M/S. HAREN MAHASUKHLAL SHETH, MUMBAI v. THE DCIT 14(2), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH H MUMBAI BEFORE SHRI R.S.PADVEKAR JM & SHRI RAJENDRA SINGH AM & I.T.A.NO.6207/MUM/2007 - A.Y 2004-05 HAREN MAHASUKHLAL SHETH 59/60/61 KRISHNA GALLI SWADESHI MARKET KALBADEVI RD. MUMBAI 400 002. PAN NO.AADPS 1557 P VS. DY. COMMISSIONER OF I.T. 14(2) MUMBAI (APPELLANT) (RESPONDENT) ASSESSEE BY : NONE REVENUE BY : SHRI SOMOGYAN PAL. O R D E R PER RAJENDRA SINGH AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER DATED 2/8/2007 OF THE CIT[A] FOR THE A.Y 2004-05. THE AS SESSEE IN THIS APPEAL HAS RAISED DISPUTE ON TWO DIFFERENT GROUNDS. 2. THE FIRST DISPUTE IS REGARDING DISALLOWANCE OF I NTEREST. THE AO HAD MADE THE DISALLOWANCE ON THE GROUND THAT NO DET AILS WERE FILED. THE ASSESSEE SUBMITTED BEFORE THE CIT[A] THAT IT H AD FILED THE LEDGER ACCOUNT OF THE RESPECTIVE PARTIES ALONG WITH PHOTO COPY OF BANK PASS BOOK REFLECTING CREDIT OF THE SAID INTEREST BEFORE THE AO. IT WAS ALSO SUBMITTED THAT AO HAD MADE DOUBLE ADDITION FIRSTLY U/S.68 ALONG WITH THE ADDITION ON ACCOUNT OF UNSECURED LOANS AND SECO NDLY BY WAY OF DISALLOWANCE OF INTEREST. IT WAS POINTED OUT THAT T HE ASSESSEE HAD CLAIMED DEDUCTION OF INTEREST AGAINST SHORT TERM CA PITAL GAIN WHICH WAS NOT CORRECT AND THE ASSESSEE HAD REVISED THE COMPUT ATION MAKING CLAIM OF DEDUCTION AGAINST THE INTEREST INCOME. THE CIT[A] OBSERVED 2 THAT THE ASSESSEE HAD CLAIMED DEDUCTION OF INTEREST AGAINST SHORT TERM CAPITAL GAIN WHICH WAS NOT ALLOWABLE AS NO BORROWE D FUNDS WERE UTILIZED FOR PURCHASE AND SALE OF SHARES. THE ALTER NATE CLAIM OF DEDUCTION AGAINST THE INTEREST INCOME FROM THE FIRM M/S. M. L. BUILDERS WHERE THE LOAN OF RS.25 LAKHS TAKEN FROM 14 PARTIES HAD BEEN TRANSFERRED TO THE CAPITAL ACCOUNT WAS ALSO NOT MA INTAINABLE. FIRSTLY THERE WAS NO NEXUS BETWEEN THE FUNDS BORROWED AND U SED FOR THE PURPOSE OF BUSINESS. SECONDLY THE SHARE OF PROFIT FROM THE PARTNERSHIP FIRM WAS EXEMPT AND THEREFORE INTEREST IF ANY P AID ON BORROWED FUNDS FOR THE PURPOSE OF INVESTMENT IN THE PARTNERS HIP FIRM WAS NOT ALLOWABLE AS DEDUCTION IN VIEW OF PROVISIONS OF SEC .14A. THE CIT[A] ACCORDINGLY CONFIRMED THE DISALLOWANCE. 3. BEFORE US NO ONE APPEARED TO REPRESENT THE CAS E ON BEHALF OF THE ASSESSEE THOUGH THE NOTICE HAD BEEN GIVEN WELL IN TIME. WE THEREFORE PROCEED TO DECIDE THE APPEAL ON THE BASI S OF MATERIAL AVAILABLE ON RECORD AND AFTER HEARING THE LD. DR W HO PLACED RELIANCE ON THE ORDERS OF THE AUTHORITIES BELOW. 4. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE M ATTER CAREFULLY. THE DISPUTE IS REGARDING DISALLOWANCE O F INTEREST WHICH HAD BEEN CLAIMED AS DEDUCTION AGAINST INTEREST INCOME E ARNED FROM THE PARTNERSHIP FIRM M/S M.L.BUILDERS IN WHICH THE ASSE SSEE WAS A PARTNER. THE CIT[A] HAS GIVEN A CLEAR FINDING THAT THERE IS NO NEXUS BETWEEN THE FUNDS BORROWED AND ITS USER FOR THE PURPOSE OF BUSINESS. SECONDLY EVEN IF THE BORROWED FUNDS WERE USED FOR INVESTMENT IN THE FIRM THE INCOME OF THE ASSESSEE FROM THE INVESTMENT IN THE F IRM IS EXEMPT AND 3 THEREFORE INTEREST COULD NOT BE ALLOWED AS DEDUCTI ON. UNDER THE CIRCUMSTANCES WE SEE NO INFIRMITY IN THE ORDER OF THE CIT[A] CONFIRMING THE DISALLOWANCE OF INTEREST AND THE SA ME IS ACCORDINGLY UPHELD. 5. THE SECOND DISPUTE IS REGARDING THE DECISION OF THE CIT[A] TREATING THE SHORT TERM CAPITAL GAINS AS BUSINESS I NCOME. THE ASSESSEE HAD EARNED TOTAL SHORT TERM CAPITAL GAINS OF RS.30 12 771/- WHICH CONSISTED OF SHORT TERM CAPITAL GAINS OF RS.28 49 4 68/- EARNED THROUGH THE SERVICES OF THE PORTFOLIO MANAGER I.E. M/S ASK RAYMOND JAMES SECURITIES PVT. LTD. AND THE NET SHORT TERM CAPITA L GAIN OF RS.1 62 902/- AFTER ADJUSTMENT OF SHORT TERM CAPITA L LOSS OF RS.5 58 875/- ON ACCOUNT OF SALE OF SHARES THROUGH THE BROKER M/S EMKAY SHARES & STOCK BROKERS. AFTER DEDUCTION OF TH E DEMAT EXPENSES OF RS.11 752/- AND INTEREST ON LOANS AT RS.2 08 762 /- THE ASSESSEE HAD DECLARED THE SHORT TERM CAPITAL GAINS OF RS.27 92 2 57/-. THE AO HAD ACCEPTED THE CLAIM OF SHORT TERM CAPITAL GAINS. CIT [A] HOWEVER ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE SHORT TERM CA PITAL GAINS SHOULD NOT BE TREATED AS BUSINESS INCOME. THE ASSESSEE EXP LAINED THAT IT HAS MADE PURCHASE AND SALE OF SHARES AS INVESTMENT AND THEREFORE THE INCOME HAD TO BE ACCEPTED AS CAPITAL GAIN. CIT[A] HOWEVER OBSERVED THAT THE ASSESSEE HAD CONDUCTED FREQUENT AND SUBSTA NTIAL TRANSACTIONS IN PURCHASE AND SALE OF SHARES AND HAD ALSO UTILIZE D THE SERVICES OF AN EXPERT PORTFOLIO MANAGER WHO HAD CHARGED FEES FOR GIVING SERVICES. CONSIDERING THE FREQUENCY OF PURCHASE AND SALE OF S HARES AND USE OF SERVICES OF PORTFOLIO MANAGER CIT[A] HELD THAT IN COME HAD TO BE 4 TREATED AS BUSINESS INCOME. SINCE THE BORROWED FUND S WERE NOT UTILIZED FOR THE PURPOSES OF PURCHASE AND SALE OF SHARES CI T[A] DISALLOWED THE CLAIM OF DEDUCTION OF INTEREST OF RS.2 08 762/- AND THUS ASSESSED THE INCOME FROM PURCHASE AND SALE OF SHARES OF RS.30 01 019/- AS BUSINESS INCOME AGGRIEVED BY THE SAID DECISION THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 6. BEFORE US NO ONE APPEARED ON BEHALF OF THE ASSES SEE. WE HAVE HEARD THE LD. DR PERUSED THE RECORDS AND CONSIDERE D THE MATTER CAREFULLY. THE CIT[A] HAS GIVEN A CLEAR FINDING TH AT THE ASSESSEE HAF CONDUCTED AN ORGANIZED ACTIVITY IN PURCHASE AND SAL E OF SHARES BY USING SERVICES OF PORTFOLIO MANAGER. HE HAS ALSO GI VEN A FINDING THAT FREQUENCY OF TRANSACTION WAS LARGE AND AMOUNTS INVO LVED WERE SUBSTANTIAL AND THERE IS NO MATERIAL BEFORE US TO C ONTROVERT THE SAID FINDING. THEREFORE WE DO NOT SEE ANY INFIRMITY IN THE ORDER OF THE CIT[A] TREATING THE SAID TRANSACTIONS AS BUSINESS ACTIVITY OF THE ASSESSEE. ACCORDINGLY THE ORDER OF THE CIT[A] IS UPHELD. 7. IN THE RESULT APPEAL OF THE ASSESSEE IS DISMIS SED. ORDER PRONOUNCED ON THIS 30 TH DAY OF APRIL 2010. SD/- SD/- (R.S.PADVEKAR) (RAJENDRA SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI: 30 TH APRIL 2010. P/-* 5