ITO 3(1)(3), MUMBAI v. EQUEST (INDIA) LTD, MUMBAI

ITA 5336/MUM/2009 | misc
Pronouncement Date: 15-07-2011 | Result: Dismissed

Appeal Details

RSA Number 533619914 RSA 2009
Assessee PAN AAACE2414P
Bench Mumbai
Appeal Number ITA 5336/MUM/2009
Duration Of Justice 1 year(s) 9 month(s) 28 day(s)
Appellant ITO 3(1)(3), MUMBAI
Respondent EQUEST (INDIA) LTD, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 15-07-2011
Appeal Filed By Department
Order Result Dismissed
Bench Allotted E
Tribunal Order Date 15-07-2011
Date Of Final Hearing 12-07-2011
Next Hearing Date 12-07-2011
Assessment Year misc
Appeal Filed On 17-09-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH E BEFORE SHRI PRAMOD KUMAR ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO JUDICIAL MEMBER ITA NO.5336/MUM/09 (ASSESSMENT YEAR : 2005-06) INCOME TAX OFFICER 3(1)(3) AAYAKAR BHAVAN M.K.ROAD MUMBAI. VS. M/S. EQUEST (INDIA) PVT. LTD. 75/77 PARK HOUSE ANNEXE WODE HOUSE ROAD COLABA MUMBAI-400 005 PAN : AAACE2414P APPELLANT. RESPONDENT. C.O. NO.122/MUM/2010 (IN ITA NO.5336/MUM/09) (ASST. YEAR 2005-06) M/S. EQUEST (INDIA) PVT. LTD. MUMBAI-400 005 VS. INCOME TAX OFFICER 3(1)(3) AAYAKAR BHAVAN M.K.ROAD MUMBAI. APPELLANT. RESPONDENT. ASSESSEE : MR. NISHANT THAKKAR. REVENUE : MR. C.G.K. NAIR. O R D E R PER PRAMOD KUMAR : ITA 5336/MUM/2009 : BY WAY OF THIS APPEAL ASSESSING OFFICER HAS CHALL ENGED CORRECTNESS OF CIT(A)S ORDER DATED 7 TH JULY 2009 FOR THE ASSESSMENT YEAR 2005-06 ON T HE FOLLOWING GROUNDS : ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) CIT(A) ERRED IN TREATING THE DIFFERENCE BETWEEN THE MARKET PRICE AS ON THE DATE OF CONVERSION OF SHARES INTO INVESTMENT AND THE ACTUAL SALE PRICE AS CAPITAL GAIN WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE HAS NOT HELD THE SHARES FOR LONG PERIOD AFTER CONVERSION. IN FACT THE SAME HAVE BEE N SOLD IN THE VERY SAME YEAR AND CAPITAL GAIN AT THE LOWER RATE OF TAX HAS BEEN CLAIMED. ITA NO.5336/MUM//09 & C.O. 122/MUM/2010 - 2 - ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LD. CIT(A) ERRED IN NOT APPRECIATING THE FACT THAT THE ASSSESS EES INTENTION OF CONVERTING STOCK-IN-TRADE OF SHARES INTO INVESTMENT WAS TO AVO ID THE DUE TAX LIABILITY. 2. BRIEFLY STATED THE MATERIAL FACTS OF THE CASE A RE LIKE THIS. THE ASSESSEE IS MAINLY ENGAGED IN THE BUSINESS OF OWNING AND MAINTAINING R ACE HORSES AS ALSO TRADING IN SHARES AND MUTUAL FUNDS. DURING THE COURSE OF ASSESSMENT PROC EEDINGS THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS ON 1.4.2004 CONVERTED A PAR T OF ITS SHARES AND MUTUAL FUND UNITS WHICH WERE HELD AS STOCK IN TRADE INTO INVESTMENTS . THE ASSESSING OFFICER FURTHER NOTED THAT OUT OF 29 SHARES/UNITS SHOWN AS INVESTMENTS THE AS SESSEE HAS SOLD A SUBSTANTIAL PART OF THESE HOLDINGS IN THE RELEVANT PREVIOUS YEAR ITSELF. THE SHORT COME CAPITAL GAINS ON THESE SALES WORKED OUT TO RS.63 70 701 OUT OF WHICH RS.18 99 9 44 RELATED TO SALES MADE PRIOR TO 1.10.2004 AND BALANCE RS.44 70 757 RELATED TO SALES MADE AFTER 1.10.2004 BUT BEFORE 31.3.2005. THESE FACTS ACCORDING TO THE ASSESSING OFFICER SHOW THAT ASSESSEES ACTION OF CONVERTING THESE HOLDINGS INTO INVESTMENTS WAS NOT BONA FIDE. THE ASSESSING OFFICER ALSO NOTED THAT THE ASSESSEE WAS NOT HAVING SEPARATE DEM AT ACCOUNT FOR THE SHARES HELD AS INVESTMENTS. IT WAS ALSO NOTED THAT BORROWED FUNDS WERE USED IN ACQUIRING SHARES WHICH ARE NOW CLAIMED TO HAVE BEEN HELD AS INVESTMENTS. THE I NTENTION TO HOLD SHARES FOR LONGER TERM AS PER THE ASSESSING OFFICER WAS NOT BORNE OUT OF MATERIAL ON RECORD. IT WAS IN THIS BACKGROUND THAT THE ASSESSING OFFICER REJECTED ASSE SSEES CLAIM OF CAPITAL GAIN ON SALE OF SHARES CLAIMED TO HAVE BEEN CONVERTED INTO INVESTME NTS AND PROCEEDED TO TAX THE SAME AS BUSINESS PROFITS. AGGRIEVED ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A) WHO REVERSED THE ACTION OF THE ASSESSING OFFICER BY OBS ERVING AS FOLLOWS : 9.3 I HAVE GONE THROUGH THE INFORMATION ON REC ORD AND STATEMENTS SUBMITTED BY THE APPELLANT. THE MOOT POINT IS WHETH ER THE ASSESSEE CAN CONVERT ITA NO.5336/MUM//09 & C.O. 122/MUM/2010 - 3 - HIS STOCK-IN-TRADE INTO INVESTMENTS WHICH IS RESULT ING IN TAX BENEFIT. THE ENTIRE ACTION OF THE ASSESSEE CAN BE EQUATED TO HE SOLD C ERTAIN SHARES HELD AS TRADING STOCK ON 01.04.2004 AND PURCHASED THE SAME SHARES A S INVESTMENTS ON THE SAME DATE. INSTEAD OF ACTUAL SALE AND PURCHASE OF SAME S HARES HE MADE ENTRIES IN THE BOOKS OF ACCOUNT TO THAT EFFECT. THE ASSESSEE IS NO T PREVENTED BY ANY LAW FROM CONVERTING HIS TRADING STOCK TO INVESTMENT. WHAT IS IMPORTANT TO NOTE IS SUCH CONVERTED SHARES WERE HELD FOR CONSIDERABLE LONG TI ME AS EVIDENT FROM THE STATEMENTS SUBMITTED BY THE APPELLANT. THE QUANTUM OF CAPITAL GAIN YEAR WISE ARE AS UNDER:- A.Y. AMOUNT 2005-06 RS.47 03 515/- (STCG) 2006-07 RS.94 07 463/- (LTCG) 2007-08 RS.16 05 788/- (LTCG) KEEPING IN VIEW THE DIFFERENCE OF TIME BETWEEN THE DATE OF PURCHASE AND DATE OF SALE IS CONSIDERABLY LONG. I CONSIDER THE DECISION OF THE ASSESSEE TO CONVERT HIS SHARES TO INVESTMENT IS BONA FIDE. KEEPING IN VIEW THE DISCUSSION I DO NOT FIND ANY R EASON TO DISTURB THE COMPUTATION MADE BY THE ASSESSEE WHEREIN THE DIFFE RENCE BETWEEN ACTUAL COST PRICE AND THE MARKET PRICE AS ON DATE OF CONVERSION WAS TREATED AS BUSINESS PROFIT AND THE DIFFERENCE BETWEEN THE MARKET PRICE AS ON THE DATE OF THE CONVERSION AND THE ACTUAL SALE PRICE AS CAPITAL GAI N. 9.4 DURING THE COURSE OF APPELLATE PROCEEDINGS THE APPELLANT HAS AMENDED GROUND OF APPEAL NO.6 AS UNDER : THE ASSESSING OFFICER OUGHT TO HAVE ASSESSED AS CA PITAL GAINS THE PROFIT ON SALE OF SHARES HELD AS INVESTMENTS AT THE TIME OF S ALE TO BE COMPUTED WITH REFERENCE TO THE ACTUAL COST INCURRED BY THE APPELL ANTS FOR PURCHASE OF SUCH SHARES CONVERTED FROM STOCK IN TRADE INTO INVESTME NTS AS ON 01.04.2004. YOUR APPELLANTS SUBMIT THAT ON THE FACTS AND IN TH E CIRCUMSTANCES OF THEIR CASE PROFIT ON SALE OF INVESTMENTS CONVERTED FROM STOCK IN TRADE TO BE COMPUTED WITH REFERENCE TO THE ACTUAL COST THEREOF INCURRED BY TH E APPELLANTS IS ASSESSABLE AS CAPITAL GAINS SHORT TERM OR LONG TERM DEPENDING UP ON THE PERIOD OF HOLDING OF SUCH INVESTMENT FROM THE DATE OF ACTUAL PURCHASE. YOUR APPELLANT CRAVES LEAVE TO ADD TO ALTER OR AM END THE AFORESTATED AMENDED GROUND OF APPEAL. 9.5 THE APPELLANT ALSO RELIED ON THE CASE OF ACIT V S. BRIGHT STAR INVESTMENTS PVT. LTD. WHEREIN THE HON'BLE TRIBUNAL HELD WHERE TRADING STOCK WAS CONVERTED TO INVESTMENTS. AND WHEN SUCH INVESTMENTS WERE SOLD THE DIFFERENCE BETWEEN ACTUAL COST AND SALE PRICE SHOULD BE TREATED AS CAP ITAL GAIN. THE APPELLANT ALSO ITA NO.5336/MUM//09 & C.O. 122/MUM/2010 - 4 - RELIED ON THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. JANNHAVE INVESTMENTS (P) LTD. 304 ITR 276 WHERE THE RATIO OF THE DECISION IN THE CASE OF BRIGHT STAR INVESTMENTS PVT. LTD. 24 SO T 288 (MUM) WAS UPHELD. 9.6 THE APPELLANTS GROUND CAN NOT BE ENTERTAINED A S ON THE DATE OF PURCHASE THE STOCKS WERE HELD AS STOCK IN TRADE. T HE DIFFERENCE AS PER ACTUAL COST PRICE AND MARKET PRICE TILL DATE OF CONVERSION SHOULD BE TAXED AS BUSINESS PROFIT. THEREFORE THE AMENDED GROUND OF APPEAL IS DISMISSED. 3. THE ASSESSING OFFICER IS NOT SATISFIED BY THE RE LIEF SO GIVEN BY THE CIT(A) AND IS IN APPEAL BEFORE US. 4. HAVING HEARD THE RIVAL CONTENTIONS AND HAVING PE RUSED THE MATERIAL ON RECORD WE ARE NOT REALLY INCLINED TO INTERFERE IN THE MATTER FOR THE SHORT REASON THAT WITH RESPECT OF SALE OF SHARES IN THE SUBSEQUENT YEAR OUT OF SHARES SO CON VERTED INTO INVESTMENT THE ASSESSING OFFICER HAS HIMSELF ACCEPTED THE CAPITAL GAINS. IT CANNOT OBVIOUSLY BE OPEN TO ASSESSING OFFICER TO ACCEPT THE CONVERSION OF STOCK IN TRADE INTO INVESTMENTS IN PART AND REJECT THE SAME IN PART. THE TREATMENT EXTENDED TO THE CONVERSION HAS TO BE CONSISTENT. THAT APART EVEN ON MERITS WE SEE NO REASONS TO INTERFERE IN THE WELL REASONED STAND OF THE CIT(A). NEITHER THERE IS ANYTHING COGENT ON RECORD TO SHOW LACK OF BONA F IDES NOR IS IT AT ALL NECESSARY TO HOLD INVESTMENTS AND STOCK IN TRADE IN SEPARATE DEMAT AC COUNTS. IN ANY CASE THERE HAS BEEN NO SUBSEQUENT PURCHASES OF THE SHARES HELD AS INVESTME NTS AND THAT WOULD INDICATE THAT ASSESSEE CEASED TO TRADE IN THE SAME. TAKING INTO ACCOUNT A LL THESE FACTS AS ALSO ENTIRETY OF THE CASE WE UPHOLD THE STAND OF THE CIT(A) AND DECLINE TO IN TERFERE IN THE MATTER. 5. THE APPEAL FILED BY THE ASSESSING OFFICER IS THU S DISMISSED. ITA NO.5336/MUM//09 & C.O. 122/MUM/2010 - 5 - C.O. NO.122/MUM/2010 6. THAT TAKES US TO THE CROSS OBJECTION FILED BY TH E ASSESSEE WHICH ALSO CHALLENGES CIT(A)S ORDER FOR THE ASSESSMENT YEAR 2005-06. 7. IN THE FIRST GROUND OF CROSS OBJECTION THE ASSE SSEE HAS RAISED THE FOLLOWING GRIEVANCE : THE CIT(A)-XXVIII MUMBAI ERRED IN DIRECTING THE ASSESSING OFFICER TO WORK OUT THE DISALLOWANCE U/S.14A OF THE I.T. AC T BY APPLYING THE PROVISIONS CONTAINED IN RULE 8D OF THE I.T. RULES IN RESPECT O F THE EXEMPTED INCOME. YOUR RESPONDENT SUBMITS THAT ON THE FACTS AND IN T HE CIRCUMSTANCES OF ITS CASE RULE 8D OF THE I.T. RULES IS NOT APPLICABLE F OR THE YEAR UNDER APPEAL. 8. LEARNED REPRESENTATIVES FAIRLY AGREE THAT THE IS SUE IS COVERED BY HONBLE BOMBAY HIGH COURTS JUDGMENT IN THE CASE OF 328 ITR 81 AND ACCORDINGLY MATTER IS REQUIRED TO BE REMITTED TO THE FILE OF THE ASSESSING OFFICER FOR F RESH ADJUDICATION IN THE LIGHT OF LAW SO LAID DOWN BY THEIR LORDSHIPS. ACCORDINGLY WE REMIT THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR FRESH ADJUDICATION AS SUCH. 9. GROUND NO.1 IS THUS ALLOWED FOR STATISTICAL PURP OSES IN THE TERMS INDICATED ABOVE. 10. IN GROUND NO.2 THE ASSESSEE HAS RAISED THE FOL LOWING GRIEVANCE : THE CIT(A)-XXVIII MUMBAI ERRED IN DISMISSING TH E GROUND OF APPEAL BEFORE HER THAT THE PROVISIONS OF SECTION 74 A(3) ARE NOT APPLICABLE IN THE CASE OF THE RESPONDENT. YOUR RESPONDENT SUBMITS THAT ON THE FACTS AND IN T HE CIRCUMSTANCES OF ITS CASE PROVISIONS OF SECTION 74A(3) OF THE I.T. ACT ARE NOT APPLICABLE IN THEIR CASE. 11. LEARNED REPRESENTATIVES FINALLY AGREE THAT THIS ISSUE IS COVERED AGAINST THE ASSESSEE BY TRIBUNALS ORDER IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEARS 1999-2000 AND 2000-01 ITA NO.5336/MUM//09 & C.O. 122/MUM/2010 - 6 - WHEREIN SPEAKING THROUGH ONE OF US (I.E. ACCOUNTAN T MEMBER) THE CO-ORDINATE BENCH OBSERVED AS FOLLOWS : HAVING CAREFULLY CONSIDERED FACTS OF THE CASE W E ARE OF THE CONSIDERED VIEW THAT BUSINESS ACTIVITY OF THE ASSESSEE IS TO OWN AN D MAINTAIN THE RACE HORSES SINCE THE DOMINANT PURPOSE OF ALL HIS ACTIVITIES IS TO AC QUIRE AND MAINTAIN THE RACE HORSES. THE ACTIVITY OF LEASING MARES FOR BREEDING ENTERING INTO LEASE OPTIONS AND ALL OTHER ACTIVITIES ARE WHOLLY INCIDENTAL TO A SSESSEES MAIN ACTIVITY OF OWNING AND MAINTAINING THE RACE HORSES. THE SALE OF HORSES BY THE A. IS ESSENTIALLY SALE OF RACING DISCARDS AS EVIDENT FROM THE FACT THAT DURI NG THE COURSE OF THIS HEARING AND DESPITE A SPECIFIC REQUISITION FROM US TO THAT EFFECT ASSESSEE COULD NOT POINT OUT A SINGLE CASE IN WHICH THE ASSESSEE HAS SOLD A RACE HORSE. IN CASE BREEDING OF HORSES WAS ITSELF AN ACTIVITY FOR COMMERCIAL GAINS IT WOULD HAVE MADE COMMERCIAL SENSE TO SELL SOME OF THE FOALS OR FILLI ES WHO ARE DOING WELL IN THE RACE COURSE BUT THAT HAS NOT HAPPENED. ONLY SUCH HORSE S ARE SOLD WHO DO NOT HAVE RACING POTENTIAL. WHEN BREEDING IS COMMERCIAL ACTIV ITY THERE CANNOT BE ANY JUSTIFICATION IN KEEPING THE BEST FOALS AND FILLIES UNSOLD. THE SALE OF HORSES IS THUS NOT THE MAIN PURPOSE BUT ESSENTIALLY INCIDENTAL ACT IVITY. IN THE CASE BEFORE US THEREFORE BREEDING OF HORSES CANNOT BE VIEWED AS A COMMERCIAL ACTIVITY IT IS ONLY INCIDENTAL TO THE ACTIVITY OF AS IS THE EXPRESSIO N IN SECTION 74A(3) OWNING AND MAINTAINING HORSES. THE WORDS ACTIVITY OF ARE N EITHER SUPERFLUOUS NOR UNINTENDED. TO OUR UNDERSTANDING THESE WORDS CONN OTE WIDE COVERAGE OF THE EXPENSES; THE EXPENSES NEED NOT ONLY BE FOR OWNING AND MAINTAINING THE RACE HORSES BUT CAN ALSO INCLUDE EXPENSES FOR THE ACTIV ITY OF OWNING AND MAINTAINING RACE HORSES. THIS WOULD INCLUDE ALL SUCH INCIDENTA L ACTIVITIES AS ARE SUBSERVIENT AND ESSENTIALLY LINKED TO OWNING AND MAINTAINING T HE HORSE RACES. THE EXPENSES ON BREEDING OF HORSES FOR THE PURPOSE OF AND AIMED AT OWNING AND DEVELOPING RACE HORSES IS THUS INCLUDED IN THE SCOPE OF SECTI ON 74A(3) OF THE ACT. NO DOUBT ONE OF THE MAIN OBJECTIVES OF THE ASSESSEE COMPANY IS BREEDING MAINTAINING AND RACING OF HORSES BUT THIS EXPRESSION IS ALSO TO BE VIEWED IN ITS SENSE AND VIEWED IN THIS PERSPECTIVE BREEDING AND MAINTAINING OF HO RSES IS ONLY TO THE EXTENT LINKED TO RACING OF HORSES. THE FACTS OF THE CASE ALSO DE MONSTRATE THIS. IN VIEW OF THESE DISCUSSIONS IN OUR CONSIDERED VIEW ACTIVITY OF BR EEDING OF HORSES CANNOT BE VIEWED AS AN INDEPENDENT COMMERCIAL ACTIVITY. WE A RE THEREFORE NOT INCLINED TO UPHOLD ASSESSEES CONTENTION THAT ASSESSEE WAS ENGA GED IN THE BUSINESS OF BREEDING OF HORSES. IN OUR CONSIDERED VIEW THE AS SESSEE WAS ENGAGED IN THE BUSINESS ACTIVITY OF OWNING AND MAINTAINING THE RAC E HORSES. THE NEXT QUESTION THEN IS WHETHER THE EXPENSES INC URRED BY THE ASSESSEE COULD BE SAID T BE CAPITAL EXPENDITURE AND WHETHER IT COULD BE SAID THAT THE BUSINESS OF THE ASSESSEE HAD COMMENCED. TO DECIDE WHETHER OR NOT A BUSINESS HAS COMMENCED IT IS NOT REALLY NECESSARY THAT EARNING OF REVENUES MU ST HAVE STARTED. LEARNED COUNSEL FOR THE ASSESSEES RELIANCE ON HON'BLE SUPR EME COURTS CONFIRMING THE GUJARAT HIGH COURT DECISION IN THE CASE OF SARABHAI MANAGEMENT CORP (SUPRA) IS ITA NO.5336/MUM//09 & C.O. 122/MUM/2010 - 7 - QUITE APPROPRIATE BECAUSE HON'BLE SUPREME COURT HAS APPROVED THIS PROPOSITION THEREIN. WE AGREE WITH THE LEARNED COUNSEL WITH I T IS NOT A GERMANE CONSIDERATION THAT THE ASSESSEE ;DID NOT EARN ANY R EVENUES IN THE RELEVANT PREVIOUS YEAR. THE AUTHORITIES BELOW WERE MISGUIDE D IN THEIR APPROACH. WE DECLINE TO APPROVE THE SAME. WHAT IS NECESSARY IN OUR CONSIDERED VIEW THAT THE ASSESSEE SHOULD START WORKING ON THE MAIN ACTIVITY FOR WHICH BUSINESS IS SET UP AND THE INFRASTRUCTURE TO DO SO SHOULD BE IN PLACE. IN THE COMPLEX WORLD OF BUSINESS IT TAKES A WHILE BEFORE THE RESULTS OF BU SINESS HAVING BEEN SET UP START MATERIALIZING. HOWEVER ONCE THE BUSINESS PROCESS IS SET ROLLING AND JUST BECAUSE THE ASSESSEE MAY STILL BE A STEP AWAY FROM THE CORE COMMERCIAL ACTIVITY IT CANNOT BE SAID THAT BUSINESS HAS NOT COMMENCED. BREEDING O F HORSES IS AN ESSENTIAL PART OF THE BUSINESS OF BREEDING OWNING AND MAINTAININ G RACE HORSES AND THAT ACTIVITY HAVING BEEN STARTED IN THE RELEVANT PREVIO US YEAR IT COULD NOT BE SAID THAT THE BUSINESS HAD NOT COMMENCED. THE ASSESSEE HAD AL SO ENTERED INTO OPTION ARRANGEMENTS AND THE PROCESS OF ACQUISITION OF RACE HORSES HAD ALSO THUS STARTED. ON THESE FACTS IN OUR CONSIDERED VIEW THE BUSINES S OF THE ASSESSEE HAD COMMENCED IN THE RELEVANT PREVIOUS YEAR. AS FOR TH E QUESTION WHETHER THE EXPENSES INCURRED BY THE ASSESSEE IN THIS YEAR COUL D BE SAID TO BE CAPITAL EXPENDITURE WE ARE NOT PERSUADED BY THE REASONING OF THE AUTHORITIES BELOW. THE EXPENSES INCURRED BY THE ASSESSEE ARE NOT DIRECTLY FOR THE PURPOSES OF ACQUISITION OF AN ASSET OR FOR ANY ENDURING BENEFIT BUT ONLY FACILITATE ACQUISITION OF AND DEVELOPING THE RACE HORSES. THE ASSESSEE HAS PAID LEASE CHARGES FOR THE MARES BUT IN CONSIDERATION THEREOF THE ASSESSEE ONLY GE TS THE MARES FOR A LIMITED PERIOD. THE LEASE OPTION CHARGES ALSO ONLY FACILIT ATE ASSESSEES ACQUISITION OF GOOD POTENTIAL RACE HORSES BUT CANNOT BE SAID TO BE PAYMENT FOR SUCH RACE HORSES BECAUSE EVEN AFTER ENTERING INTO OPTIONS ARRANGEME NT THE ASSESSEE HAS TO ACTUALLY PAY FOR FOALS OR FILLIES WHEN THE ASSESSEE SO ACQUIRES THE FOALS AND FILLIES IN EXERCISE OF THE OPTION. AS REGARDS PAYMENT FOR TRANSPORTATION CHARGES OF MARES MEDICAL COSTS AND TRAINING COSTS WE FIND TH AT THESE EXPENSES ARE OF INHERENTLY REVENUE NATURE IN THE ORDINARY COURSE OF ASSESSEES BUSINESS AND JUST BECAUSE THESE EXPENSES ARE LINKED TO SOME CAPITAL A SSET THESE EXPENSES CANNOT TAKE COLOUR OF CAPITAL EXPENDITURE. AS OBSERVED BY THE HONBLE MADRAS HIGH COURT IN THE CASE OF BUSH BOAKE ALLEN INDIA LTD. (1 35 ITR 306) THE ONLY MERIT OF SUCH AN ARGUMENT IS ITS APPARENT LOGICAL SIMPLICITY . ALTHOUGH THESE OBSERVATIONS WERE MADE IN THE CONTEXT OF LEGAL EXPENSES BEING VI EWED AS CAPITAL EXPENSES AS THE TRANSACTION FOR WHICH LEGAL EXPENSES WERE INCUR RED WAS IN THE CAPITAL FILED WE ARE OF THE VIEW THAT THESE OBSERVATIONS ARE EQUALLY RELEVANT IN THE PRESENT CONTEXT AND IT IS EQUALLY NOT POSSIBLE TO VIEW ALL THESE EX PENSES AS DERIVATE EXPENSES TAKING ITS COLOUR FROM THE TRANSACTIONS TO WHICH TH EY RELATE. AN EXPENSES RELATABLE TO A RACING HORSE CANNOT THEREFORE BE VIEWED AS A CAPITAL EXPENDITURE SIMPLY BECAUSE THE RACING HORSE IS TO BE VIEWED AS CAPITAL ASSET. THE DISALLOWANCE ON ACCOUNT OF EXPENSES BEING TREATED AS CAPITAL EXPENS ES THEREFORE DELETED. THAT TAKES US TO THE QUESTION WHETHER THE PROVISIO NS OF SUB-SECTION 74A(3) WILL BE ATTRACTED IN THIS YEAR. IT IS INTERESTING TO NOTE THAT THIS SECTION BEGINS WITH THE ITA NO.5336/MUM//09 & C.O. 122/MUM/2010 - 8 - WORDS IN THE CASE OF AN ASSESSEE BEING AN OWNER OF HORSES MAINTAINED BY HIM FOR RUNNING IN HORSE RACES AND THEREFORE THE PROVI SIONS OF THIS SUB SECTION CAN ONLY COME INTO PLAY WHEN THE ASSESSEE IS A OWNER OF RACE HORSES ALTHOUGH ONCE AN ASSESSEE IS FOUND TO BE COVERED BY THIS EXPRESSI ON THE SPECIAL TREATMENT IS NOT CONFINED TO EXPENSES ON OWNING AND MAINTAINING THE RACE HORSES BUT IS EXTENDED TO THE ACTIVITY OF OWNING AND MAINTAINING RACE HO RSES. IN THE PRESENT YEAR IT IS NOT EVEN THE CASE OF THE REVENUE THAT THE ASSESSEE OWNED ANY RACE HORSES. THEREFORE FOR THIS ASSESSMENT YEAR AND PARTICULARL Y BEARING IN MIND THE FACT THAT THE ASSESSEE DID NOT OWN ANY RACE HORSES THE PROVI SIONS OF SUB SECTION 74A(3) DO NOT COME INTO PLAY. WE HOLD SO. 12. GROUND NO.2 IS THUS DISMISSED. 13. IN GROUND NO.3 THE ASSESSEE HAS RAISED THE FOL LOWING GRIEVANCE : THE CIT(A) ERRED IN DISMISSING THE AMENDED GROU ND OF APPEAL BEFORE HER THAT THE CAPITAL GAINS OUGHT TO HAVE BEEN COMPU TED WITH REFERENCE TO THE ACTUAL COST INCURRED BY THE RESPONDENT FOR PURCHASE OF SUCH SHARES CONVERTED FROM STOCK-IN-TRADE INTO INVESTMENTS AS ON 1.4.2004 WITHOUT BIFURCATING THE GAINS INTO PROFITS OF BUSINESS UP TO THE DATE OF CO NVERSION AND CAPITAL GAINS THEREAFTER. YOUR RESPONDENT SUBMITS THAT ON THE FACTS AND IN TH E CIRCUMSTANCES OF THEIR CASE THE ENTIRE GAINS FROM THE DATE OF ACTUAL PURC HASE TO THE DATE OF SALE OUGHT TO HAVE COMPUTED AS CAPITAL GAINS WITH REFERE NCE TO ACTUAL COST OF PURCHASE. 14. LEARNED REPRESENTATIVES ALSO AGREE THAT THIS IS SUE IS ALSO COVERED THIS TIME IN FAVOUR OF THE ASSESSEE BY TRIBUNALS DECISION IN THE CASE OF ACIT VS. BRIGHT STAR INVESTMENTS PVT. LTD. (24 SOT 288) AND HONBLE BOMBAY HIGH COURTS J UDGMENT IN THE CASE OF CIT VS. JANNHAVI INVESTMENTS (P) LTD. (304 ITR 276). WE A CCORDINGLY DIRECT THE ASSESSING OFFICER TO COMPUTE THE CAPITAL GAINS BY TAKING INTO ACCOUNT ORIGINAL COST OF ACQUISITION AND WITHOUT SPLITTING THE GAINS INTO PROFITS TILL THE DATE OF C ONVERSION AND CAPITAL GAIN THEREAFTER. THE ASSESSEE GETS THE RELIEF ACCORDINGLY. 15. GROUND NO.3 IS ALLOWED. 16. IN THE RESULT CROSS OBJECTION IS PARTLY ALLOWE D IN THE TERMS INDICATED ABOVE. ITA NO.5336/MUM//09 & C.O. 122/MUM/2010 - 9 - 17. TO SUM UP WHILE APPEAL OF THE ASSESSING OFFICE R IS DISMISSED THE CROSS OBJECTION FILED BY THE ASSESSEE IS PARTLY ALLOWED IN THE TERM S INDICATED ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 15.07.2011. SD/- SD/- (VIJAY PAL RAO) (PRAMOD KUMAR) JUDICIAL MEMBER ACC OUNTANT MEMBER MUMBAI DT.15.07.2011. *GPR TRUE COPY COPY TO : 1. THE ASSESSEE. 2. THE ASSESSING OFFICER. 3. CIT(APPEALS) 4. CIT 5. DEPARTMENTAL REPRESENTATIVE ITAT MUMBAI. 6. GUARD FILE. BY ORDER DY./ASST.REGISTRAR ITAT MUMBAI