SANGHVI APOORVA LALUBHAI (HUF),MUMBAI vs. ACIT 16(2), MUMBAI

Facts qua the dispute are that the assessee is a Resident HUF engaged in shares/securities transactions. The return of income for impugned AY was filed 2 Sanghvi Apporva Lalubhai (HUF) Vs. ACIT Assessment Year 2010-2011 declaring total income of Rs.43,22,899/- which was taken up for scrutiny assessment u/s 143(3) wherein total income was determined at Rs.42,70.920/- vide Assessing Officer [AO] order dated 15/03/2013. The assessee earned Short Term Capital Gains’ [STCG] on securities transactions for Rs. 43,22,899/- besides speculation loss and income from other sources. The AO applied various parameters on the share transaction activities carried out by assessee and relied on various judicial pronouncements and CBDT Instruction No. 1827 dated 31/08/1989 and concluded that impugned transactions constituted ‘Business Income’ and not STCG in the hands of the assessee. AO noted that share transaction activity was being carried on in regular and systematic manner over several years with a profit motive. Moreover, activities were voluminous both in terms of quantity and quantum. The holding period was low and there were repetitive sale & purchase transactions. Further, as assessee earned tax free incomes, he applied Section 14A and computed disallowance of Rs.1,65,595/- under Rule 8D. Aggrieved, the assessee preferred appeal before CIT(A) who noted that the assessee was maintaining two separate portfolio viz. investment and trading accounts. The assessee indulged in repetitive sale and purchase in some shares within a period of less than 30 days and in particularly in the shares of ‘Jain Irrigation’ wherein capital gain earned was to the tune of Rs.14,75,102/-. Noting this, CIT(A) concluded that the transactions with respect to this scrip involving capital gain of Rs.14,75,102/- constitute business income and accordingly taxable as ‘Business income’. For balance amount, he accepted the contention of assessee, being taxable as STCG. Hence, this contention was partially allowed in favor of assessee. The disallowance u/s 14A was upheld for want of justification and prosecution on the part of assessee. Aggrieved, the assessee is in appeal before us.

The Ld. Counsel for Assessee, Sh. Venugopal C.Nair, contended that the income has rightly been offered under the head ‘Capital Gains’ as the assessee is a HUF and indulged in share transaction with investment motive. It maintained two 3 Sanghvi Apporva Lalubhai (HUF) Vs. ACIT Assessment Year 2010-2011 separate portfolios viz. trading and investment activities for several years. The loss with respect to trading activities was speculation in nature and hence the same has been offered under the head ‘business income’. The income of investment activity has been offered under the head ‘capital gains’. It is well settled that the assessee may maintain two separate portfolios. The stand of the assessee has been accepted by revenue in other years also. Further, owned capital was much more than investment in shares which further fortifies the claim of the assessee that it indulged in investment activities. In support, a copy of Balance Sheet as on 31/03/2010 has been placed before us. The Ld. AR placed reliance on the judgment CIT Vs. HDFC Bank Limited Bombay High Court of 2012 and also on M/s Vahanvati Consultants P. Ltd V DCIT Mumbai Tribunal ITA No. 8700/Mum/2011, a copy of which has been placed before us. Qua 14A disallowance, the Ld. AR has contended that dividend has been earned from trading portfolio and hence no 14A disallowance is called for in such a case. The Ld. AR has fairly conceded that even if any addition is to be made on account of 14A, then it should be restricted to amount of tax exempt income earned by the assessee. This issue was well agitated before CIT(A) but this has not been properly considered. Per contra, the Ld. DR has contended that the assessee has entered into repetitive transaction of same scrips which has been sold even before one month from date of acquisition. There was clear profit motive and conduct of assessee is not commensurate with contentions raised by him. Further, res judicata principal is not applicable to Income Tax proceedings. Further, assessee earned Tax Free income which justifies 14A disallowance.

We have heard rival contentions and perused material available on record. A perusal of details of transactions entered by assessee in Scrip ‘Jain Irrigation’ shows that the assessee earned income of Rs.14.75 Lacs on turnover of Rs. 195.86 Lacs with high frequency of transactions in this particular scrip. The holding period ranges from 0 days to 30 days. The assessee has purchased the scrip in 37 days and sold the scrip 4 Sanghvi Apporva Lalubhai (HUF) Vs. ACIT Assessment Year 2010-2011 in 27 days. The frequency and repetitive nature of transaction in one single scrip shows a clear profit motive on the part of the assessee and negates its contention that the assessee has indulged in investment activity. A substantial relief has already been provided by CIT(A) with respect to balance amount. Therefore, we find no infirmity in the order of CIT(A) and dismiss this ground of appeal