ACIT CIR 15(1), MUMBAI v. SANJAY KUMAR J PODDAR, MUMBAI

ITA 7410/MUM/2011 | 2008-2009
Pronouncement Date: 26-11-2014 | Result: Dismissed

Appeal Details

RSA Number 741019914 RSA 2011
Assessee PAN AABPP2018E
Bench Mumbai
Appeal Number ITA 7410/MUM/2011
Duration Of Justice 3 year(s) 23 day(s)
Appellant ACIT CIR 15(1), MUMBAI
Respondent SANJAY KUMAR J PODDAR, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 26-11-2014
Appeal Filed By Department
Order Result Dismissed
Bench Allotted E
Tribunal Order Date 26-11-2014
Date Of Final Hearing 14-10-2014
Next Hearing Date 14-10-2014
Assessment Year 2008-2009
Appeal Filed On 03-11-2011
Judgment Text
E IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH MUMBAI BEFORE S HRI I.P. BANSAL JUDICIAL MEMBER AND SHRI R.C. SHARMA ACCOUNTANT MEMBER I.T.A. NO. 7087 / MUM/20 11 ( A SSESSMENT YEAR : 20 0 8 - 20 0 9 SHRI SANJAY KUMAR J. PODDAR C/O SHANKARLAL JAIN & ASSOCIATES 12 ENGINEER BUILDING 265 PRINCESS STREET M UMBAI 400 0 02 . VS. ASSTT. COMMISSIONER OF INCOME TAX CIRCLE 15(1) MUMBAI . PAN : AABPP20 18E ( APPELLANT ) .. ( RESPONDENT ) I.T.A. NO. 7410 /MUM/2011 ( ASSESSMENT YEAR : 2008 - 2009 ASSTT. COMMISSIONER OF INCOME TAX CIRCLE 15(1) MUMBAI. VS. SHRI SANJAY KUMAR J. PODDAR C/O SHANKARLAL JAIN & ASSOCIATES 12 ENGINEER BUILDING 265 PRINCESS STREET MUMBAI 400 002. PAN : AABPP2018E ( APPELLANT ) .. ( RESPONDENT ) ASSESSEE BY SHRI S.L. JAIN DEPAR TMENT BY SHRI NEIL PHILIP DATE OF HEARING : 14 - 10 - 2014 / DATE OF PRONOUNCEMENT : 26 - 11 - 2014 O R D E R PER R.C. SHARMA A .M . : THESE ARE THE C ROSS APPEALS FILED BY THE ASSESSEE AND REVENUE ARE DIRECTED AGAINST THE ORDER OF LD. CIT(A) - 26 MUMBAI DATED 04 - 08 - 2014 2 ITA 7087 / M/ 11 & ITA 7410/ M/11 FOR A.Y. 2008 - 09 IN THE MATTER OF ORDER PASSED U/S 143(3) OF THE INCOME TAX ACT 1961. 2. FACTS IN BRIEF ARE THAT THE ASSESSEE WAS C ONSISTENTLY INVESTING IN SHARES. DURING THE YEAR UNDER CONSIDERATION CAPITAL GAIN OFFERED BY THE ASSESSEE ON SALE OF SHARES WAS TREATED BY THE A.O. AS BUSINESS INCOME. AFTER GIVING DUE REASONING THE LD. CIT(A) HAS DIRECTED THE A.O. TO TREAT THE SAME AS CAPITAL GAINS. THE A.O. HAS ALSO MADE DISALLOWANCE BY INVOKING THE PROVISIONS OF SECTION 14A READ WITH RULE 8 - D OF THE INCOME TAX RULES 1962 . THE LD. CIT(A) CONFIRMED THE DISALLOWANCE. AGAINST THE ORDER OF LD. CIT(A) BOTH ASSESSEE AND REVENUE ARE IN APP EAL BEFORE US. 3. THE ASSESSEE HAS TAKEN FOLLOWING GROUNDS OF APPEAL: - 1. LD. COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN UPHOLDING APPLICABILITY OF RULE 8D AND FURTHER HOLDING THAT ID. ASSESSING OFFICER RECORDED A CATEGORICAL SATISFACTION THAT APPELLA NT INCURRED EXPENDITURE RELATING TO EARNING OF THE EXEMPT INCOME AND DIVIDEND AND MERELY DIRECTING THE ASSESSING OFFICER TO RE - CALCULATE DISALLOWANCE AS MADE U/S 14A WITHOUT PROPERLY CONSIDERING: - (I) THE FACT THAT NO BORROWED FUNDS WERE USED BY THE APPEL LANT IN ACQUISITION OF INVESTMENTS ON WHICH DIVIDEND IS RECEIVED NO PART OF INTEREST I S DISALLOWABLE U/R 8D(2)(II) OF THE I.T. RULES. (II) THE FACT THAT NO ADMINISTRATIVE EXPENSE IS BEING INCURRED FOR EARNING OF DIVIDEND AS DIVIDEND IS RECEIVED IN THE BAN K ACCOUNT OF THE APPELLANT IN THE NORMAL COURSE WITHOUT SPENDING ANY EXPENDITURE FOR THE SAME. 2. THE APPELLANT PRAY THAT DISALLOWANCE UPHELD U/ S 14A BE DELETED AS NO EXPENSE HAS BEEN INCURRED BY THE APPELLANT FOR EARNING OF THE DIVIDEND. 4. THE REVENUE HAS TAKEN FOLLOWING GROUNDS OF APPEAL: - 01 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND LAW THE LD. CIT(A) ERRED IN DIRECTING THE AO TO ASSESS THE 3 ITA 7087 / M/ 11 & ITA 7410/ M/11 INCOME FROM SHARES AS CAPITAL GAINS AS AGAINST BUSINESS INCOME.' 02 'WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND LAW THE LD. CIT(A) ERRED IN DIRECTING THE AO TO TREAT THE NOTIONAL LOSS ON F & 0 TRANSACTION OF RS. 1 34 14 682/ - AS NORMAL BUSINESS LOSS' 5. THE LD. CIT(A) DIRECTED THE A.O. TO TREAT THE PROFIT ON SALE OF SHARES AS CAP ITAL GAINS AFTER HAVING OBSERVED AS UNDER : - 3.2 I HAVE CAREFULLY CONSIDERED THE FINDINGS OF THE AO AS WELL AS THE VARIOUS WRITTEN SUBMISSIONS OF THE APPELLANT. BOTH THE AO AS WELL AS THE APPELLANT HAS RE L IED UPON A NUMBER OF CASE LAWS ON THE TAXABILITY OF INCOME FROM SHARES. IT IS HOWEVER NOTED THAT NEITHER THE AO NOR THE APPELLANT HAS BEEN ABLE TO POINT OUT AS TO THE FACTS OF WHICH RELIED UPON CASE ARE IDENTICAL WITH THE FACTS OF THE INSTANT CASE. THE CONTENTIOUS ISSUE OF THE TAXABILITY OF INCOME FROM SHARES HAS BEEN ANALYZED IN DEPTH IN QUITE A FEW RECENT DECISIONS OF THE JURISDICTIONAL ITAT MUMBAI AND HON'BLE HIGH COURT OF BOMBAY. ONE SUCH IMPORTANT CASE IS THE CASE OF GOPAL PUROHIT VS. CIT 1 WHEREIN THE DECISION OF - ITAT MUMBAL HAS BEEN CONFIRMED BY HON'BLE BOMBAY HIGH COURT AND SLP HAS BEEN DISMISSED BY THE HON'BLE APEX COURT. IN THIS CASE IT IS HE L D THAT IT IS WELL SETTLED PRINCIPLE THAT THE QUESTION WHETHER THE ACTIVITY OF BUYING AND SELLING OF THE SHARES IS IN THE NATURE OF TRADE OR INVESTMENT IS A MIXED QUESTION OF LAW AND FACTS. IN THAT CASE AFTER PERUSING THE VARIOUS VITAL FACTS SUCH AS (I) THE ASSESSEE HAS TREATED THE ENTIRE INVESTMENT AS INVESTMENT IN THE BOOKS OF ACCOUNT (II) THE ASSESSEE IS NEITHER A SHARE BROKER NOR REGISTERED WITH ANY STOCK EXCHANGE (III) THE ASSESSEE HAS NOT BORROWED MONEY FOR INVESTMENT IN SHARES AND (IV) IN THE PRECEDING YEARS IT WAS CONSISTENTLY DECLARING THE GAINS OF IT'S PROFIT ON SALE OF SHARES UNDER THE HEAD CAPITAL GAINS IT WAS HELD THAT THOUGH THE RULE O F RESJUDICATA IS NOT APPLICABLE TO THE INCOME - TAX PROCEEDINGS BUT AT THE SAME TIME IT IS ALSO WELL SETTLED PRINCIPLE THAT IF THERE IS NO CHANGE IN FACTS THEN THERE SHOULD BE CONSISTENCY IN THE APPROACH OF REVENUE AUTHORITIES. ACCORDINGLY IT WAS HELD THA T THE ITAT WAS CORRECT IN TAXING THE INCOME AS CAPITAL GAINS. 4 ITA 7087 / M/ 11 & ITA 7410/ M/11 .2.1 IF WE ANALYZE THE IMPORTANT FACTS OF THE INSTANT CASE ONLY THEN A LOGICAL AND REASONABLE DECISI O N WILL EMERGE OUT AS TO WHETHER THE INTENTION OF THE ASSESSEE WAS TO EARN PROFIT FROM T HE SALE OF SHARES IN THE CAPACITY OF A TRADER OR THE APPRECIATION IN SHARE VALUES HAVE BEEN EARNED BY THE ASSESSEE AS CAPITAL GAINS ON THE INVESTMENTS. IT IS ALSO SEEN THAT THE PRINCIPLES LAID DOWN IN THE CASE OF GOPAL PUROHIT HAS ALSO BEEN APPLIED IN QUIT E A FEW OTHER RECENT DECISIONS OF HON'BLE ITAT SUCH AS THE CASE OF SHRI MAHENDRA C. SHAH IN ITA NO. 6289/MUM/2008 - 09. IN THIS CASE ALSO ALMOST THE SAME POINTS WERE SEEN AS POINTED OUT IN THE CASE OF GOPAL PUROHIT. FURTHER IN THE CASE OF HITESH CHANDRA J O SHI - ITA NO. 6497/MUM/2009 ALSO THIS ISSUE HAS BEEN EXTENSIVELY DEALT WITH IN THE LIGHT OF THE DECISION IN THE CASE OF SHRI MAHENDRA C. SHAH (SUPRA). IN ALL THESE CASES THE INCOME FROM SALE OF SHARES HAS BEEN HELD AS CAPITAL GAINS SHORT TERM OR LONG TER M IF THE ASSESSEE HAS CONSISTENTLY DISCLOSED THE CLOSING BALANCE OF SHARES AS INVESTMENT THERE WAS NO SUBSTANTIAL UTILIZATION OF FRESH BORROWED MONEY FOR MAKING INVESTMENT IN SHARES AND THE ASSESSEE WAS NOT A TRADER OR REGISTERED BROKER WITH STOCK EXCHAN GE. IN THE INSTANT CASE ALSO THERE IS NO BORROWING FOR THE PURPOSE OF PURCHASE OF SHARES AS THE OWN CAPITAL OF THE APPELLANT (RS. 26 CRORE) IS MUCH MORE THAN THE TOTAL INVESTMENT IN SHARES (RS. 17.75 CRORE) THE ASSESSEE HAS CONSISTENTLY SHOWING INCOME FR OM SALE OF SHARES EITHER AS SHORT TERM CAPITAL GAIN OR LONG TERM CAPITAL GAIN THE SHARES ARE REFLECTED AS INVESTMENT IN THE BALANCE SHEET. IN THE ASSESSMENT YEAR 2006 - 07 AND 2007 - 08 THE APPELLANT HAS BEEN ASSESSED U/S. 143(3) AND THE AOS HAVE ASSESSED SI MILAR INCOME AS CAPITAL GAINS IN ALL THESE YEARS. FURTHER THE APPELLANT HAS MAINLY EARNED LONG TERM CAPITAL GAINS AND HAS ALSO EARNED SUBSTANTIAL DIVIDENDS THESE ARE ALSO IMPORTANT INDICATORS OF THE INTENTION OF THE APPELLANT OF INVESTMENT FOR A LONG PER IOD. THEREFORE UNDER THESE CIRCUMSTANCES THE DECISION OF THE AO HOLDING THE ASSESSEE AS SHARE TRADER DOES NOT APPEAR TO BE BASED ON COGENT REASONS. RATHER HE HAS. GIVEN VAGUE REASONS IN SUPPORT OF HIS DECISION SUCH AS THE NUMBER AND FREQUENCY OF TRANS ACTIONS IN THE SHARES ARE VOLUMINOUS IT IS A MAJOR ACTIVITY OF ASSESSEE AND THE ASSESSEE HAS DEVOTED SUBSTANTIAL TIME ON CONTINUOUS TRANSACTIONS. OF SHARES. ALL THESE REASONS ARE DEVOID OF SUBSTANCE AND THE SAME ARE NOT OBJECTIVE. ACCORDINGLY THE VIEW TAK EN BY THE A.O. CANNOT BE SUSTAINED AS IT IS NOT CO - TERMINOUS WITH THE ABOVE REFERRED RECENT JUDICIAL PRONOUNCEMENTS OF THE JURISDICTIONAL ITAT AND HIGH COURT. THEREFORE THE AO IS DIRECTED TO TREAT THE INCOME FROM SHARES AS CAPITAL GAINS AS AGAINST BUSINE SS INCOME. 5 ITA 7087 / M/ 11 & ITA 7410/ M/11 6. THE CIT(A) HAS ALSO DIRECTED THE A.O. TO TREAT THE DERIVATIVE TRANSACTIONS CONDUCTED THROUGH A RECOGNIZED STOCK EXCHANGE AS NORMAL BUSINESS LOSS ON THE PLEA THAT THESE TRANSACTIONS HAVE BEEN TAKEN OUT OF THE PURVIEW OF THE SPECULATION TRANSA CTIONS U/S 45(3) OF THE ACT AFTER THE AMENDMENT WITH EFFECT FROM 1 - 4 - 2006. THE OBSERVATIONS OF THE LD. CIT(A) WAS AS UNDER: - 4.2 I HAVE CAREFULLY CONSIDERED THE FINDINGS OF THE AO AS WELL AS THE SUBMISSIONS OF THE APPELLANT. IN THIS REGARD THE FINDING S OF THE AO DOES NOT APPEAR APPROPRIATE BECAUSE THE APPELLANT HAS REGULARLY CARRIED OUT THE DERIVATIVE TRANSACTIONS OF F & 0. IT IS NOW A SETTLED PRINCIPLE THAT THE DERIVATIVE TRANSACTIONS CONDUCTED THROUGH A RECOGNIZED STOCK EXCHANGE HAVE BEEN TAKEN OUT OF THE PURVIEW OF THE SPECULATION TRANSACTIONS UNDER SECTION 45(3) OF THE I.T. ACT AFTER THE AMENDMENT WITH EFFECT FROM 01.4.2006. THIS POSITION HAVE RECENTLY BEEN CLARIFIED BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF BHARAT RUIA (HUF) WHEREIN IT IS HELD THAT AFTER THE AMENDMENT THE DERIVATIVE TRANSACTIONS IN SHARES WOULD NOT COME WITHIN THE AMBIT OF SPECULATIVE TRANSACTIONS U/S. 45(3) OF THE I.T. ACT. IN THE INSTANT CASE IT IS AN UNDISPUTED FACT THAT THESE TRANSACTIONS HAVE BEEN CARRIED OUT THROUGH RECOGNIZED STOCK EXCHANGE ACCORDINGLY THE PROFIT/LOSS ON SUCH TRANSACTIONS WILL BE TREATED AS NORMAL BUSINESS PROFIT/LOSS AND IT CANNOT BE TREATED AS NOTIONAL LOSS. THEREFORE THE FINDING OF THE AO IN THIS REGARD IS REVERSED. 7. WE HAVE CONSIDERED RI VAL CONTENTIONS CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND ALSO STATEMENT OF INVESTMENT AND OWN FUNDS VIS - - VIS STATEMENT OF SOURCES OF FUNDS FOR INVESTMENT DURING THE YEAR UNDER CONSIDERATION. WE HAVE ALSO DELIBERATED UPON VARIOUS CAS E LAWS CITED BY THE LD. AUTHORIZED REPRESENTATIVE AND LD. CIT DR AND IN THE CONTEXT OF FACTUAL MATRIX OF THE CASE. WE HAD ALSO DELIBERATED ON THE CASE LAWS REFERRED TO BY LOWER AUTHORITIES IN THEIR RESPECTIVE ORDERS. THE QUESTION AS TO WHETHER THE ASSESSEE HAS EARNED CAPITAL GAIN OR 6 ITA 7087 / M/ 11 & ITA 7410/ M/11 BUSINESS PROFITS ON THE SHARES SOLD BY HIM DEPEND ON THE FACTS AND CIRCUMSTANCES OF EACH CASE. SUCH DECISION IS TO BE ARRIVED AT BY TAKING INTO ACCOUNT THE INTENTION OF THE ASSESSEE WHILE PURCHASING THE SHARES AS TO WHETHER THE SAME WAS ACQUIRED FOR HOLDING AS INVESTMENT OR FOR DOING BUSINESS THEREIN. THE TREATMENT GIVEN BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT IS ALSO ONE OF THE DECISIVE FACTORS TO FIND OUT WHETHER THE SHARES WERE HELD AS INVESTMENT OR STOCK IN TRADE. IF THE SHA RES ARE BOUGHT WITH THE INTENTION OF EARNING CAPITAL GAINS THEREON AND ALSO DIVIDEND INCOME BY KEEPING THE SAME AS INVESTMENT THE GAIN ARISING THERE FROM IS REQUIRED TO BE TREATED AS CAPITAL GAINS. ON THE OTHER HAND IF THE SHARES ARE PURCHASED WITH THE I NTENTION TO EARN PROFIT THEREON AND THE SAME IS TREATED AS STOCK IN TRADE IN THE BOOKS OF ACCOUNT THE PROFIT ARISING OUT OF SALE OF SUCH SHARES ARE LIABLE TO BE TREATED AS BUSINESS INCOME. VOLUME AND FREQUENCY OF TRANSACTION IS ALSO ONE OF THE GUIDING FAC TORS TO FIND OUT WHETHER THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PURCHASE AND SALE OF SHARES OR MAKING INVESTMENT TO HAVE CAPITAL GAINS THEREON. IN THE INSTANT CASES BEFORE US THE FACT OF THE ASSESSEE INVESTING IN SHARES FOR THE LAST SEVERAL YEARS IS N OT IN DISPUTE. THERE IS ALSO NO DISPUTE TO THE FACT THAT THE ASSESSEE HAS TREATED THE EQUITY SHARES OF INDIAN COMPANIES AS INVESTMENT I.E. CAPITAL ASSET ALL ALONG. THE ASSESSEE HAS ALSO VALUED THE SHARES AT COST THUS GIVEN A PARTICULAR TREATMENT TO THE S HARES HELD AS INVESTMENT THEREFORE WITHOUT BRINING ON RECORD CONTRARY MATERIAL THE AO CANNOT CHANGE THE INTENTION AND MANNER OF INVESTMENT BEING MADE BY THE ASSESSEE. HAD THE ASSESSEE VALUED THE SHARES AT COST OR MARKET PRICE WHICHEVER IS LOWER THE GAI N ARISING OUT OF SALE OF SHARES COULD EASILY BE TREATED AS BUSINESS INCOME. ASSESSEE HAD NOT VALUED THE SHARES AS STOCK BUT VALUED THE SAME AS INVESTMENT. THUS WHAT WAS A CAPITAL ASSET WILL REMAIN A CAPITAL ASSET UNLESS A PERSON HOLDING THE ASSET HIMSELF CHANGES THE NATURE BY A 7 ITA 7087 / M/ 11 & ITA 7410/ M/11 SPECIFIC ACTION LIKE CONVERSION OF CAPITAL ASSET INTO STOCK IN TRADE. IN THE INSTANT CASES BEFORE US THE ASSESSEE HAS NOT TREATED THE INVESTMENT IN EQUITY SHARES OF INDIAN COMPANIES AS STOCK IN TRADE. IN VIEW OF THE DECISION OF HON 'BLE SUPREME COURT IN THE CASE OF RAM KUMAR AGARWAL & BROTHERS 205 ITR 251 THE AO WAS NOT JUSTIFIED IN TREATING THE CAPITAL GAIN EARNED FROM SALE OF THESE SHARES AS BUSINESS PROFITS WHICH WERE ENTERED BY THE ASSESSEE AS INVESTMENT IN BOOKS OF ACCOUNT. THERE IS ALSO NO DISPUTE TO THE WELL SETTLED LEGAL PROPOSITION THAT RES JUDICATA DO NOT STRICTLY APPLY TO THE INCOME TAX PROCEEDINGS BUT AT THE VERY SAME TIME IT IS WELL SETTLED THAT PRINCIPLE OF CONSISTENCY UNDER THE SAME FACTS AND CIRCUMSTANCES IS THE FUNDAMENTAL OF JUDICIAL PRINCIPLE WHICH CANNOT BE BRUSHED ASIDE WITHOUT PROPER REASONING. 8 . MERELY BECAUSE THE ASSESSEE LIQUIDATES ITS INVESTMENT WITHIN A SHORT SPAN OF TIME WHICH HAD GIVEN BETTER OVERALL EARNING TO THE ASSESSEE WOULD NOT LEAD TO THE CONCLUSION THAT THE ASSESSEE HAD NO INTENTION TO KEEP ON THE FUNDS AS INVESTOR IN EQUITY SHARES BUT WAS ACTUALLY INTENDED TO TRADE IN SHARES. 9 . HERE IT IS PERTINENT TO MENTION THE INTENTION OF GOVERNMENT FOR INTRODUCING THE SECURITY TRANSACTION TAX AN D EXEMPT THE LONG TERM CAPITAL GAIN EARNED FROM SALE OF SHARES AND LEVYING 10 % TAX ON SHORT TERM CAPITAL GAIN EARNED ON SALE OF SHARES. IT IS NOTED THAT UNDER THE OLD PROVISIONS OF THE INCOME - TAX ACT PROFITS OR GAINS ARISING TO AN INVESTOR FROM THE TRANS FER OF SECURITIES WERE CHARGED TO TAX EITHER AS LONG TERM CAPITAL GAINS OR SHORT TERM CAPITAL GAINS DEPENDING ON THE PERIOD OF HOLDING OF THE SAID SECURITIES; SHORT - TERM CAPITAL GAINS ARISING FROM TRANSFER OF SECURITIES WERE TAXED AT THE APPLICABLE RATES ( NORMAL RATE) AND LONG - TERM CAPITAL GAINS WERE TAXED @ 20% AFTER ADJUSTING FOR INFLATION BY INDEXING THE COST OF ACQUISITION. FOR LISTED SECURITIES THE 8 ITA 7087 / M/ 11 & ITA 7410/ M/11 TAXPAYER HAD AN OPTION TO PAY TAX ON LONG - TERM CAPITAL GAINS @ 10% BUT WITHOUT INDEXATION. FOR FOREIGN INSTITUTIONAL INVESTORS (FIIS) THE LONG - TERM CAPITAL GAINS AND SHORT - TERM CAPITAL GAINS WERE TAXED AT THE RATE OF 10% (WITHOUT INDEXATION) AND 30% RESPECTIVELY. IN CASE OF A TRADER IN SECURITIES HOWEVER THE GAINS WERE TAXED AS ANY OTHER NORMAL BUSINESS INCOME. THUS TAX LIABILITY ON THE INCOME FROM PURCHASE & SALE OF SHARES AS REGARDS TO THE STCG & BUSINESS INCOME WAS AT PAR. HOWEVER THE ISSUE OF TREATMENT OF INCOME FROM SHARE TRANSACTION AS CAPITAL GAIN OR BUSINESS INCOME HAS IN - FACT ARISEN AFTER THE AM ENDMENT BROUGHT WITH FINANCE ACT - 2004 BY INSERTION OF PROVISIONS OF SECTION 111A AND 10(38) AS REGARDS TO LEVY OF TRANSACTION TAX AND EXEMPTION / CONCESSION ON CAPITAL GAIN ARISING FROM SECURITIES ENTERED IN A RECOGNIZED STOCK EXCHANGE. WITH A VIEW TO SI MPLIFY THE TAX REGIME ON SECURITIES TRANSACTIONS A TAX AT THE RATE OF 0.015 PER CENT. (SEE: CHANGE IN RATES ON SECURITIES TRANSACTIONS BY FINANCE ACTS AT APPROPRIATE HEAD) IS LEVIED ON THE VALUE OF ALL THE TRANSACTIONS OF PURCHASE OF SECURITIES THAT TAK E PLACE IN A RECOGNIZED STOCK EXCHANGE IN INDIA. THIS TAX IS COLLECTED BY THE STOCK EXCHANGE FROM THE PURCHASER OF SUCH SECURITIES AND PAID TO THE EXCHEQUER. THE PROVISIONS RELATING TO THE SECURITIES TRANSACTIONS TAX ARE CONTAINED IN CHAPTER VII OF THE FIN ANCE (NO.2) BILL 2004 AND CAME INTO EFFECT FROM 01.10.2004. FURTHER CLAUSE (38) HAS BEEN INSERTED IN SECTION 10 OF THE INCOME - TAX ACT SO AS TO PROVIDE EXEMPTION FROM LONG - TERM CAPITAL GAINS ARISING OUT OF SECURITIES SOLD ON THE STOCK EXCHANGE. A NEW SE CTION 111A HAS ALSO BEEN INSERTED AND SECTION L15AD IS AMENDED SO AS TO PROVIDE THAT SHORT - TERM CAPITAL GAINS ARISING FROM SALE OF SUCH SECURITIES TO AN INVESTOR INCLUDING FIIS SHALL BE CHARGED AT THE RATE OF TEN PER CENT. THESE AMENDMENTS APPLY TO ASSESS MENT YEAR 2005 - 2006 AND SUBSEQUENT YEARS. THROUGH FINANCE ACT 2008 SECTIONS 111A AND 115AD HAVE FURTHER BEEN AMENDED WHEREBY THE RATE OF TAX ON SUCH 9 ITA 7087 / M/ 11 & ITA 7410/ M/11 SHORT - TERM CAPITAL GAIN HAS BEEN RAISED TO FIFTEEN PERCENT. THUS W.E.F. 01.10.2004; ON THE SHARE TRANSA CTIONS SUBJECTED TO STT; CONCESSIONAL TAX RATE OF 10% (WHICH HAS BEEN INCREASED TO 15% FROM AY 2009 - 10) ARE APPLICABLE IN RESPECT OF STCG WHEREAS NO TAX IS CHARGEABLE IN RESPECT OF LTCG. IT IS ALSO NOTED THAT THE CBDT VIDE ITS CIRCULAR NO.4/2007 DATED 15. 06.2007 HAS ALSO RECOGNIZED POSSIBILITY OF TWO PORTFOLIOS I.E. ONE 'INVESTMENT PORTFOLIO' COMPRISING OF SECURITIES WHICH ARE TO BE TREATED AS CAPITAL ASSETS AND THE OTHER 'TRADING PORTFOLIO' COMPRISING OF STOCK IN TRADE WHICH ARE TO BE TREATED AS TRADING ASSETS. IN VIEW OF THESE FACTS PROFIT AROSE ON SHARES IN RESPECT OF DELIVERY BASED TRANSACTION ARE LIABLE TO BE TAXED AS CAPITAL GAIN AND NOT AS BUSINESS INCOME. 10 . EVEN THE HON'BLE APEX COURT IN THE CASE OF K.P. VERGHESE VS TO 131 ITR 597 (SC) OBSERVED AS UNDER: - THE TASK OF INTERPRETATION OF A STATUTORY ENACTMENT IS NOT MECHANICAL TASK. IT IS MORE THAN A MERE READING OF MATHEMATI CAL FORMULAE BECAUSE FEW WORD POSSESSES THE PRECISION OF MATHEMATICAL SYMBOLS. IT IS AN ATTEMPT TO DISCOVER THE INTENT OF THE LEGISLATURE FROM THE LANGUAGE USED BY IT AND IT MUST ALWAYS BE REMEMBERED THAT LANGUAGE IS AT BEST AN IMPERFECT INSTRUMENT FOR THE EXPRESSION OF HUMAN THOUGHT AND AS POINTED OUT BY LORD DENNING IT WOULD BE IDLE TO EXPECT EVERY STATUTORY PROVISIONS TO BE DRAFTED WITH DIVINE PRESCIENCE AND PERFECT CLARITY. 11 . THE ABOVE OBSERVATIONS OF HON'BLE JUDGES OF THE APEX COURT WAS REITERA TED BY HON'BLE APEX COURT IN THE CASE OF KERALA STATE INDUSTRIAL CORPORATION 259 ITR 51 (SC) HOLDING AS UNDER: - THAT THE FINANCE MINISTERS SPEECH CAN BE RELIED UPON TO THROW LIGHT ON THE OBJECT AND PURPOSE OF THE PARTICULAR PROVISIONS INTRODUCTION BY T HE FINANCE BILL HAS BEEN RECOGNIZED BY THIS COURT IN K.P. VERGHESE VS ITO 1981) 131 ITR 597 (SC) AT 609. AGAIN IN THE CASE OF R & B FALCON (A) PVT. LTD VS CIT (2008) 301 ITR 309 (SC) IT WAS HELD THAT (PAGE 323): - RULES OF EXECUTIVE CONSTRUCTION IN A SITUATION OF THIS NATURE MAY ALSO BE APPLIED. WHERE A REPRESENTATION IS MADE BY THE MAKERS OF LEGISLATION AT THE TIME OF INTRODUCTION OF BILL OR CONSTRUCTION THEREUPON IS PUT BY THE EXECUTIVE UPON ITS COMING INTO FORCE THE CARRIES GREAT WEIGHT. 10 ITA 7087 / M/ 11 & ITA 7410/ M/11 1 2 . TH E HON'BLE DELHI HIGH COURT IN ARJ SECURITY PRINTERS 264 ITR 276 AND NEO POLLYPACK PVT LTD. 245 ITR 492 (DEL.) HELD THAT EVEN WHEN THE DOCTRINE OF RES JUDICATA DOES NOT APPLY TO INCOME TAX PROCEEDINGS WHERE A ISSUE HAS BEEN DECIDED CONSISTENTLY IN EARLIER ASSESSMENT YEARS IN PARTICULAR MANNER THE SAME VIEW SHOULD PREVAIL IN SUBSEQUENT YEARS UNLESS THERE IS A MATERIAL CHANGE IN FACTS MEANING THEREBY THERE MUST BE MATERIAL CHANGE IN THE FACTS. 1 3 . THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF SHANTIL AL M JAIN VS ACIT VIDE ORDER DATED 27 - 04 - 2011 (ITA NO. 269/MUM/2010) HELD THAT DESPITE LARGE VOLUME OF SHARES TRANSACTIONS THE ASSESSING OFFICER CANNOT IGNORE THE RULE OF CONSISTENCY TO TREAT THE GAINS ON SALE OF SHARES AS STCG. IN THAT CASE THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF TRADING OF INVESTMENT IN SHARES AND SECURITIES OFFERED RS. 1.54 CRORES AS SHORT TERM CAPITAL GAIN AND RS. 2.91 CRORES FROM LONG TERM CAPITAL GAIN. THE LONG TERM CAPITAL GAIN WAS ACCEPTED WHEREAS SHORT TERM CAPITAL GAIN WAS H ELD TO BE BUSINESS PROFIT. SINCE IN EARLIER ASSESSMENT YEARS THE CLAIM OF THE ASSESSEE WAS CONSISTENTLY ACCEPTED AS SHORT TERM CAPITAL GAIN IT WAS HELD THAT THE RULE OF CONSISTENCY AS PROPOUNDED BY HON'BLE BOMBAY HIGH COURT IN THE CASE OF GOPAL PUROHIT (S UPRA) IT IS FAIRLY APPLICABLE AND THE INCOME HAS TO BE TREATED AS SHORT TERM CAPITAL GAIN. IDENTICALLY IN THE CASE OF NAGINDAS P SETH (ITA NO.961/MUM/2010) IT WAS HELD THAT DESPITE LARGE NUMBER OF TRANSACTIONS IN SHARES THE PROFIT CAN BE ASSESSED AS CAPITAL GAINS UNDER THE FACTS OF THE CASE. THE CASE OF THE ASSESSEE IS FURTHER FORTIFIED BY THESE DECISIONS MORE SPECIFICALLY WHEN THE ASSESSEE WAS HOLD THE SHARES IN HIS BOOKS AS INVESTOR AS WELL AS TOCK - IN - TRADE SEPARATELY. THE DECISION IN THE CASE OF JANAK S RANAWALA 11 SOT 627 (MUM.) FURTHER SUPPORTS THE CASE OF THE ASSESSEE. LIKEWISE THE DECISION FROM HON'BLE MADRAS HIGH COURT IN CIT VS N.S.S. INVESTMENT PVT LTD. 227 ITR 149 (MAD) CIT VS. ASSOCIATED 11 ITA 7087 / M/ 11 & ITA 7410/ M/11 INDUSTRIAL DEVELOPMENT COMPANY 82 ITR 526 (SC) SUPPORTS THE CASE OF THE ASSESSEE. IN THE PRESENT APPEAL WE NOTE THAT THE ASSESSEE MADE INVESTMENT IN SHARES WITH INTENTION TO EARN DIVIDEND INCOME ON APPRECIATION OF PRICE OF SHARES. THEREFORE IT CANNOT BE SAID THAT THE ASSESSEE WAS DOING BUSINESS. 1 4 . FROM THE RECORD WE FOUND THAT THE ASSESSEE HAS MADE INVESTMENT IN SHARES AND SECURITIES OUT OF SALE PROCEEDS OF SHARES HELD AS LONG TERM INVESTMENT ON WHICH ASSESSEE HAS DECLARED LONG TERM CAPITAL GAINS OF RS.10.91 CRORES. SINCE THE ASSESSEE HAS EARNED DIVIDEND INCOME THE AO DISALLOWED RS.33 87 373/ - BY INVOKING PROVISIONS OF SECTION 14A. THE ASSESSEE HAS ALSO EARNED LONG TERM CAPITAL GAIN OF RS.10.91 CRORES AND SUFFERED SHORT TERM CAPITAL LOSS OF RS.1.34 CRORES. HOWEVER THE AO DID NOT ACCEPT ASSESSEE S CLAIM OF CAPITAL GAIN AND TREATED THE SAME AS BUSINESS INCOME. THE BASIC PLEA OF THE AO WAS THAT ASSESSEE HAS INVESTED BORROWED FUNDS FOR THE ACQUISITION OF SHARES AND SECURITIES THEREFORE THE PROFIT/LOSS EARNED THEREON WAS TREATED AS BUSINESS INCOME. FROM THE RECORD WE FOUND THAT ASSESSEE WAS FOLLOWING CONSISTENT PRACTICE OF HOLDING SHARES AS INVESTMENT IN ITS BOOKS OF ACCOUNTS IN ALL THE YEARS. SUCH INVESTMENT WAS CONSISTENTLY VALUED AT COST AS AGAINST COST OR MARKET VALUE WHICHEVER IS LOWER. IN EA RLIER YEARS ASSESSMENT HAS BEEN COMPLETED BY DEPARTMENT TREATING SUCH ACTIVITIES AS ACTIVITY OF REALIZATION OF INVESTMENT RATHER THAN TRADING IN SHARES. WE FOUND THAT IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR 2007 - 08 LONG TERM CAPITAL GAIN OF RS.5.95 C RORES WAS REALIZED ON SALE OF SHARES COSTING RS.1.55 CRORES WHICH WERE REALIZED FOR RS.7.50 CRORES. THE AO HAS ACCEPTED LONG TERM AND SHORT TERM CAPITAL GAIN SHOWN BY ASSESSEE WAS UNDER SCRUTINY ASSESSMENT ORDER FRAMED U/S.143(3) VIDE ORDER DATED 24 - 11 - 20 09. SIMILARLY ASSESSMENT FOR ASSESSMENT YEAR 2006 - 07 WAS 12 ITA 7087 / M/ 11 & ITA 7410/ M/11 COMPLETED U/S.143(3) VIDE ORDER DATED 29 - 12 - 2009 WHEREIN LONG TERM CAPITAL GAIN OF RS.4.90 CRORES AND SHORT TERM CAPITAL GAIN OF RS.1.78 CRORES WAS ACCEPTED BY THE DEPARTMENT. DURING THE YEAR UNDER CONSIDERATION ALSO THE ASSESSEE HAS SHOWN LONG TERM CAPITAL GAINS OF RS.10.91 CRORES AND SHORT TERM CAPITAL LOSS OF RS.1.47 CRORES HOWEVER WITHOUT INDICATING ANY CHANGE IN THE FACTS AND CIRCUMSTANCES THE AO CHANGED HIS VIEW AND HELD THE SAME AS BUSINESS INCOME. WE FOUND THAT THERE IS NO CHANGE IN THE CIRCUMSTANCES IN THE CURRENT YEAR THEREFORE HAVING REGARD TO THE PRINCIPLE OF CONSISTENCY PROFIT ON REALIZATION OF INVESTMENT IS REQUIRED TO BE ASSESSED AS CAPITAL GAINS. IN THIS REGARD RELIANCE MAY BE PL ACED ON THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF GOPAL PUROHIT REPORTED IN 122 TTJ 87 WHICH WAS CONFIRMED BY THE HONBLE HIGH COURT REPORTED IN 228 CTR 582 AND THE SLP FILED BY THE DEPARTMENT BEFORE THE HONBLE SUPREME COURT WAS A LSO DISMISSED VIDE ORDER DATED 15.11.2010 . THERE IS NO DISPUTE TO THE FACT THAT IN ITS BOOKS OF ACCOUNTS ALSO THE ASSESSEE HAS TREATED THE SAME AS INVESTMENT BY PROPER DISCLOSURE IN ITS AUDITED BALANCE SHEET. THE INVESTMENTS HELD BY THE ASSESSEE CONSISTED OF INVESTMENT IN QUOTED SHARES OF RS.6.60 CRORES AND INVESTMENT IN UNQUOTED SHARES AND SHARES WARRANTS OF RS.11.14 CRORES WHICH WERE VALUED AT COST. SIMILARLY IN ASSESSMENT YEAR 2007 - 08 ASSESSEE WAS HOLDING QUOTED SHARES AT COST OF RS.7.10 CRORES AND UNQU OTED SHARES OF RS.2.26 CRORES. THE DISCLOSURE OF THE INVESTMENT IN THE ACCOUNTS IS A MATERIAL FACT TO ASCERTAIN THE INTENTION OF THE ASSESSEE TO HOLD THE SHARES AS INVESTMENT OR STOCK IN TRADE. IN THE CASE OF GOPAL PUROHIT (SUPRA) THE TRIBUNAL HELD TH AT PRESENTATION IN THE BOOKS OF ACCOUNTS IS MOST CRUCIAL SOURCE OF GATHERING INTENTION OF THE ASSESSEE WITH REGARD TO THE NATURE OF TRANSACTION. IT IS ALSO NOT THE CASE OF AO THAT THE SHARES WHICH WERE HELD AS INVESTMENT IN EARLIER ASSESSMENT YEARS I.E. 20 05 - 06 2006 - 07 & 13 ITA 7087 / M/ 11 & ITA 7410/ M/11 2007 - 08 AND ACCEPTED BY THE DEPARTMENT AS INVESTMENT WERE CONVERTED INTO STOCK IN TRADE SO AS TO ATTRACT THE PROVISIONS OF SECTION 4 3 ( 5 ) OF THE ACT. SINCE THE SHARES HELD AS INVESTMENT IN EARLIER YEARS AND ALSO ACCEPTED BY THE DEPARTMENT A S SUCH THE ASSESSEE HAVING NOT CONVERTED ITS SHARES IN STOCK IN TRADE THERE WAS NO REASON TO ASSESS THE PROFIT ARISING OUT OF SALE AS BUSINESS INCOME IN PLACE OF CAPITAL GAINS. 1 5 . NOW COMING TO THE AOS OBSERVATION WITH REGARD TO THE BORROWED FUND HAVING BEEN UTILIZED FOR ACQUIRING SHARES WE FOUND THAT INCREMENTAL INVESTMENT MADE DURING THE YEAR WAS OF RS.3.79 CRORES WHICH WAS COMPLETELY FINANCED OUT OF SALE PROCEEDS OF EARLIER INVESTMENT ON WHICH LONG TERM CAPITAL OF RS.10.91 CRORES HAS BEEN RETUR NED BY THE ASSESSEE. WE FOUND THAT SHARES COSTING FOR RS.3.59 CRORES WERE REALIZED FOR RS.14.50 CRORE. THE SHARES WERE SOLD DURING THE PERIOD FROM APRIL2007 TO JANUARY 2008 AND FRESH SHARES HAS BEEN ACQUIRED DURING THE PERIOD JUNE 2007 TO MARCH 2008. IN CASE OF UNQUOTED SHARES THE ASSESSEE HAS ACQUIRED THE SAME DURING THE PERIOD JUNE 2007 TO MARCH 2008 WHICH WAS ACQUIRED OUT OF SHARE APPLICATION GIVEN IN EARLIER YEARS WHICH CLEARLY INDICATES THAT ASSESSEE HAS NOT USED BORROWED FUNDS FOR INVESTMENT H ELD EITHER AS ON 31 - 3 - 2008 OR 31 - 3 - 2007.THE AO HAS FAILED TO APPRECIATE THE FACTUAL POSITION EMERGING OUT OF THE AUDITED BALANCE SHEET TO THE EFFECT THAT INCREASED UNSECURED LOANS HAS BEEN UTILIZED FOR FURTHER ADVANCING LOANS. LOANS AND ADVANCES AS ON 31 - 3 - 2008 AMOUNTED TO RS.20.56 CRORES AS AGAINST LOANS AND LOAN OF RS.8.96 CRORES AS ON 31 - 3 - 2007. THUS INCREASE IN LOANS AND ADVANCES WERE MUCH MORE THAN INCREASE IN UNSECURED LOANS. ACCORDINGLY WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF CIT(A) FOR HOLDI NG THESE SHARES AS INVESTMENT GIVING RISE TO THE CAPITAL GAIN. THE CIT(A) HAS PROPERLY APPRECIATED THE VOLUME AND FREQUENCY OF THE TRANSACTION THE ASSESSEES 14 ITA 7087 / M/ 11 & ITA 7410/ M/11 INTENTION OF INVESTING IN SHARES AS WELL AS DEPARTMENTS CONCLUSION OF TREATING THESE SHARES AS I NVESTMENT IN THE SCRUTINY ASSESSMENT FRAMED IN EARLIER YEARS. 1 6 . IF THE CONCLUSION DRAWN IN THE IMPUGNED ORDER OBSERVATIONS MADE FROM THE ASSESSMENT ORDER ASSERTIONS MADE BY RESPECTIVE COUNSEL AND THE MATERIAL AVAILABLE ON RECORD ARE KEPT IN JUXTAPOSIT ION AND ANALYZED WE FIND THAT THE ASSESSEE HAD BEEN CONSISTENTLY INVESTING IN SHARES AND INCOME ARISING FROM SALE AND PURCHASE OF SHARES HAD BEEN SHOWN AND ACCEPTED AS CAPITAL GAINS. 17 . WITH REGARD TO DISALLOWANCE MADE BY THE AO U/S.14A READ WITH RULE 8D WE FOUND THAT ASSESSEE HAS NOT INVESTED INTEREST BEARING FUNDS IN THE SHARES AND SECURITIES IN TERMS OF DETAILED DISCUSSION MADE HEREINABOVE. SINCE NO INTEREST EXPENDITURE WAS INCURRED DURING THE YEAR IN RESPECT OF ADDITIONAL INVESTMENT PUT IN THE SHA RES WHICH WERE FULLY FINANCED OUT OF THE SALE PROCEEDS OF SHARES HELD AS LONG TERM CAPITAL INVESTMENT AND SAME ALSO OFFERED AS LONG TERM CAPITAL GAINS THERE IS NO REASON FOR DISALLOWANCE OF INTEREST EXPENDITURE BY INVOKING PROVISIONS OF SECTION 14A READ WITH RULE 8D. 18 . WITH REGARD TO THE OTHER EXPENDITURE DEBITED IN THE PROFIT AND LOSS ACCOUNT WE FOUND THAT COMMON EXPENDITURE HAVE BEEN DEBITED WHICH ARE IN THE NATURE OF INSURANCE EXPENSES BANK CHARGES AUDIT FEES REPAIRS AND MAINTENANCE STAMP DUTY ETC. WHICH AMOUNTS TO RS.65 925/ - . SINCE THIS EXPENDITURE WAS ALSO ATTRIBUTABLE FOR THE EARNING OF EXEMPT INCOME WE DIRECT THE AO TO CONFIRM THE DISALLOWANCE OF THESE EXPENDITURE OF RS.65 925/ - U/S.14A. WE DIRECT ACCORDINGLY. 15 ITA 7087 / M/ 11 & ITA 7410/ M/11 19 . WITH REGARD TO SHORT TERM CAPITAL GAIN OF RS.1 34 14 682/ - EARNED BY THE ASSESSEE WE FOUND THAT AFTER CONSIDERING THE ACTUAL PAYMENT MADE FOR SHARES THE CIT(A) HELD THAT DERIVATIVE TRANSACTIONS THROUGH A RECOGNIZED STOCK EXCHANGE HAVE BEEN TAKEN OUT OF THE PURVIEW OF THE SPE CULATION TRANSACTION U/S.4 3 ( 5 ) AFTER AMENDMENT W.E.F. 1 - 4 - 2006. IN THE INSTANT CASE RELEVANT ASSESSMENT YEAR UNDER CONSIDERATION IS 2008 - 09 TO WHICH AMENDED PROVISION IS APPLICABLE. FURTHERMORE THE HONBLE BOMBAY HIGH COURT IN THE CASE OF BHARAT RUIA (HUF) 337 ITR 452 ALSO CONSIDERED THE AMENDED PROVISIONS AND HELD THAT DERIVATIVE TRANSACTIONS PRIOR TO AMENDMENT WOULD COME WITHIN THE AMBIT OF SPECULATION TRANSACTIONS U/S.4 3 ( 5 ) OF THE ACT. A CATEGORICAL FINDING HAS ALSO BEEN RECORDED BY THE CIT(A) TO T HE EFFECT THAT THESE TRANSACTIONS HAVE BEEN CARRIED OUT THROUGH RECOGNIZED STOCK EXCHANGE ACCORDINGLY PROFIT/LOSS ON SUCH TRANSACTIONS WILL BE TREATED AS NORMAL BUSINESS PROFIT/LOSS AND IT CANNOT BE TREATED AS NOTIONAL LOSS. WE DO NOT FIND ANY REASON TO INTERFERE IN THE FINDINGS RECORDED BY THE CIT(A) FOR TREATING SUCH LOSS AS A NORMAL BUSINESS LOSS INSTEAD OF AOS ACTION OF TREATING THE SAME AS NOTIONAL LOSS. 20. IN THE RESULT APPEAL OF THE REVENUE IS DISMISSED WHEREAS THE APPEAL OF THE ASSESSEE IS ALLOWED IN PART. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 26 /11/ 2014. SD/ - SD/ - ( ) ( I.P.BANSAL ) ( ) ( R.C.SHARMA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED 26 /11/2014 16 ITA 7087 / M/ 11 & ITA 7410/ M/11 COPY OF THE ORDER FORWARDED TO : / BY ORDER ( ASSTT. REGISTRAR) / ITAT MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / THE CIT(A) MUMBAI. 4. / CIT 5. / DR ITAT MUMBAI 6. GUARD FILE. //TRUE COPY//