TIKUCHAND DURGAJI JOGANI,MUMBAI vs. ITO 17(3)(4), MUMBAI

For the sake of convenience the facts are extracted from the appeal of assessee in for assessment year 2011-12.

Shri Ashok Patil appearing on behalf of the assessee submitted that the assessee is engaged in investment and trading of shares and future and options. During the period relevant to assessment year under appeal, the assessee apart from incomes assessable under others head of income has earned capital gains (short/long term capital gains) on sale of shares. The assessee has also earned interest income and dividend income. In the return of income for AY 2011-12, the assessee has declared short term capital gain of Rs.15,50, 041/- from sale of shares. In scrutiny assessment proceeds, the Assessing Officer treated the aforesaid short term capital gain as ‘Business Income’. The ld. Counsel for the assessee submitted that the assessee has maintained separate portfolios for shares held as investments and the shares held for trading. The assessee had purchased the shares transaction of which is under dispute with the intention of making an investment. The ld. Counsel for the assessee pointed that in assessment year 2006-07, the Assessing Officer in similar manner had changed the head of income from ‘short term capital gains’ to ‘business income’ in respect of shares purchased and sold by the assessee under investment portfolio. The assessee carried the issue in appeal before the Tribunal in ITA No.2285/Mum/2010. The Tribunal vide order dated 21/08/2013 decided the issue in favour of the assessee and directed the Assessing Officer to treat the gain on account of sale of shares as short term capital gain. Thereafter, in assessment year 2008-09, 2012-13 and 2014-15 again the Assessing Officer changed the head income from short term capital gains to business income in respect of income earned by the assessee on sale of shares held as investment. The Tribunal in an appeal by the assessee in for AY 2008-09 decided on 30-10-2015, ITA No.6798/Mum/2018 for AY 2012-13 & 6800/Mum2018 for AY 2014-15 decided vide common order dated 22/01/2020 held that the income from sale of shares is to be treated as short term capital gains. The facts in the impugned assessment year are (A.Y.2011-12) ITA NO.156/MUM/2019(A.Y.2015-16)

The ld. Counsel for the assessee submitted that in ground No.2 of appeal the assessee has assailed disallowance made under section 14A of the Income Tax Act, 1961 (in short ‘the Act’) r.w.r 8D(2) of the Income Tax Rules, 1962 (in short ‘the Rules’). The ld. Counsel for the assessee contended that during the period relevant to assessment year under appeal, the assessee earned dividend income of Rs.4,21,195/-. No suo-motu disallowance was made by the assessee in respect of exempt income earned. The Assessing Officer invoking the provisos of Rule -8D and computed disallowance of Rs.20,98,875/- under section 14A of the Act r.w.r. 8D. The ld. Counsel submitted that the disallowance under section 14A of the Act be restricted to the exempt income earned. To support this argument, he placed reliance on the following decisions of the Tribunal: i. Future Corporate Resources Ltd. vs. DCIT, 85 taxmann.com 190 (Mum); ii. Tata Industries Ltd. vs. ITO 181 TTJ 600 (Mum).

Per contra, Shri Sanjay Sethi representing the Department vehemently defended the impugned order and prayed for dismissing the appeal of assessee. The ld. Departmental Representative submitted that after considering frequency of transactions, time devoted by the assessee, motive of sale and purchase of shares, the Assessing Officer came to the conclusion that the income from sale of shares is assessable as ‘Business Income’ and not as ‘short term capital gains’. The ld. Departmental Representative submitted that in some of the preceding assessment years the issue has been decided by the Tribunal in favour of the assessee but the principle of res judicata does not apply under Income Tax provisions, each assessment year has to be examined separately on its own facts.

The ld. Counsel for the assessee controverting the submissions made by ld. Departmental Representative submitted that during the period relevant to assessment year under appeal the number of transactions in respect to sale and purchase of shares that has resulted in short term capital gains is 238, whereas in assessment year 2006-07 the number of transactions were 363. The Tribunal after examining the entire facts held that the transactions were carried on account of capital investments. The ld. Counsel for the assessee vehemently contended that by no stretch to imagination the frequency of sale and purchases of share transactions is high looking at the size of assessee’s portfolio. He referred to investments reflected in the balance sheet consisting of 197 quoted shares at the end of the year. The ld. Counsel for the assessee further referred to CBDT Circular No.4 of 2007 dated 16/06/2007 to contend that the assessee can have two portfolios one comprising of securities, which are to be treated as capital assets and the trading portfolio comprising of stock in trade.

Both sides heard, orders of the authorities below examined and the decisions on which reliance has been placed by the ld. Counsel for the assessee considered.

In ground No.1 of appeal the assessee has assailed the findings of CIT(A) in treating income of Rs.15,50,041/- under the head ‘Income from Business or Profession’ as against ‘Income from Short Term Capital Gains’ disclosed by the assessee. Undisputedly, there is no bar in assessee holding two portfolios i.e. (1) investment portfolio; and (2) business portfolio. The income generated from transactions held under investment portfolio results in capital gains, short term/long term as the case may be depending upon holding period. Whereas, the income from sale and purchase of shares held under business portfolio is exigible to tax under the head ‘Income from Business or Profession’.

In ground No.2 of appeal, the assessee has assailed disallowance of Rs.20,98,875/- made under section 14A r.w.r. 8D(2) of the Act. The assessee has earned dividend income of Rs.4,21,195/- during AY 2011-12. The short contention of the assessee is that the disallowance may be restricted to exempt income earned. It is no more res-integra that disallowance under section 14A of the Act cannot exceed exempt income earned. [Re. PCIT v. State Bank of Patiala 259 Taxman 314 (P&H); The Hon’ble Supreme Court of India dismissed the SLP of revenue against the judgement of Hon’ble High Court]. The Assessing Officer is directed to restrict the (A.Y.2011-12) ITA NO.156/MUM/2019(A.Y.2015-16)

In ground No.3 of appeal, the assessee has assailed charging of interest under section 234A, 234B and 234C and 234D of the Act. Charging of interest under aforesaid sections is mandatory and consequential, hence, the ground No.3 raised by the assessee is without any merit, hence, dismissed.

In ground No.4 of appeal, the assessee has assailed initiation of penalty proceeding under section 271(1)(c) of the Act. Challenge to penalty proceedings at this stage is premature, ergo, the ground No.4 is dismissed as such.

In the result, appeal by the assessee is partly allowed.

The ld. Counsel for the assessee submitted at the outset that the grounds raised

The ld. Departmental Representative concurred with the contentions of the ld. Counsel for the assessee that the grounds raised by the assessee and the facts in assessment year 2015-16 are similar to facts and grounds in assessment year 2011- 12.

Both sides heard. A perusal of grounds of appeal reveal that they are identical to the grounds raised by the assessee in assessment year 2011-12. Both sides are (A.Y.2011-12) ITA NO.156/MUM/2019(A.Y.2015-16)

In ground No.2, the assessee has assailed disallowance of Rs.1,81,515/- under section 14A of the Act. The assessee has earned dividend income of Rs.2,25,446/-. A perusal of the assessment order shows that while computing disallowance u/r 8D(2), disallowances has been made on account interest expenditure Rs.41,772/- and on account of average investments Rs.1,39,743/-. The ld. Counsel for the assessee has prayed that the issue may restored to the Assessing Officer to re-examine disallowance. The issue is restored to the file of Assessing Officer for re-computation of disallowance under section 14A r.w.r. 8D(2), in accordance with law. The ground no. 2 of the appeal is allowed for statistical purpose.

The ground No. 3 and 4 are identical to the grounds raised in assessment year 2011-12, thus, both these grounds are dismissed for parity of reasons.

In the result, appeal of the assessee is partly allowed.

To sum up, the appeals of the assessee for AY 2011-12 and 2015-16 are partly allowed.