ITA. NO. 950/M/2012 3 FUNDS. DRAWING OU R ATT ENTION TO THE BALANCE SHEET, THE LD. COUNSEL STATED THAT THERE IS NO LOAN LIABILITY AND THE ASSESSEE HAS NOT PAID ANY INTEREST DURING THE YEAR UNDER CONSIDERATION. IN RESPECT OF VOLUME AND FREQUENCY, THE LD. COUNSEL STATED THAT THE ASSESSEE HAS DONE TRANS ACTIONS IN ONLY 23 SCRIPS WITH NO. OF PURCHASE DAYS AS 41 AND NO. OF SALE DAYS AS 56. IN SUPPORT OF ITS CLAIM, THE LD. COUNSEL RELIED UPON THE DECISION IN THE CASE OF CIT VS GOPAL PUROHIT 336 ITR 287, DECISION OF THE TRIBUNAL MUMBAI BENCH IN THE CASE OF K ORADIA CONSTRUCTION (P) LTD. VS DCIT 146 ITD 251. 5. THE LD. DEPARTMENTAL REPRESENTATIVE STRONGLY SUPPORTED THE FINDINGS OF THE LD. CIT(A). IT IS THE SAY OF THE LD. DR THAT ASSESSEE HAD BORROWED FUNDS IN EARLIER YEARS AND THE INVESTMENTS HAVE COME OUT IN THE EARLIER YEARS OUT OF THE BORROWED FUNDS. IT IS THE SAY OF THE LD. DR THAT THE INTENTION OF THE ASSESSEE IS CLEARLY PROFIT MAKING THEREFORE THE AO HAS RIGHTLY TREATED THE GAINS UNDER THE HEAD BUSINESS INCOME AND THERE IS NO ERROR IN THE FINDINGS OF THE LD. CIT(A). 6. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS 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 SALE AND PURCHASE OF SHARES IN A PARTICULAR CASE SHOULD BE TREATED AS CAPITAL GAIN OR AS BUSINESS 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 SITU ATION. A PERUSAL OF THE 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 SHEET, THE ASSESSEE HAS SHOWN SHARES UNDER THE H EAD INVESTMENT. THESE INVESTMENT SHARES HAVE BEEN VALUED AT COST. THE HONBLE SUPREME COURT IN THE CASE OF CIT ITA. NO. 950/M/2012 4 ASSOCIATED INDUSTRIAL 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 OF 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 SHOULD, IN NORMAL CIRCUMSTANCES, BE IN A POSITION TO PRODUCE EVIDENCE FROM ITS RECORDS AS TO WHETHER IT HAS MAINTAINED ANY DISTINCTION BETWEEN THOSE SHARES WHICH ARE ITS STOCK - IN - TRADE AND THOSE WHICH ARE HELD BY WAY OF INVESTMENT 7. THE CBDT HAS ALSO MENTIONED IN ITS CIRCULAR THAT IT IS P OSSIBLE 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. 8. A PERUS AL OF THE BALANCE SHEET OF THE ASSESSEE SHOWS THAT THERE IS NO BORROWED FUND NOR THE ASSESSEE HAS CHARGED ANY INTEREST TO ITS PROFIT AND LOSS ACCOUNT. THE CLAIM OF THE LD. DR THAT THE ASSESSEE HAD BORROWED FUNDS IN EARLIER YEARS CANNOT BE ACCEPTED AS IN E ARLIER YEARS , T HE AO HAS ACCEPTED THE GAINS UNDER THE HEAD CAPITAL GAINS. THE ALLEGATION OF THE REVENUE AUTHORITIES IS THAT THE ASSESSEE HAS INDULGED INTO HIGH FREQUENCY TRANSACTION. 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 INVESTMENTS 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 CAPITAL GAINS WHERE THE SHARES ARE HELD FOR MORE THAN 12 MONTHS. HAD THIS BEEN NOT THE CASE, ALL THE GAINS ON SHARES WOULD HAVE B EEN CONSIDERED AS BUSINESS INCOME ONLY. THE FACT THAT THE LAW ITA. NO. 950/M/2012 5 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 OF LESS THAN 1 2 MONTHS AND HELD AS INVESTMENT WOULD BE CONSIDERED AS SHORT TERM CAPITAL GAINS ONLY. THUS THE ASSESSEES CLAIM CANNOT BE NEGATED ON THE BASIS OF FREQUENCY OF TRANSACTION AS HELD IN THE CASE OF GOPAL PUROHIT (SUPRA). 9. CONSIDERING THE ENTIRE FACTS IN T OTALITY IN THE 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 WH ICH WAS FILED BEFORE THE AO. IN OUR HUMBLE OPINION, THE SHARES HAVE TO BE TREATED AS AN INVESTMENT AND THEREFORE ANY PROFIT EARNED ON THE SALE THEREOF IS TO BE TREATED AS CAPITAL GAIN. FINDINGS OF THE LD. CIT(A) ARE REVERSED. THE AO IS DIRECTED TO TREAT THE PROFITS ON SALE OF SHARES AS CAPITAL GAIN, SHORT TERM OR LONG TERM AS THE CASE MAY BE. GROUND NO. 1 IS ACCORDINGLY ALLOWED. 10. GROUND NO. 2 RELATES TO THE DISALLOWANCE MADE U/S. 14A R.W. RULE 8D. 10.1. WHILE SCRUTINIZING THE RETURN OF INCOME, THE AO NOTICED THAT THE ASSESSEE HAS EARNED EXEMPT DIVIDEND INCOME AT RS. 6,53,125/ - . THE ASSESSEE WAS ASKED TO FURNISH THE DETAILS OF EXPENDITURE RELATING TO SUCH INCOME. IT WAS EXPLAINED THAT ALL THE INVESTMENTS HAVE BEEN DONE OUT OF OWN FUNDS AND THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE RELATING TO SUCH INCOME. THE SUBMISSIONS MADE BY THE ASSESSEE DID NOT FIND ANY FAVOUR WITH THE AO WHO PROCEEDED BY COMPUTING THE DISALLOWANCE U/S. 14A R.W. RULE 8D AND ACCOR DINGLY EXPENSES RELATABLE TO EARNING EXEMPT INCOME WAS COMPUTED AT RS. 2,63,269/ - . ITA. NO. 950/M/2012 6 11. AGGRIEVED BY THIS, THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A) BUT WITHOUT ANY SUCCESS. 12. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE RELIED UPON THE DE CISION OF THE TRIBUNAL IN THE CASE OF M/S. JAYSHREE PETROCHEMICALS PVT. LTD. IN ITA NO. 7292/M/2011, UDHAV HOLDINGS PVT. LTD. IN ITA NO. 5117/M/2012. DRAWING OUR ATTENTION TO THE PROFIT AND LOSS ACCOUNT, THE LD. COUNSEL STATED THAT THE DETAILS OF EXPENSE S EXHIBITED AT PAGE - 14 OF THE PAPER BOOK WOULD SUGGEST THAT ALL THE EXPENSES CANNOT BE ATTRIBUTED TOWARDS COMPUTATION OF THE DISALLOWANCE AND AS PER THE DECISION OF THE TRIBUNAL RELIED UPON ONLY RELA TA BLE EXPENSES SHOULD BE CONSIDERED. 13. PER CONTRA, THE LD. DR RELIED UPON THE FINDINGS OF THE LD. CIT(A). 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HAVE CAREFULLY PERUSED THE ORDERS OF THE AUTHORITIES BELOW. WE HAVE ALSO GONE THROUGH THE DECISIONS OF THE TRIBUNAL RELIED UPON BY THE ASSESSEE. IT IS AN UNDISPUTED FACT THAT RULE 8D CAN BE INVOKED ONLY WHEN SECTION 14A IS ATTRACTED AND NOT OTHERWISE. THE SCHEME AND PURPOSE OF SEC. 14A IS TO DISALLOW THE CLAIM OF THE EXPENSES INCURRED IN RELATION TO EARNING THE INCOME NOT FORMING PART OF THE TOTAL INCO ME. THEREFORE, THE DISALLOWANCE OF EXPENDITURE IS ALWAYS IN RELATION TO THE CLAIM OF EXPENDITURE. WE FIND THAT UNDER THE HEAD SELLING ADMINISTRATION AND OTHER EXPENSES, THE ASSESSEE HAS CHARGED TOTAL EXPENSES OF RS. 16,03,959/ - . RESPECTFULLY FOLLOWING T HE DECISION OF THE CO - ORDINATE BENCHES (SUPRA), WE RESTORE THIS ISSUE TO THE FILE OF THE AO. THE AO IS DIRECTED TO CONSIDER ONLY THOSE EXPENSES WHICH HAVE A DIRECT NEXUS WITH THE EARNING OF EXEMPT INCOME AND DECIDE THE ISSUE AFRESH AFTER GIVING REASONABL E OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. GROUND NO. 2 IS TREATED AS ALLOWED FOR STATISTICAL PURPOSE. ITA. NO. 950/M/2012 7 15. GROUND NO. 3 RELATES TO THE DISALLOWANCE OF LOSSES OF RS. 53.25 LAKHS. 15.1. WHILE SCRUTINIZING THE RETURN OF INCOME, THE AO OBSERVED THAT TH E ASSESSEE HAS CARRIED OUT TRADING IN PEAS. THE AO FURTHER OBSERVED THAT THE ASSESSEE HAS NEVER CARRIED OUT TRANSACTION IN PEAS IN EARLIER YEARS. THE AO FURTHER FOUND THAT ALL THE TRANSACTIONS HAVE BEEN DONE WITH GROUP COMPANIES AND IN NONE OF THE CASES DELIVERY OF GOODS HAVE TAKEN PLACE. THE ASSESSEE HAS SHOWN LOSS OF RS. 53.25 LAKHS. THE ASSESSEE WAS ASKED TO SUBSTANTIATE ITS CLAIM AS THERE IS NO DELIVERY OF GOODS AND FURTHER TRANSACTION IS CARRIED OUT AMONG SISTER CONCERNS WHERE BOTH SALES AND PURCH ASES PARTIES ARE GROUP CONCERNS. THE SUBMISSIONS MADE BY THE ASSESSEE DID NOT FIND ANY FAVOUR WITH THE AO. THE AO WAS OF THE FIRM BELIEF THAT THE ONLY PURPOSE OF THESE TRANSACTION WAS TO BUY LOSS AND SET O FF SUCH LOSS AGAINST THE TAXABLE INCOME. THE A O DISALLOWED THE CLAIM OF LOSS OF RS. 53.25 LAKHS AND ADDED BACK TO THE TOTAL INCOME. 16. AGGRIEVED BY THIS, THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A) BUT WITHOUT ANY SUCCESS. 17. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE STATED THAT THE PURCHASE AND SALE TRANSACTIONS HAVE BEEN DONE THROUGH ACCOUNT PAYEE CHEQUE. THE LD. COUNSEL VEHEMENTLY SUBMITTED THAT NONE OF THE PARTIES IS RELATED TO THE ASSESSEE AND IT IS A WRONG ASSUMPTION THAT THE TRANSACTIONS HAVE BEEN DONE WITH GROUP CONCERNS. TH E LD. COUNSEL DREW OUR ATTENTION TO THE COPIES OF THE LEDGER ACCOUNT OF THE RESPECTIVE PARTIES. 18. PER CONTRA, THE LD. DR SUPPORTED THE FINDINGS OF THE REVENUE AUTHORITIES. ITA. NO. 950/M/2012 8 19. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE AUTHORITIES BELOW AND HAVE CAREF ULLY GONE THROUGH THE RELEVANT EXTRACTS OF THE LEDGER ACCOUNT PLACED IN THE PAPER BOOK. UNDOUBTEDLY, THE TRANSACTIONS HAVE BEEN MADE THROUGH ACCOUNT PAYEE CHEQUE. WE FIND THAT NONE OF THE LOWER AUTHORITIES HAVE DONE ANY VERIFICATION FROM THE RESPECTIVE P ARTIES FROM WHOM PURCHASES AND TO WHOM SALES HAVE BEEN MADE. WE ALSO FIND THAT THE AFFIDAVIT OF THE ASSESSEE HAS BEEN BRUSHED ASIDE LIGHTLY BY THE REVENUE AUTHORITIES WHICH IS AGAINST THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE M EHTA PARIK H & CO. 30 ITR 181. HOWEVER, AT THE SAME TIME, WE FIND THAT THE LEDGER ACCOUNT OF THE ASSESSEE IN THE BOOKS OF RESPECTIVE PARTIES WAS NOT BEFORE THE AO. THEREFORE, THE AO HAD NO OCCASION TO VERIFY THE DETAILS. THE LD. CIT(A) HAS BRUSHED ASIDE THESE D OCUMENTARY EVIDENCES WITHOUT ANY VERIFICATION. THEREFORE, IN THE INTEREST OF JUSTICE AND FAIR PLAY, WE RESTORE THIS ISSUE TO THE FILE OF THE AO. THE ASSESSEE IS DIRECTED TO FILE ALL THE DOCUMENTARY EVIDENCES BEFORE THE AO. THE AO IS DIRECTED TO VERIFY T HE DETAILS FROM THE RESPECTIVE PARTIES. THE AO IS ALSO DIRECTED TO VERIFY THE CONTENTS OF THE AFFIDAVIT FILED BY THE ASSESSEE AND DECIDE THE ISSUE AFRESH AFTER GIVING SUFFICIENT OPPORTUNITY OF BEING HEARD. 20. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSE. OR DER PRONOUNCED IN THE OPEN COURT ON 8 TH JU LY , 2015 SD/ - SD/ - ( A.D. JAIN ) (N.K. BILLAIYA) /JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED : 8 TH JU LY , 2015 . . ./ RJ , SR. PS ITA. NO. 950/M/2012 9 / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE . / BY ORDER, //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI