ASHISH RANWALA,MUMBAI vs. ACIT 19(1), MUMBAI

The present appeal is directed against the order passed by the CIT(A)-30, Mumbai, dated 28.10.2014, which in itself is directed against the order passed by the A.O under Sec. 143(3) of the Income tax Act, 1961

Briefly stated, the facts of the case are that the assessee had filed his return of income for AY 2010-11, declaring total income of Rs.1,20,09,500/- on 15.10.2010. The return of income filed by the assessee was processed under Sec. 143(1) of the „Act‟. The case of the assessee was thereafter taken up for scrutiny assessment under Sec. 143(2).

The assessee during the year under consideration was a partner in a concern, viz. M/s Kashvi Enterprises which was engaged in the business of trading in shares and Future & Options. During the course of the assessment proceedings the A.O observed that the assessee was mainly engaged in purchase and sale of shares and units of mutual funds. The assessee had in his return of income offered the gain from the sale of shares under the head capital gain depending on the period of holding. The P a g e | Ashish Ranwala Vs. ACIT-19(1) A.O observed that the assessee had shown Short term capital gain (for short „STCG‟) of Rs.1,15,29,161/- and Long term capital loss (for short „LTCL‟) of Rs.14,88,880/-on sale of shares. The assessee furnished with the A.O the scrip wise details of purchase and sale transactions along with the source of acquisition of the shares for the year under consideration and for the previous years. The A.O after deliberating on the details placed on record by the assessee took cognizance of certain material facts as had emerged therefrom, viz. (i) the principal source of income of the assessee was from dealing in shares; (ii) the assessee was involved in the purchase and sale of shares for several years; (iii) the assessee was also the managing partner of M/s Kashvi Enterprises which was engaged in speculative transactions; (iv) the assessee devoted his entire time in stock market operations; (v) the assessee had during the year purchased 6,40,880 shares which were sold in the same year; (vi) the investment in the shares during the year was Rs.9.72 crore whereas the dividend income received was only Rs.2.33 lac which was 0.2% of the investment; (vii) the sale proceeds of the shares were in a regular and a systematic manner re- invested by the assessee in acquisition of shares/units to maximise the profits; and (viii) the books of account of the assessee revealed that he had utilized borrowed interest bearing funds for acquisition of shares. The A.O after deliberating on the aforesaid material facts, called upon the assessee to show cause as to why his activities of purchase and sale of shares may not be treated as a business and not just an investment. The assessee in his reply submitted before the A.O that he was a partner in M/s Kashvi Enterprises where the trading in shares and Future & Options business was carried on and the income arising from the same was offered for tax by the firm as business income. That as regards the income from the sale of shares which was shown by him under the head capital gains, it was submitted that the said shares were purchased and held by him as an investment. The assessee in order to buttress his aforesaid claim

The A.O further observed that the assessee had during the year received dividend income at Rs.2,33,117/-, which was claimed as exempt. It was observed by the A.O that the assessee had not offered any disallowance under Sec. 14A r.w. Rule 8D in relation to earning of the aforesaid exempt income. That in the absence of any explanation by the assessee as to why a disallowance in respect of the expenses incurred for earning of the exempt dividend income may not be made in his hands, the A.O proceeded with and carried out a disallowance of Rs.1,15,676/- under Sec. 14A of the „Act‟.

Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) after deliberating at length on the contentions of the assessee, observed, that the assessee along with his wife Smt. Sheetal A. Ranwala were partners in the firm M/s Kashvi Enterprises, which was carrying on the business of trading in shares and Future & Options. The CIT(A) deliberated on certain facts which had a strong bearing on the adjudication of the issue under consideration, viz. (i) the total investment in shares by the assessee was Rs.3.43 crore; (ii) the assessee had during the year purchased 6,40,880 shares at a cost of Rs.9.72 crore which were sold during the year itself for a consideration of Rs.10.81 crore; (iii) that the assessee had borrowed an amount of Rs.37.06 lacs for purchase of shares, which included an interest bearing loan of Rs.29,50,000/- from a close relative, viz. Mrs. Nirupa Ranwala; (iv) the assessee had shown STCG of Rs.1,15,29,161/- from the purchase and sale of shares during the year; (v) the assessee had earned dividend income of Rs.2,33,000/- on an investment of Rs.9.72 crore in shares which was 0.2% of the investment; and (vi). the entire STCG of Rs.1.15 crore declared during the year was from sale of shares which were held for a period of not more than 3 months. The CIT(A) after deliberating on the aforesaid material facts concluded that the assessee by borrowing funds from his close relatives and other close associates had as a matter of fact extended the business activity of the firm in which he was a partner. It was further observed by the CIT(A) that the dividend income earned by the assessee was so meagre that it did not support the claim of the assessee that it had held the shares as an investment, but rather, on the contrary proved that the same were held with the intent to make profit by trading in the same. The CIT(A) observed that the A.O while concluding that the profit from the purchase and sale of shares by the assessee was liable to be brought to tax as his

The CIT(A) thus deliberating on the facts of the case in the backdrop of the aforesaid parameters, viz. volume, frequency, continuity and regularity of transactions of purchase and sale of shares, observed that the same were purchased by the assessee with the motive to earn profit and not held as an investment. The CIT(A) observed that the frequency, continuity and regularity of share transactions could also be gauged from the fact that during the year it was as high as to earn 83.13% of the gross total income declared by the assessee in his return of income. Thus, the CIT(A) in the backdrop of his aforesaid observations was not persuaded to subscribe to the claim of the assessee and concluded that profit from purchase and sale of shares declared by the assessee under the head

The CIT(A) further deliberating on the disallowance of Rs.1,15,676/- made by the A.O under Sec. 14A of the Act, observed that the A.O by carrying out a disallowance @ 0.5% of the average investment had made an addition of Rs.83,852/- on the said count to the income of the assessee. The assessee submitted before the CIT(A) that as the disallowance contemplated under Sec. 14A of the Act could be validly made only if the assessee had claimed any expenditure, therefore, now when it had not claimed any expenditure, the question of any disallowance did not arise at all. Alternatively, it was submitted by the assessee that even if disallowance @ 0.5% on average investment was to be made, the same was liable to be restricted only in respect of those shares on which dividend was earned by the assessee. It was thus submitted by the assessee that either the addition be deleted or in the alternative the same be restricted to Rs. 27,912/-. The CIT(A) observed that the A.O had made the disallowance under Rule 8D(2)(iii) towards “deemed expenses”. The CIT(A) though did not rebut the claim of the assessee that he had not claimed any expenditure, therefore, the disallowance under Sec.14A could not have been made, but howeve, observed that as the disallowance in Rule 8D(2)(iii)

The assessee being aggrieved with the order of the CIT(A) had carried the matter in appeal before us. The ld. Authorized Representative (for short „A.R.‟) during the course of hearing of the appeal placed on record his „Brief submissions‟ as regards the issues under consideration and relied on the same. It was submitted by the ld. A.R that the lower authorities had erred in assessing the income shown by the assessee on sale of shares held by him as an investment, as his business income. The ld. A.R further submitted that the lower authorities had failed to appreciate that now when no expense was claimed by the assessee, therefore, there remained no occasion to make any disallowance under Sec. 14A. It was submitted by the assessee that the issue under consideration involving the same facts had been adjudicated by a coordinate bench of the Tribunal, viz. ITAT “E”, Mumbai in the case of his wife, viz. Sheetal Ranwala Vs. ACIT 19(1), Mumbai (ITA No. 20/Mum/2015, dated 20.10.2016) for AY 2010-11. (copy placed on record). Per contra, the ld. Departmental representative (for short „D.R‟) relied on the order of a coordinate bench of the Tribunal, viz. ITAT “E”, Mumbai, in the case of Shri Sanjay Marwah Vs. DCIT, Circle 3, Thane (ITA No. 3299/Mum/2012, dated 20.11.2014). It was submitted by the ld. D.R that the Tribunal in its aforesaid order had deliberated on the various parameters for concluding as to whether the gain from sale of shares was liable to be brought to tax as the income of the assessee under the head capital gain or business income. It was thus submitted by the ld. D.R that as the appeal of the assessee was devoid of any merit, therefore, the same may be dismissed.

We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on P a g e | Ashish Ranwala Vs. ACIT-19(1) record. We find that it remains as a matter of fact that the assessee along with his wife Smt. Sheetal Ranwala during the year under consideration was a partner in a firm M/s Kashvi Enterprises, which was engaged in the business of trading in shares and Future & Options. We find that though the A.O while framing the assessment had referred to the various parameters which have a material bearing on adjudicating as to whether the profit on the sale of shares by the assessee was liable to be brought to tax under the head „capital gain‟ or „business income‟, but we find that the primary issue which had weighed in the mind of the A.O while concluding that the gain on the sale of shares was liable to be assessed as the business income of the assessee, was the fact that the assessee happened to be a partner in the firm M/s Kashvi Enterprises which was engaged in the business of trading in shares and Future & Options. We further find that both of the lower authorities had observed that the assessee had borrowed interest bearing funds for making investment in the shares during the year under consideration, which as observed by them included an amount of Rs.29,50,000/- borrowed from a family member Mrs. Nirupa Ranwala. We however find that the lower authorities had misconceived the facts as regards the loan which was raised by the assessee from Mrs. Nirupa Ranwala, on two grounds, viz. (i). that it was not an interest bearing loan, but rather, an interest free unsecured loan; (ii). the loan was raised by the assessee in the preceding year and not during the year under consideration. We find that the aforesaid claim of the assessee that the loan was raised from Mrs. Nirupa Ranwala in the preceding year can safely be gathered from a perusal of the outstanding liability of the assessee on 31.03.2009 and 31.03.2010. Similarly, the fact that the aforesaid loan was free of interest is proved beyond doubt on a perusal of the „Capital account‟ of the assessee for the year under consideration, which reveals that interest was paid by the assessee during the year only on his housing loan, and no interest was paid on the outstanding loan of Mrs. Nirupa Ranwala.

We have deliberated at length on the issue under consideration before us and after giving a thoughtful consideration are of the considered view that as the assessee had purchased and held the shares as an investment, therefore, keeping in view the various factors which have a material bearing on adjudicating as to whether the income from the purchase and sale of shares is liable to be assessed under the head „capital gain‟ or „business income‟, find ourselves to be in agreement with the claim of the assessee that the gain on the sale of the shares was liable to be assessed under the head capital gains, as claimed by him. We may herein observe that not only the assessee fairly satisfies the parameters contemplated for bringing the purchase and sale transactions of the shares held by him as an investment under the head capital gain, but rather, find that the department had itself in the preceding as well as the succeeding years, viz. AY: 2007-08 and AY 2013-14, respectively, had duly accepted the said claim of the assessee and had assessed the income arising from the sale of the shares under the head capital gain, as claimed by the assessee. We are of the considered view that as per the rule of consistency the department cannot be allowed to take an inconsistent approach and resort to shifting stands in respect of an issue involving the same facts. We find that our aforesaid view is fortified by the judgment of the Hon’ble

We have further deliberated on the disallowance made by the A.O under Sec. 14A r.w. Rule 8D in the hands of the assessee. We have perused the statement of total income of the assessee and find that the assessee had not claimed any expenditure against any income. We are of the considered view that disallowance of any part of the expenses by relating the same to earning of income not forming part of the total income of the assessee, would arise only if any expenditure is claimed by the assessee. It is further the settled position of law that the A.O can resort to and make a disallowance under Sec. 14A r.w r. 8D, only where he is not satisfied with the claim of the assessee having regard to the accounts of the assessee. We are of the considered view that as in the present case the assessee had not claimed any expenditure, therefore, there was no occasion for the A.O to have carried out any disallowance under Sec. 14A. We thus in the backdrop of our aforesaid observations set aside the order