JAISAL FINANCE P.LTD, MUMBAI v. DCIT RG 2(2), MUMBAI

ITA 3769/MUM/2011 | 2007-2008
Pronouncement Date: 31-07-2013 | Result: Partly Allowed

Appeal Details

RSA Number 376919914 RSA 2011
Assessee PAN AAACJ2041F
Bench Mumbai
Appeal Number ITA 3769/MUM/2011
Duration Of Justice 2 year(s) 2 month(s) 22 day(s)
Appellant JAISAL FINANCE P.LTD, MUMBAI
Respondent DCIT RG 2(2), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 31-07-2013
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted J
Tribunal Order Date 31-07-2013
Date Of Final Hearing 01-07-2013
Next Hearing Date 01-07-2013
Assessment Year 2007-2008
Appeal Filed On 09-05-2011
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL J B ENCH MUMBAI . . !'#$ % & BEFORE SHRI I.P. BANSAL JM AND SHRI N.K. BILLA IYA AM ./ I.T.A. NO.3769/MUM/2011 ( ' ' ' ' / ASSESSMENT YEAR :2007-08 M/S. JAISAL FINANCE PVT. LTD. TEX CENTRE K WING 3 RD FLOOR 26-A CHANDIVALI ROAD OFF SAKI VIHAR ROAD ANDHERI (E) MUMBAI THE DCIT RANGE 2(2) AAYAKAR BHAVAN MUMBAI-400 020 ( % ./ ) ./PAN/GIR NO. : AAACJ 2041F ( (* /APPELLANT ) .. ( + (* / RESPONDENT ) (* - / APPELLANT BY : ` SHRI SANJEEV LALAN + (* . - /RESPONDENT BY : SHRI RUSHABH MEHTA . /0% / DATE OF HEARING :29.07.2013 12' . /0% / DATE OF PRONOUNCEMENT :31.07.2013 3 / O R D E R PER N.K. BILLAIYA AM: THIS APPEAL BY THE ASSESSEE IS PREFERRED AGAINST TH E ORDER OF THE LD. CIT(A)-5 MUMBAI DT.4.3.2011 PERTAINING TO A.Y. 20 07-08. 2. THE SUM AND SUBSTANCE OF THE GRIEVANCE OF THE AS SESSEE IS THAT THE LD. CIT(A) ERRED IN LAW AND FACTS IN CONFIRMING THE ACTION OF THE AO IN TREATING THE ALLEGED SHORT TERM CAPITAL GAIN OF RS . 3 23 95 021/- AS BUSINESS INCOME. WITHOUT PREJUDICE TO THIS GRIEVAN CE THE ASSESSEE HAS ITA NO.3769/M/2011 2 ALSO TAKEN AN ALTERNATIVE PLEA THAT IF THE SHORT TE RM CAPITAL GAIN IS TREATED AS BUSINESS INCOME THEN THE BUSINESS PROFIT SHOULD BE ARRIVED AT BY APPLYING PRINCIPLES FOR COMPUTING BUSINESS INCOME A ND VALUING THE STOCK OF SHARES AT COST OR NET REALIZABLE WHICH IS LOWER. 3. THE ASSESSEE FILED THE RETURN OF INCOME ELECTRON ICALLY DECLARING TOTAL INCOME AT RS. 3 41 19 292/-. THE RETURN WAS SELECTED FOR SCRUTINY ASSESSMENT AND STATUTORY NOTICES WERE SERVED UPON T HE ASSESSEE. WHILE SCRUTINIZING THE RETURN OF INCOME THE ASSESSING OF FICER OBSERVED THAT THE TOTAL INCOME OF RS. 3 41 19 292/- CONSISTS OF SHORT TERM CAPITAL GAIN ON SALE OF SHARES AMOUNTING TO RS. 3 23 95 021/- AND P ROFITS OF THE BUSINESS FROM SALE OF SHARES AT RS. 17 24 271/-. THE AO WAS OF THE FIRM BELIEF THAT THE SHORT TERM CAPITAL GAIN SHOWN BY THE ASSESSEE I S NOTHING BUT BUSINESS INCOME OF THE ASSESSEE BY TRADING IN SHARES. THE A O BASED HIS BELIEF ON THE CBDT CIRCULAR NO. 4 OF 2007 DT. 15.6.2007 WHERE IN CERTAIN CONDITIONS HAVE BEEN LAID DOWN FOR DISTINGUISHING S HARES HELD AS INVESTMENT AND SHARES HELD AS STOCK-IN-TRADE. THE RELEVANT PART OF THE CIRCULAR OF THE BOARD HAVE BEEN INCORPORATED AT PAG ES 3 4 & 5 OF THE ASSESSMENT ORDER. THE AO COMPARED THE TRANSACTIONS OF THE ASSESSEE IN THE LIGHT OF THE GUIDANCE ISSUED BY THE CBDT. THE AO WAS CONVINCED THAT THE ASSESSEE HAS ACTUALLY DONE TRADING IN SHAR ES ON A FREQUENT AND REGULAR BASIS. 3.1. THE AO SOUGHT EXPLANATION FROM THE ASSESSEE AN D SHOW CAUSE WHY SHORT TERM CAPITAL GAIN SHOULD NOT BE TREATED AS BU SINESS INCOME. THE ASSESSEE FILED A DETAILED REPLY DT. 11.9.2009 AND E XPLAINED THE NATURE OF TRANSACTION VIS--VIS CIRCULAR OF CBDT. IT WAS EXP LAINED THAT THE ASSESSEE IS HOLDING SHARES AS INVESTMENT AND THIS ASPECT IS DULY REFLECTED IN THE BALANCE SHEET OF THE ASSESSEE. IT WAS FURTHER EXPL AINED THAT ALL THE ITA NO.3769/M/2011 3 TRANSACTIONS ARE DELIVERY BASED TRANSACTION. IT WA S ALSO EXPLAINED THAT THE STOCK-IN-TRADE IS VALUED AT COST OR MARKET PRICE WH ICHEVER IS LESS WHEREAS THE ASSESSEE HAS SHOWN SHARES AS INVESTMENT AND HEN CE VALUED AT COST. THE SUBMISSIONS OF THE ASSESSEE DID NOT FIND FAVOUR WITH THE AO. THE AO OBSERVED THAT THE HOLDING PERIOD OF THE ASSESSEE IS SO LESS THAT IT CANNOT BE ACCEPTED THAT THE ASSESSEE IS AN INVESTOR AND NOT A TRADER. AFTER REJECTING THE ASSESSEES SUBMISSION THE AO WENT ON TO TREAT THE PROFIT ON SALE OF SHARES UNDER THE HEAD BUSINESS INCOME. 4. THE ASSESSEE STRONGLY AGITATED THIS MATTER BEFOR E THE LD. CIT(A). THE ASSESSEE REITERATED THAT IT HAS INVESTED IN SHA RES AND HAS ALSO CLASSIFIED IT AS INVESTMENTS IN THE AUDITED BALANCE SHEET. FURTHER NO BORROWED FUNDS HAVE BEEN UTILIZED BY THE ASSESSEE F OR INVESTMENT IN SHARES. IT WAS STRONGLY CONTENDED THAT MERE VOLUME AND FREQUENCY OF TRANSACTION WOULD NOT RENDER THE SHARE INVESTMENT A CTIVITY AS TRADING ACTIVITY. TO FURTHER STRENGTHEN ITS VIEWS THE ASS ESSEE SUBMITTED THAT IT HAS RECEIVED A SUBSTANTIAL DIVIDEND OF RS. 19 64 465/- WHICH CLEARLY SHOWS THE INTENTION OF THE ASSESSEE TO REMAIN INVESTED. HOWEVER THE LD. CIT(A) WAS NOT CONVINCED WITH THE SUBMISSIONS OF TH E ASSESSEE. 4.1. THE LD. CIT(A) OBSERVED THAT THE DATES OF TRAN SACTIONS ARE MANY WHICH SHOW THAT THE ASSESSEE DID NOT WANT TO STAY I NVESTED IN THE SHARES. THE HOLDING PERIODS OF THE SHARES TRANSACTED ARE VE RY LOW. THE LD. CIT(A) FURTHER OBSERVED THAT IT IS QUITE CLEAR THAT THE INTENTION OF THE ASSESSEE IS NOT TO MAKE INVESTMENT FOR THE PURPOSE OF EARNING OF DIVIDEND OR FOR CAPITAL APPRECIATION BUT VERY CLEARLY FOR D ERIVING REGULAR INCOME FROM THE SALES AND PURCHASES. THE LD. CIT(A) CONFI RMED THE FINDINGS OF THE AO. ITA NO.3769/M/2011 4 5. AGGRIEVED BY THIS FINDING OF THE LD. CIT(A) ASS ESSEE IS BEFORE US. 6. THE LD. COUNSEL FOR THE ASSESSEE REITERATED WHAT HAS BEEN SUBMITTED BEFORE THE LOWER AUTHORITIES. 7. PER CONTRA THE LD. DEPARTMENTAL REPRESENTATIVE RELIED UPON THE FINDINGS OF THE LD. CIT(A). 8. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE LOWE R AUTHORITIES AND THE MATERIAL EVIDENCES BROUGHT ON RECORD. THE ASSE SSEE IS A LIMITED LIABILITY COMPANY. A PERUSAL OF THE MEMORANDUM AND ARTICLES OF ASSOCIATION OF THE ASSESSEE COMPANY EXHIBITED AT PA GES 38 TO 53 OF THE PAPER BOOK SHOW THAT THE MAIN OBJECT OF THE COMPANY IS TO FINANCE INDUSTRIAL ENTERPRISES AND TO LEND MONEY AND/OR NEG OTIATE LOANS AND DEPOSITS EITHER WITH OR WITHOUT SECURITY FOR THE PURPOSE OF FINANCING ANY INDIVIDUALS FIRMS ASSOCIATION OF PERSON BODY CORP ORATE ETC. AND THE OBJECTS INCIDENTAL OR ANCILLARY TO THE ATTAINMENT O F THE MAIN OBJECTS SHOW THAT THE ASSESSEE WOULD ENGAGE IN RELATED ACTIVITIE S WHICH ARE PURSUANT TO THE MAIN OBJECT OF THE COMPANY. THUS THE MAIN OBJE CT OF THE COMPANY CLEARLY SHOW THAT IT WANT TO CARRY ON FINANCING B USINESS OTHER THAN BANKING BUSINESS WITHIN THE MEANING OF BANKING REGU LATION ACT 1949. IN THE LIGHT OF THE MEMORANDUM OF ASSOCIATION WE F IND THAT IN THE IMMEDIATE PRECEDING ASSESSMENT YEAR AND ALSO IN THE SUBSEQUENT ASSESSMENT YEAR THERE IS NOT EVEN A SINGLE ITEM OF INCOME WHICH COULD BE SAID TO BE IN PURSUANCE OF THE MAIN OBJECT OF THE C OMPANY. IN ALL THESE YEARS THE ASSESSEE HAS SHOWN INCOME ONLY FROM SHAR E TRANSACTIONS. IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR I.E. 2006 -07 THE ASSESSEE HAS SHOWN INCOME FROM SHARES UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. ITA NO.3769/M/2011 5 8.1. AS PER COMPUTATION OF INCOME EXHIBITED AT PAGE -89 OF THE PAPER BOOK IT IS THE SAY OF THE LD. COUNSEL THAT INADVER TENTLY THE CAPITAL GAINS HAS BEEN SHOWN UNDER THE HEAD BUSINESS INCOME. HOW EVER THIS SUBMISSION OF THE LD. COUNSEL CANNOT BE ACCEPTED BE CAUSE THE ASSESSEE HAS NEVER FILED ANY REVISED RETURN CLAIMING THE INC OME UNDER THE HEAD CAPITAL GAINS. THE CONTENTION THAT THE ASSESSEE HA S BEEN SHOWING THE INVESTMENT UNDER THE HEAD INVESTMENT IN THE BALANCE SHEET DO NOT HOLD ANY WATER BECAUSE BOOK ENTRIES CANNOT JUSTIFY THE N ATURE OF TRANSACTION. THE HONBLE SUPREME COURT IN THE CASE OF KEDARNATH JUTE MANUFACTURING CO. LTD. VS CIT 82 ITR 363 HAS HELD THAT: EXISTENCE OR ABSENCE OF ENTRIES IN THE BOOKS OF AC COUNT CANNOT BE DECISIVE OR CONCLUSIVE IN THE MATTER. SIMILAR OBSERVATIONS WERE GIVEN BY THE HONBLE DELH I HIGH COURT IN THE CASE OF CIT VS HITASHI ESTATES LTD. 313 ITR 393 (DE L) WHEREIN IT HAS BEEN HELD THAT : TREATMENT GIVEN IN THE BOOKS OF ACCOUNTS WAS PATEN TLY WRONG AND SUCH WRONG TREATMENT COULD NOT BE CAPITAL IZED AGAINST THE ASSESSEE PARTICULARLY WHEN THE SAID TEN ANCY RIGHT UNDISPUTEDLY WAS A CAPITAL ASSET IN THE HANDS OF TH E APPELLANT. 8.2. A PERUSAL OF THE BALANCE SHEET OF THE ASSESSEE SHOW THAT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE HAS BORROWED UNSECURED FUNDS TO THE TUNE OF RS. 2.81 CRORES WHICH WAS AT NIL IN THE IMMEDIATE PRECEDING ASSESSMENT YEAR. THUS THE UTILIZATION OF THE BORR OWED FUNDS COULD NOT BE PROPERLY EXPLAINED. THE ONLY PLAUSIBLE UTILIZATION APPEARS TOWARDS PURCHASE OF SHARES. THE OWN FUNDS AVAILABLE WITH T HE ASSESSEE ARE TO THE TUNE OF RS. 8.5 CRORES WHEREAS THE TOTAL INVESTMENT AS ON 31.3.2007 IS TO THE TUNE OF RS. 9 CRORES WHICH IN THE IMMEDIATELY P RECEDING ASSESSMENT ITA NO.3769/M/2011 6 YEAR WAS AT RS. 4.41 CRORES. THUS THE ENTIRE BORR OWED FUNDS HAVE BEEN UTILIZED FOR THE PURPOSE OF PURCHASE OF SHARES. 8.3. A PERUSAL OF FORM NO. 3CD ATTACHED TO THE TAX AUDIT REPORT EXHIBITED AT PAGE-8 OF THE PAPER BOOK SHOW THAT THE AUDITORS HAVE MENTIONED UNDER THE HEAD BOOKS OF ACCOUNT MAINTAINE D --- PURCHASE & SALES REGISTER CASH AND BANK BOOK LEDGER AND JOU RNAL AND THE STATEMENT OF ACCOUNTS OF THE ASSESSEE CLEARLY SHOW THAT THE A SSESSEE HAS NOT DONE ANY BUSINESS IN PURSUANT TO ITS MAIN OBJECT. THEN H OW THE AUDITORS ARE MENTIONING THAT THE ASSESSEE HAS MAINTAINED PURCHAS E AND SALES REGISTER. THIS ALSO SHOWS THAT THE ASSESSEE HAS DONE BUSINESS IN SHARES. CONSIDERING ALL THESE FACTS IN TOTALITY WE DO NOT FIND ANY REASON TO INTERFERE WITH THE FINDINGS OF THE LD. CIT(A). THE GAINS ARISING OUT OF SHARE TRANSACTION HAVE BEEN RIGHTLY TAXED UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. GROUND NO. 1 & 2 ARE AC CORDINGLY DISMISSED. 9. GROUND NO. 3 IS AN ALTERNATIVE PLEA OF THE ASSES SEE THAT IF CAPITAL GAINS ARE TREATED AS BUSINESS INCOME THEN THE PROF ITS SHOULD BE COMPUTED APPLYING PRINCIPLES OF BUSINESS INCOME. 10. AS WE HAVE HELD THAT THE PROFIT OF THE ASSESSEE ARISING OUT OF THE TRANSACTIONS IN SHARES IS TO BE TREATED AS BUSINESS INCOME WE ACCORDINGLY DIRECT THE AO TO RECOMPUTE THE PROFIT AFTER ALLOWIN G ALL THE EXPENSES DIRECTLY RELATED TO THIS BUSINESS OF THE ASSESSEE. FURTHER THE AO IS DIRECTED TO ADOPT THE VALUE OF STOCK OF SHARES AT C OST OR MARKET PRICE WHICHEVER IS LOWER. THE AO IS EXPECTED TO GIVE A R EASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE BEFORE DECIDING THIS ISSUE. ITA NO.3769/M/2011 7 11. THE LAST GRIEVANCE OF THE ASSESSEE RELATES TO D ISALLOWANCE U/S. 14A OF THE ACT. 12. AS WE HAVE RESTORED THE COMPUTATION OF BUSINESS INCOME BACK TO THE FILES OF THE AO THIS ISSUE IS ALSO RESTORED BA CK TO THE FILES OF THE AO. THE AO IS DIRECTED TO MAKE A REASONABLE DISALLOWANC E U/S. 14A OF THE ACT WITHOUT APPLYING RULE 8D IN THE LIGHT OF THE FINDIN GS GIVEN FOR THE TREATMENT OF CAPITAL GAINS UNDER THE HEAD BUSINESS INCOME AFTER GIVING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. 13. IN THE RESULT THE APPEAL FILED BY THE ASSESSEE IS ALLOWED IN PART FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 31.7.2013 3 . 2' % 4 56 31.7.2013 2 . 7 SD/- SD/- (I.P. BANSAL ) (N. K. BILLAIYA ) /JUDICIAL MEMBER % / ACCOUNTANT MEMBER MUMBAI; 5 DATED 31.7.2013 . . ./ RJ SR. PS ITA NO.3769/M/2011 8 3 3 3 3 . .. . +/! +/! +/! +/! 8!'/ 8!'/ 8!'/ 8!'/ / COPY OF THE ORDER FORWARDED TO : 1. (* / THE APPELLANT 2. + (* / THE RESPONDENT. 3. 9 ( ) / THE CIT(A)- 4. 9 / CIT 5. !:7 +/ / DR ITAT MUMBAI 6. 7; < / GUARD FILE. 3 3 3 3 / BY ORDER !/ +/ //TRUE COPY// = == = / > > > > (DY./ASSTT. REGISTRAR) / ITAT MUMBAI