VINOD K. NEVATIA, MUMBAI v. ACIT 4(2), MUMBAI

ITA 6556/MUM/2009 | 2005-2006
Pronouncement Date: 03-12-2010 | Result: Partly Allowed

Appeal Details

RSA Number 655619914 RSA 2009
Assessee PAN AAEPN8175H
Bench Mumbai
Appeal Number ITA 6556/MUM/2009
Duration Of Justice 11 month(s) 11 day(s)
Appellant VINOD K. NEVATIA, MUMBAI
Respondent ACIT 4(2), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 03-12-2010
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted F
Tribunal Order Date 03-12-2010
Date Of Final Hearing 27-10-2010
Next Hearing Date 27-10-2010
Assessment Year 2005-2006
Appeal Filed On 23-12-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH F MUMBAI BEFORE SHRI S.V. MEHROTRA ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO JUDICIAL MEMBER I.T.A.NO. 6556/MUM/2009 ASSESSMENT YEAR : 2005-06 SHRI VINOD K. NEVATIA 165 SHREE SADAN SION (EAST) MUMBAI 400 022. PAN: AAEPN 8175 H VS. THE ASST. COMMISSIONER OF INCOME- TAX AAYAKAR BHAVAN R.NO. 647 M.K. ROAD MUMBAI 400 020. (APPELLANT) (RESPONDENT) I.T.A.NO. 181/MUM/2010 ASSESSMENT YEAR : 2005-06 THE ASST. COMMISSIONER OF INCOME- TAX AAYAKAR BHAVAN R.NO. 647 M.K. ROAD MUMBAI 400 020. VS. SHRI VINOD K. NEVATIA 165 SHREE SADAN SION (EAST) MUMBAI 400 022. PAN: AAEPN 8175 H (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI S.C.TIWARI RESPONDENT BY : SHRI P. PEERYA O R D E R PER S.V. MEHROTRA AM: THESE CROSS APPEALS BY THE ASSESSEE AND THE REVENU E ARE DIRECTED AGAINST THE IMPUGNED ORDER DATED 21.10.2009 PASSED BY THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS)-VIII MUMBAI FOR THE ASSESSME NT YEAR 2005-06. ITA NO.181/MUM/2010 (REVENUES APPEAL) 2. THE GROUNDS TAKEN BY THE REVENUE READ AS UNDER: 1 (I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(A) ERRED IN DELETING THE DISALLOWANCE O F VSAT LEASELINE AND TRANSACTION CHARGES OF RS. 2 21 755/- U/S.40(A)(IA) WITHOUT APPRECIATING THE FACTS THAT THESE WERE COMPOSITE CHARGES FOR PRO FESSIONAL AND TECHNICAL ITA NO.6556/M/09 & 181/M/10 VINOD K. NEVATIA 2 SERVICES RENDERED BY THE STOCK EXCHANGE TO ITS MEMB ERS AND THE ASSESSEE HAS FAILED TO DEDUCT TDS THEREON. (II) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW THE THE LD.CIT(A) ERRED IN IGNORING THE FACT THAT THESE SER VICES ARE ESSENTIAL IN NATURE AS THEY CAN ONLY BE AVAILED BY MEMBERS OF ST OCK EXCHANGE. (III) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD.CIT(A) ERRED IN IGNORING THE FACTS THAT USE OF T ECHNOLOGY AND ALGORITHMIC BASED PROGRAMS HAVE CONVERTED AN ERSTWH ILE PHYSICAL MARKET INTO A DIGITALLY OPERATED MARKET. (IV) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW THE LD.CIT(A) ERRED IN IGNORING THE FACT THAT THE SERVI CES RENDERED BY THE BROKERS ARE NOT STANDARD SERVICES THAT HAS BEEN DEV ELOPED TO CATER TO THE NEEDS OF THE BROKER COMMUNITY TO FACILITATE TRADING . (V) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LD.CIT(A) HAS OVERLOOKED THE FACT THAT THE BROKERS HAVE IN SUBSEQUENT YEARS THEMSELVES STARTED DEDUCTING THE TDS ON SUCH PAYMENTS AND THERE IS NO REASON TO VIVE A DIFFERENT TREATMENT IN THIS YEAR. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LD.CIT(A) ERRED IN TREATING RS.47 23 828/- AS CAPIT AL GAIN AS AGAINST BUSINESS INCOME TREATED BY THE A.O. SINCE THE ASSES SEE IS TRADER AND NOT INVESTOR WITHOUT APPRECIATING MULTIPLICITY OF TRANS ACTIONS. 3. THE ASSESSEE AN INDIVIDUAL A MEMBER OF THE NAT IONAL STOCK EXCHANGE AND PROPRIETOR OF M/S. GAURAV TRADING COMPANY IN T HE RELEVANT ASSESSMENT YEAR WAS ENGAGED IN THE BUSINESS OF SHARE TRADING AND SE CURITIES. HE FILED HIS RETURN OF INCOME DECLARING TOTAL INCOME OF RS. 2 12 77 512/-. THE A.O. DETERMINED THE TOTAL INCOME AT RS. 2 24 50 205/- INTER ALIA MAKING THE FOLLOWING DISALLOWANCES: (A) DISALLOWANCE U/S.40(A)(IA) ON ACCOUNT OF VSAT CHARGES ITA NO.6556/M/09 & 181/M/10 VINOD K. NEVATIA 3 PAID TO NATIONAL STOCK EXCHANGE (I) LEASELINE CHARGES .. RS. 67 828 (II) TRANSACTION CHARGES .. RS. 57 927 (B) DISALLOWANCE U/S.14A RS. 4 69 413 (C) TREATING INCOME BY WAY OF CAPITAL GAINS AS BUSINESS INCOME RS.47 23 828 THE AO NOTICED THAT THESE CHARGES ARE PAYABLE TO ST OCK EXCHANGE ON ACCOUNT OF SERVICES PROVIDED BY IT WITH REGARD TO THE TRANSACT IONS IN SECURITIES THROUGH THE EXCHANGE. HE OBSERVED THAT AS PER THE PROVISIONS OF SECTION 40(A)(IA) NO DEDUCTION IS TO BE ALLOWED UNLESS TAX HAS BEEN DEDUCTED AT SO URCE FROM THE PAYMENTS MADE FOR TECHNICAL SERVICES AS PER THE PROVISIONS CONTA INED UNDER CHAPTER-XVII-B OF THE ACT. HE EXAMINED THE NATURE OF SERVICES RENDERED B Y THE STOCK EXCHANGE AND CONCLUDED THAT THEY WERE IN THE NATURE OF TECHNICAL SERVICES RENDERED BY THE STOCK EXCHANGE AND THEREFORE TAX WAS DEDUCTIBLE UNDER SE CTION 194 OF THE ACT. HE THEREFORE DISALLOWED THE ASSESSEES CLAIM OF RS.2 21 755/-. THE LEARNED CIT(A) DELETED THE ADDITION BY FOLLOWING THE DECISION OF T HE I.T.A.T MUMBAI IN ITA NO.1955/MUM/2008 FOR THE ASSESSMENT YEAR 2005-06 IN THE CASE OF KOTAK SECURITIES PVT. LTD. VIDE ORDER DATED 26 TH AUGUST 2008 WHEREIN IT HAS BEEN HELD THAT STOCK EXCHANGE DOES NOT PROVIDE MANAGERIAL SER VICES AND THE FEES PAID BY A MEMBER TO THE STOCK EXCHANGE IS NOT FOR ANY TECHN ICAL SERVICES AND THEREFORE NO TDS WAS DEDUCTIBLE FROM THE ASSESSEE. 4. HAVING HEARD BOTH THE PARTIES WE FIND NO REASON TO INTERFERE WITH THE ORDER OF THE CIT(A) IN VIEW OF THE DECISION OF THE I.T.A.T IN THE CASE OF KOTAK SECURITIES LTD. V. ADDL.CIT(2009) 318 ITR (AT) 2268 (MUM) WHEREIN IT HAS BEEN HELD THAT TRANSACTION FEES PAID TO THE STOCK EXCHA NGE COULD NOT BE SAID TO BE A FEES PAID IN CONSIDERATION OF STOCK EXCHANGE RENDER ING ANY TECHNICAL SERVICES TO THE ASSESSEE. THE PROVISIONS OF SECTION 9(1)(VII) E XPLANATION 2 WERE THEREFORE NOT ATTRACTED. THEREFORE THERE WAS NO OBLIGATION O N THE PART OF THE ASSESSEE TO ITA NO.6556/M/09 & 181/M/10 VINOD K. NEVATIA 4 DEDUCT TAX AT SOURCE. CONSEQUENTLY THE PROVISIONS OF SECTION 40(A)(IA) WERE ALSO NOT ATTRACTED AND THEREFORE THE DISALLOWANCE MADE W AS DELETED. IN VIEW OF THE ABOVE DECISION OF THE TRIBUNAL WE DECIDE THIS ISSU E IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 5. THE SECOND GROUND IS THAT THE LEARNED CIT(A) ERR ED IN TREATING RS.47 23 828/- AS CAPITAL GAINS AS AGAINST BUSINESS INCOME TREATED BY THE AO AS THE ASSESSEE IS A TRADER. BRIEF FACTS APROPOS THE I SSUE ARE THAT THE ASSESSEE IN THE RELEVANT ASSESSMENT YEAR CARRIED ON THE BUSINESS AS SHARE BROKER OF NATIONAL STOCK EXCHANGE AND CARRIED ON THE BUSINESS IN THE NAME AN D STYLE OF M/S. GAURAV TRADING CO. THE A.O. NOTICED THAT ASSESSEE HAD RETU RNED SHORT TERM CAPITAL GAINS OF RS. 47 23 8928/-. HE NOTED THAT THE ASSESSEE HAD PURCHASED SHARES DURING THE YEAR AMOUNTING TO RS. 4.21 CRORE. HE NOTED THAT IN THE IMMEDIATELY PRECEDING YEAR THE ASSESSEE HAD PURCHASED SHARES OF RS.3.49 CRORES AND SOLD SHARES WORTH 1.81 CRORES. THUS HE CONCLUDED THAT THE PURCHASE TO SA LE RATIO DURING THE YEAR WAS CONSIDERABLY HIGHER THAN THE RATIO DURING THE IMMED IATELY PRECEDING YEAR. HE FURTHER NOTED THAT DURING THE YEAR ASSESSEE HAD BO RROWED FUNDS. HE EXAMINED IN DETAIL VARIOUS CASE LAWS LAYING DOWN PRINCIPLES TO DECIDE WHETHER AN INDIVIDUAL IS TRADER OR INVESTOR IN SHARES AND EXAMINED THE FACTS QUA THESE PRINCIPLES. HE NOTED THAT THE ASSESSEES CONTENTION WAS THAT THE FUNDS W ERE BORROWED FOR CONDUCTING THE BUSINESS ON NATIONAL STOCK EXCHANGE. HOWEVER SINCE THE FUNDS WERE COMMON AND COULD NOT BE SEGREGATED AS NO EVIDENCE HAD BEEN ADDUCED WITH REGARD TO THE FACT THAT THE INTEREST FREE FUNDS WERE USED TO FUND INVESTMENTS IN SHARES HE CONCLUDED THAT BORROWED FUNDS WERE UTILIZED FOR MAK ING INVESTMENT IN SHARES. HE NOTED THAT THE TOTAL LOAN TAKEN DURING THE YEAR WA S TO THE EXTENT OF RS.21 73 31 027/. HE THEREFORE CONCLUDED THAT THE RECORDINGS MADE IN THE BOOKS OF ACCOUNT WERE CAMOUFLAGING DEVICES TO HIDE THE RE AL INTENT. HE POINTED OUT THAT ITA NO.6556/M/09 & 181/M/10 VINOD K. NEVATIA 5 THE ASSESSEE HAD NOT BEEN ABLE TO SHOW HIS INTENT T O HOLD ON THE SCRIPS. HE SUMMED HIS FINDING IN PARA 7.4 AT PAGE 13 AS UNDER: (I) THE ASSESSEE IS A BROKER AND A TRA DER AS PER THE AUDIT REPORT. THE TRANSACTIONS IN SHARES HAVE BEEN DONE IN THE ORDINA RY COURSE OF ASSESSEES BUSINESS. THE DECISION OF HONBLE SUPREM E COURT IN THE CASE OF CT V. SUTLEJ COTTON MILLS (100 ITR 706) IS SQUARELY APPLICABLE TO THE FACTS OF THE CASE WHEREIN THE COURT HAS HELD IF THE TRANSACTION IS IN THE ORDINARY COURSE OF ASSESSEES BUSINESS THERE CAN BE LITTLE DIFFICULTY IN HOLDING THAT IT IS IN THE N ATURE OF TRADE. (II) SECONDLY IT IS A WELL SETTLED PRIN CIPLE OF LAW THAT EVEN A SINGLE TRANSACTION CAN BE IN THE NATURE OF TRAD. IN OUR CA SE THE ASSESSEE HAS UNDERTAKEN NUMEROUS TRANSACTIONS. IN VIEW OF THE MU LTIPLICITY OF TRANSACTIONS THE ASSESSEE IS TREATED AS A TRADER. R ELIANCE IS PLACED ON THE DECISION OF HONBLE APEX COURT IN THE CASE OF A SSOCIATED INDUSTRIAL DEVELOPMENT CO.(P) LTD. (82 ITR 586) (III) FURTHER THE BENCHMARKS OF DISTINC TION BETWEEN A TRADER AND A INVESTOR AS PUT FORTH BY THE ROYAL COMMISSION IN ITS REPORT ARE CLEARLY APPLICABLE ON THE ASSESSEE: (A) THE ASSESSEE DEALS IN COMMODITIES OR SHARES WHICH A RE A SUBJECT MATTER OF TRADING AND ARE VERY EXCEPTIONALLY A SUBJ ECT MATTER OF INVESTMENT ESPECIALLY IN CASE WHERE TRADING IN SHAR ES IS THE PREDOMINANT SOURCE OF INCOME. (B) AS LAID DOWN BY ROYAL COMMISSION USUALLY PROFITS O N SUCH A PROPERTY ARE REALIZED IN SHORT PERIOD OF TIME. THIS IS TRUE IN THE CASE OF ASSESSEE AS ALREADY DISCUSSED ABOVE. (C) FURTHER THERE IS NO DISCERNIBLE REASON OF PURCHASE AND SALE. THAT IS THE ASSESSEE ACQUIRED SHARE TO HAVE SUBSTANTIAL STA KES IN THE COMPANY OR SOLD THEM BECAUSE HE WAS IN DIRE NEED OF MONEY. NO SUCH REASON EXISTS. THE SALE AND PURCHASE HAS BEEN DETERMINED BY THE VOLATILITY AT THE MARKETS WHICH IS AGAINST THE BASIC FEATURE OF AN INVESTOR WHO IS RECOGNIZED BY THE DISCIPLINE HE DIS PLAYS IN THE MARKET AND IS NOT EASILY SWAYED BY THE MOVEMENTS OF THE MA RKET. (D) FINALLY THE FREQUENCY AND CONTINUITY IN THE NATURE OF SIMILAR TRANSACTIONS IS DEFINITELY INDICATIVE OF HIS INTENT I.E. TO TRADE. (IV) FURTHER DURING THE ASSESSMENT PROCEEDINGS IN THE A.Y. 2004-05 THE INCOME FROM SHORT TERM CAPITAL GAIN WAS TREATED AS BUSINESS INCOME AND THE ASSESSEE HAS NOT PREFERRED AN APPEAL AGAINS T THE DECISION. HE ACCORDINGLY TREATED THE SUM OF RS. 47 23 828 /- AS BUSINESS INCOME OF THE ASSESSEE. 6. BEFORE THE LEARNED CIT(A) THE CONCLUSION OF A.O. WA S ASSAILED FIRSTLY ON THE GROUND THAT IN MOST OF THE SCRIPS HELD IN THE FIELD OF THE INVESTMENT ACTIVITY ITA NO.6556/M/09 & 181/M/10 VINOD K. NEVATIA 6 THE PERIOD OF HOLDING BY THE ASSESSEE HAD BEEN SEVE RAL MONTHS AND YEARS AND NOT FEW DAYS ONLY AS CONCLUDED BY THE A.O. IT WAS POINT ED OUT THAT INVESTMENT TRANSACTIONS OF THE ASSESSEE WHERE SHARES OF A PART ICULAR COMPANY WERE SOLD WITHIN A FEW DAYS FROM PURCHASE WERE VERY FEW AND F AR BETWEEN. SECONDLY IT WAS POINTED OUT THAT THE ASSESSEE HAD BEEN MAINTAINING SEPARATE DEMAT ACCOUNTS OF INVESTMENT SHARES AND ONLY THE SHARES WHERE THE INT ENTION IS AN INVESTMENT ARE TAKEN INTO INVESTMENT DEMAT ACCOUNT. THUS THERE IS CLEAR DEMARCATION OF INVESTMENTS. THIRDLY THE ASSESSEE HAD OFFERED LONG TERM CAPITAL GAINS ON SALE OF SHARES AGGREGATING TO RS.2 37 29 464/- WHICH HAS BE EN ACCEPTED BY THE A.O. FOURTHLY FROM THE PERUSAL OF ANALYSIS OF PERIOD O F HOLDING OF SCRIPS YIELDING SHORT TERM CAPITAL GAINS IT WOULD BE CLEAR THAT THE ASS ESSEE HAD DEALT ONLY IN 14 SCRIPS. OUT OF THE TOTAL STCG OF RS. 4 723 827 SHORT TERM C APITAL GAINS AMOUNTING TO RS.3 582 813/- HAD ARISEN FROM THE TRANSACTIONS WHE RE THE HOLDING PERIOD WAS MORE THAN SIX MONTHS. LASTLY NO PART OF THE ASSESS EES INTEREST BEARING BORROWINGS WAS UTILIZED FOR ACQUISITION OF SHARES ON INVESTMEN T ACCOUNT. THE LEARNED CIT(A) ALLOWED THE ASSESSEES APPEAL TAKING NOTE OF THE FA CT THAT ASSESSEE HAD MAINTAINED SEPARATE PORTFOLIO OF SCRIPS AS STOCK IN TRADE OR I NVESTMENTS BY MAINTAINING SEPARATE DEMAT ACCOUNT FOR BOTH. HE ALSO TOOK INTO CONSIDERATION THE FACT THAT SHARE TRADING PERTAINING TO STOCK IN TRADE HAS BEEN DECLARED BY THE ASSESSEE AS BUSINESS INCOME AND THE A.O. HAD ACCEPTED THE ASSES SEES CLAIM WITH RESPECT TO LONG TERM CAPITAL GAIN OF RS. 2 37 29 463/-. 7. THE LEARNED DEPARTMENTAL REPRESENTATIVE REFERRED TO THE ASSESSMENT ORDER AND POINTED OUT THAT H HAS DISCUSSED IN DETAI L THE GUIDING PRINCIPLES LAID DOWN IN VARIOUS LAWS FOR DECIDING WHETHER THE ASSES SEE HAS BEEN DOING BUSINESS OF TRADING IN SHARE OR WAS HOLDING THE SAME AS INV ESTMENT. HE POINTED OUT THAT ASSESSEE HAD NOT FURNISHED ANY EVIDENCE BEFORE THE A.O. TO ESTABLISH THAT THE BORROWINGS MADE BY IT WERE ONLY FOR BUSINESS PURPOS ES AND NO BORROWED FUNDS ITA NO.6556/M/09 & 181/M/10 VINOD K. NEVATIA 7 WERE UTILIZED FOR MAKING THE ALLEGED INVESTMENTS IN SHARES. HE POINTED OUT THAT IN VARIOUS CASE LAWS IT HAS BEEN LAID DOWN THAT MULTI PLICITY OF TRANSACTION IS AN IMPORTANT FACTOR FOR DECIDING WHETHER THE ASSESSEE WAS CARRYING ON BUSINESS OR NOT. IN THIS REGARD HE REFERRED TO THE DECISION OF THE SUPREME COURT IN THE CASE OF RAJA BAHADUR VISHESHWAR SING V. CIT (41 ITR 685)(SC ) WHEREIN IT HAS BEEN HELD THAT MAGNITUDE AND FREQUENCY OF TRANSACTIONS AND TH E RATIO OF SALES TO PURCHASES IS AN IMPORTANT FACTOR FOR DECIDING WHETHER THE ASSES SEE WAS DEALER IN SHARES AND SECURITY OR NOT. LEARNED DR RELIED ON VARIOUS CASE LAWS REFERRED TO BY THE AO IN PARA 7.1 OF HIS ORDER. 8. LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE A.O. HAS RELIED ONLY ON TWO FACTORS VIZ. FREQUENCY OF TRANSACTION AND BO RROWING MADE BY THE ASSESSEE. HE POINTED OUT THAT THE ASSESSEE IS PRIMARILY CARRY ING ON THREE ACTIVITIES WHICH ARE AS UNDER: (1) REGULAR BROKERAGE BUSINESS; (2) TRADING IN SHARES AND (3) INVESTOR IN SHARES. HE POINTED OUT THAT FOR ALL THESE THREE ACTIVITIES ASSESSEE HAS MAINTAINED SEPARATE BOOKS OF ACCOUNT. FURTHER HE SUBMITTED THA T THE A.O. HAS NOT POINTED OUT EVEN A SINGLE INSTANCE REGARDING BORROWED FUNDS BEI NG USED FOR INVESTING IN SHARES. HE FURTHER POINTED OUT THAT AO HAS NOT CONS IDERED THE POSITION OF OPENING STOCK AND CLOSING STOCK. 9. THE LEARNED COUNSEL FOR THE ASSESSEE REFERRED TO CBDTS CIRCULAR NO. 4/2007 DATED 15.6.2007 WHEREIN IT HAS BEEN INTER ALIA OBSERVED AS UNDER: 4. THE CENTRAL BOARD OF DIRECT TAXES (CBDT) THROUG H INSTRUCTION NO. 1827 DATED AUGUST 31 1989 HAD BROUGHT TO THE NOTICE OF THE ASSESSING OFFICERS THAT THERE IS A DISTINCTION BETWEEN SHARES HELD AS INVESTMENT (CAPITAL ASSET) AND SHARES HELD AS STOCK-IN-TRADE (TRADING ASSET). IN THE LIGHT OF A NUMBER OF JUDICIAL DECISIONS PRONOUNCED AFTER THE ISSUE OF THE ABOVE INSTRUCTIONS IT IS PROPOSED TO UPDATE THE ABOVE INSTRUCTIONS FOR TH E INFORMATION OF ASSESSEE AS WELL AS FOR GUIDANCE OF THE ASSESSING O FFICERS. 5. IN THE CASE OF COMMISSIONER OF INCOME TAX (CENTR AL) CALCUTTA VS. ASSOCIATED INDUSTRIAL DEVELOPMENT COMPANY (P) LTD. (82 ITR 586) THE SUPREME COURT OBSERVED THAT : ITA NO.6556/M/09 & 181/M/10 VINOD K. NEVATIA 8 WHETHER A PARTICULAR HOLDING OF SHARES IS BY WAY O F INVESTMENT OR FORMS PART OF THE STOCK-IN-TRADE IS A MATTER WHICH IS WIT HIN THE KNOWLEDGE OF THE ASSESSEE WHO HOLDS THE SHARES AND IT SHOULD IN NOR MAL CIRCUMSTANCES BE IN A POSITION TO PRODUCE EVIDENCE FROM ITS RECORDS AS TO WHETHER IT HAS MAINTAINED ANY DISTINCTION BETWEEN THOSE SHARES WHI CH ARE ITS STOCK-IN- TRADE AND THOSE WHICH ARE HELD BY WAY OF INVESTMENT . 6. IN THE CASE OF COMMISSIONER OF INCOME TAX BOMBA Y VS. H. HOLCK LARSEN (160 ITR 67) THE SUPREME COURT OBSERVED: THE HIGH COURT IN OUR OPINION MADE A MISTAKE IN O BSERVING WHETHER TRANSACTIONS OF SALE AND PURCHASE OF SHARES WERE TR ADING TRANSACTIONS OR WHETHER THESE WERE IN THE NAME OF INVESTMENT WAS A QUESTION OF LAW. THIS WAS A MIXED QUESTION OF LAW AND FACT. 7. THE PRINCIPLES LAID DOWN BY THE SUPREME COUR T IN THE ABOVE TWO CASES AFFORD ADEQUATE GUIDANCE TO THE ASSESSING OFF ICERS. 10. CBDT ALSO WISHES TO EMPHASISE THAT IT IS POSSI BLE FOR A TAX PAYER TO HAVE TWO PORTFOLIOS I.E. AN INVESTMENT PORTFOLIO C OMPRISING OF SECURITIES WHICH ARE TO BE TREATED AS CAPITAL ASSETS AND A TRA DING PORTFOLIO COMPRISING OF STOCK-IN-TRADE WHICH ARE TO BE TREATED AS TRADIN G ASSETS. WHERE AN ASSESSEE HAS TWO PORTFOLIOS THE ASSESSEE MAY HAVE INCOME UNDER BOTH HEADS I.E. CAPITAL GAINS AS WELL AS BUSINESS INCOM E. WITH REFERENCE TO ABOVE CIRCULAR THE LEARNED COUNSE L POINTED OUT THAT THE ASSESSEE HAS MAINTAINED SEPARATE DEMAT ACCOUNT FOR ITS TRAD ING TRANSACTIONS VIS--VIS INVESTMENT MADE IN SHARES. HE FURTHER SUBMITTED THA T THE A.O. HAS ACCEPTED LONG TERM CAPITAL GAIN WHICH WAS MORE THAN RS. 2 CRORES . HE SUBMITTED THAT WHEREAS A TRADER LOOKS AT MARGIN OF PROFIT THE INVESTOR LO OKS IN REALIZING ITS INVESTMENT IN ORDER TO ENSURE THAT IT DOES NOT LOOSES ITS CAPITAL . HE POINTED OUT THAT IN THE CASE OF TRADING TRANSACTION TURNOVER IS MORE AND THAT IS NOT SO IN THE CASE OF INVESTMENT. HE POINTED OUT THAT IN THE PRESENT CAS E BULK OF SHARES WERE SOLD AFTER SIX MONTHS NUMBER OF SCRIPS WERE ONLY 14 IN WHICH ASSESSEE HAD MADE INVESTMENTS AND THEREFORE THE LEARNED CIT(A) RIGH TLY ACCEPTED THE ASSESSEES CONTENTION. HE SUBMITTED THAT THE DECISION OF THE I .T.A.T IN THE CASE OF GOPAL PUROHIT V. JCIT ITA NO.4854/MUM/2008 FOR THE ASSE SSMENT YEAR 2005-06 (122 TTJ (MUM) 87DATED 10.2.2009 HAS BEEN CONFIRMED BY T HE HONBLE BOMBAY HIGH COURT WHEREIN ALSO THE ASSESSEES CLAIM OF SHORT TE RM CAPITAL GAINS WAS ACCEPTED BY TRIBUNAL. ITA NO.6556/M/09 & 181/M/10 VINOD K. NEVATIA 9 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HA VE PERUSED THE RECORDS OF THE CASE. BEFORE WE CONSIDER THE MERITS OF THE C ASE WE MAY FIRST DEAL WITH THE RELIANCE PLACED BY THE LD. COUNSEL ON THE DECISION IN THE CASE OF GOPAL PUROHIT V. JCIT (SURPA). IN THIS CASE THE FACTS AS FUND BY THE TRIBUNAL WERE THAT ASSESSEE WAS ENGAGED IN THE ACTIVITY OF SALE AND PURCHASE OF SHA RES FOR QUITE LONG TIME. IT WAS ALSO NOTED THAT NON-DELIVERY BASED TRANSACTION HAD BEEN TREATED BY THE ASSESSEE AS BUSINESS ACTIVITY AND DELIVERY BASED TRANSACTION HAD BEEN TREATED AS AN INVESTMENT ACTIVITY AND ACCORDINGLY THE ASSESSEE H AD CLAIMED HIMSELF BOTH DEALER AS WELL AS INVESTOR AND HAD OFFERED INCOME FOR TAXA TION ACCORDINGLY. HOWEVER IN THE PRESENT CASE THE FACTS ARE ENTIRELY DIFFERENT INASMUCH AS EVEN IN RESPECT OF SHARES WHERE DELIVERY HAD BEEN TAKEN THE ASSESSEE HAD RETURNED THE INCOME BOTH UNDER THE HEAD BUSINESS INCOME AS WELL AS CAP ITAL GAINS. THEREFORE THE CASE OF GOPAL PUROHIT (SUPRA) IS CLEARLY DISTINGUIS HABLE ON FACTS. 11. NOW COMING TO THE FACTS OF THE CASE IT IS NO T DISPUTED THAT THE ASSESSEE HAD MAINTAINED SEPARATE BOOKS OF ACCOUNT AS WELL AS SEPARATE DEMANT ACCOUNTS IN RESPECT OF ITS TRADING ACTIVITY AND FOR MAKING INVE STMENT IN SHARES. THE HONBLE SUPREME COURT IN THE CASE OF RAJA BAHADUR VISHESHWA R SINGH V. CIT (41 ITR 685) INTER ALIA OBSERVED THAT THE MANNER IN WHICH THE B OOKS HAD BEEN MAINTAINED IS AN IMPORTANT PIECE OF EVIDENCE FOR ARRIVING AT PROPER CONCLUSION IN SUCH CIRCUMSTANCES. IT ALL DEPENDS ON FACTS AND CIRCUMST ANCES OF EACH CASE WHETHER THE ASSESSEES CONDUCT WAS DIRECTED TOWARDS REALIZING I TS INVESTMENT OR CHANGE IN INVESTMENT OR THE ACT WAS DONE WHICH TRULY COULD BE BRANDED AS CARRYING ON THE BUSINESS. NO SINGLE FACT CAN BE SAID TO BE DECISIVE FACTOR UNDER SUCH CIRCUMSTANCES. NO ACID TEST HAS BEEN LAID DOWN IN A NY OF THE JUDGMENTS REFERRED TO BY THE A.O. IN ALL CASES ONLY CERTAIN PRINCIPLES HAVE BEEN LAID DOWN HAVING REGARD TO THE PECULIAR FACTS OBTAINING IN THE SAID CASES. PRIMARILY IT IS THE INTENTION WITH WHICH AN ASSESSEE STARTS ITS ACTIVITY WHICH IS THE MOST IMPORTANT FACTOR WHICH ITA NO.6556/M/09 & 181/M/10 VINOD K. NEVATIA 10 HAS TO BE CONSIDERED KEEPING IN VIEW THE ADJOINING CIRCUMSTANCES. IF THE ASSESSEE PURCHASES THE SHARES FROM ITS OWN FUNDS WITH A VIE W TO KEEP THE FUNDS IN EQUITY SHARES TO EARN CONSIDERABLE RETURN ON ACCOUNT OF EN HANCEMENT IN THE VALUE OF SHARE OVER A PERIOD THEN MERELY BECAUSE THE ASSESSE E LIQUIDATES ITS INVESTMENT WITHIN SIX MONTHS OR EIGHT MONTHS WOULD NOT LEAD TO THE CONCLUSION THAT THE ASSESSEE HAD NO INTENSION TO KEEP THE FUNDS AS INVE STED IN EQUITY SHARES BUT WAS ACTUALLY INTENDED TO TRADE IN SHARES. MERE INTENTIO N TO LIQUIDATE THE INVESTMENT AT HIGHER VALUE DOES NOT IMPLY THAT THE INTENTION WAS ONLY TO TRADE IN SECURITY. HOWEVER IT CANNOT BE HELD THAT IN ALL CIRCUMSTANCE S IF ASSESSEE HAS USED ITS OWN FUNDS FOR SHARE ACTIVITY THEN IT WOULD ONLY LEAD TO INFERENCE OF INVESTMENT BEING THE SOLE INTENTION. IN SUCH CIRCUMSTANCES FREQUEN CY OF TRANSACTIONS WILL HAVE TO BE CONSIDERED TO ARRIVE AT PROPER CONCLUSION REGARD ING THE TRUE INTENTION OF THE ASSESSEE. HOWEVER IF THE ASSESSEE ON THE OTHER HA ND BORROWS FUNDS FOR MAKING INVESTMENT IN SHARES THEN DEFINITELY IT IS A VERY I MPORTANT INDICATOR OF ITS INTENTION TO TRADE IN SHARES. IN THE PRESENT CASE WE FIND THAT THE A.O. MERELY PROCEEDED ON THE ASSUMPTION THAT BORROWED FUNDS HAD BEEN UTIL IZED FOR BUYING SHARES ON THE GROUND THAT FUNDS WERE COMMON AND COULD NOT BE SEGR EGATED. BEFORE THE CIT(A) IT WAS CATEGORICALLY POINTED OUT THAT NO PAR T OF THE ASSESSEES INTEREST BEARING FUNDS WERE UTILIZED FOR ACQUISITION OF SHAR ES ON INVESTMENT ACCOUNT. THIS PLEA HAS BEEN ACCEPTED BY THE CIT(A) AND THE DEPART MENT HAS NOT BROUGHT ON RECORD ANYTHING TO CONTROVERT THE SAME. FURTHER I N THE CBDT CIRCULAR NO. 4/2007 DATED 15.6.2007 THE CBDT HAS EMPHASIZED THAT IT IS POSSIBLE FOR A TAX PAYER TO HAVE TWO PORTFOLIOS I.E. AN INVESTMENT PORTFOLIO C OMPRISING OF SECURITIES WHICH ARE TO BE TREATED AS CAPITAL ASSETS AND A TRADING PORT FOLIO COMPRISING OF STOCK-IN TRADE WHICH ARE TO BE TREATED AS TRADING ASSETS. FURTHER THE A.O. HAS ACCEPTED THE ASSESSEES CLAIM OF LTCG TO THE EXTENT OF RS. 2 CRO RE WHICH IMPLIES THAT HE HAS ACCEPTED THE ASSESSEES CLAIM REGARDING HOLDING INV ESTMENT PORTFOLIO. IN VIEW OF ITA NO.6556/M/09 & 181/M/10 VINOD K. NEVATIA 11 THE ABOVE DISCUSSION WE DO NOT FIND ANY REASON TO I NTERFERE WITH THE ORDER OF THE CIT(A). ACCORDINGLY WE CONFIRM THE ORDER OF THE CI T(A). ITA NO. 6556/MUM/2009 -(ASSESSEES APPEAL) 12. THE ONLY EFFECTIVE GROUND OF APPEAL RAISED BY T HE ASSESSEE IS IN RESPECT OF DIRECTION OF THE AO TO RECOMPUTE THE DISALLOWANCE U /S.14A IN ACCORDANCE WITH RULE 8D OF THE I.T.RULES. BRIEF FACTS APROPOS THIS ISSU E ARE THAT THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION HAD RECEIVED A DIVIDEND OF RS.35 53 986/- AND RS.2 29 77 048/- FROM LONG TERM CAPITAL GAINS. THE ASSESSING OFFICER OBSERVED THAT NO DEDUCTION WAS ALLOWABLE IN RESPECT OF EXPE NDITURE INCURRED BY THE ASSESSEE IN RELATION TO THE INCOME WHICH DID NOT FO RM PART OF TOTAL INCOME UNDER THE ACT. AFTER CONSIDERING THE ASSESSEES SUBMISSIO NS AND CASE LAWS ON THE ISSUE HE TREATED 10% OF THE TOTAL EXPENSES AS BEING INCU RRED BY THE ASSESSEE TOWARDS EARNING OF DIVIDEND INCOME AND MADE THE DISALLOWANC E ACCORDINGLY. 13. BEFORE THE LEARNED CIT(A) THE ASSESSEE HAD TAK EN THE GROUND THAT THE ASSESSEE HAD NOT INCURRED ANY EXPENDITURE TO EARN T HE DIVIDEND INCOME AND THEREFORE THE DISALLOWANCE TO THE EXTENT OF RS.4 6 9 413/- WAS NOT WARRANTED AS THE SAME WAS ATTRIBUTABLE TO ITS BROKERAGE BUSINESS INCOME ONLY. THE LEARNED CIT(A) FOLLOWING THE DECISION OF THE I.T.A.T. SPECI AL BENCH IN THE CASE OF DAGA CAPITAL MANAGEMENT PVT. LTD. (117 ITD 169) RESTORE D THE MATTER TO THE A.O. FOR COMPUTING THE DISALLOWANCE IN ACCORDANCE WITH RULE 8D. 14. HAVING HEARD BOTH THE PARTIES WE FIND THAT THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE MFG. CO. LTD. V. DCIT ( 34 DTR 1)(BOM.) HAS REVERSED THE FINDINGS OF THE SPECIAL BENCH OF T HE TRIBUNAL IN HOLDING THAT RULE 8D IS RETROSPECTIVE. THEREFORE RULE 8D WAS NOT APP LICABLE FOR THE ASSESSMENT YEAR 2005-06 AND THEREFORE THE DIRECTIONS OF THE CIT(A ) ARE NOT SUSTAINABLE. THE ASSESSEES PLEA THAT IT HAD NOT INCURRED ANY EXPEND ITURE FOR EARNING THE DIVIDEND INCOME HAS NOT BEEN CONSIDERED BY THE LEARNED CIT(A ) AND THEREFORE AS AGREED ITA NO.6556/M/09 & 181/M/10 VINOD K. NEVATIA 12 BY BOTH THE PARTIES WE RESTORE THIS ISSUE TO THE F ILE OF THE A.O. FOR DECIDING THE SAME DENOVO AFTER CONSIDERING THE ASSESSEES SUBMIS SIONS. 15. IN THE RESULT THE REVENUES APPEAL IS DISMISSE D WHILE THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURP OSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 3 RD DAY OF DECEMBER 2010 SD. SD. (VIJAY PAL RAO) (S.V. MEHROTRA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI DATED THE 3 RD DECEMBER 2010. COPY TO: 1. THE ASSESSEE 2. THE REVENUE 3. THE CIT-IV MUMBAI 4. THE CIT(A)-VIII MUMBAI 5. THE DR F BENCH MUMBAI BY ORDER /TRUE COPY/ ASST. REGISTRAR ITAT MUMBAI