PANKAJ K. DHARIA,MUMBAI vs. ITO 16(1)(1), MUMBAI

This appeal by assessee is arising out of the order of Ld. CIT(A)-27, Mumbai in Appeal No. CIT(A)-27/16(1)(1)/259/2010-11, order dt. 04/03/2013. Assessment was framed by ITO, Ward 16(1)(1), Mumbai under section 143(3) of the Act, 1961 ( hereinafter ‘the Act’) for the AY 2008- 09, vide his order dt. 01/12/2010.

Briefly stated facts are that the assessee claimed the income arising out of sale and purchase of shares as Short Term Capital Gain or Long Term Capital Gain as the case may be. But the Assessing Officer treated the profit arising out of sale and purchase of shares as income from business for the reason that the assessee cannot be treated as investor as the pattern of the assessee for purchase and sale of shares is that of a trader due to volume of transaction and holding pattern of shares. According to Assessing Officer the holding period of shares varied from 1 day to 6 months, and he noted the details of transaction in his assessment order. Finally in view of the above, the Assessing Officer treated the profit arising out of sale and purchase of shares as business income. Aggrieved, assessee preferred the appeal before Ld. CIT(A).

The Ld. CIT also confirmed the action of the Assessing Officer in disallowing the claim of the assessee that the profit arising out of purchase and sale of share as Short Term/ Long Term Capital Gain or loss. The fact is that the assessee had entered into volume of transaction with a holding period of 1 day to 6 month, which earned Short Term Capital Gain of Rs. 1,75,966/- and Long Term Capital Gain from other transactions at Rs. 61,659/-. Ld. CIT(A) also confirmed the action of the AO by observing that the assessee had entered into 144 transactions with a holding period of 1 day to 1 month , on which earned a capital gain of Rs. 1,47,367/-. He further noted that assessee entered into 84 transaction with a period of 1 month to 3 months on which assessee incurred loss of Rs. 9,557/-. In view of these facts the Ld. CIT(A) confirmed the action of the AO treating the profit arising out of transactions of sale purchase of shares as business income. Aggrieved, assessee is in appeal before the Tribunal.

We have heard the rival contention and gone through the facts and circumstances of the case. The assessee before us filed a Paper Book containing various details of transaction of sale and purchase of shares. The assessee is a partner in partnership firm from where he is deriving income from business. The Assessing Officer during the course of assessment proceeding noted the nature of business of the assessee is share trading but this was contested by the assessee before us that actually he is investor and not a trader in shares. The Ld. Counsel for the assessee before us stated that the entire sales and purchase of shares are through brokers and holding period is from 1 day to 180 days. He described that there are 67 transactions wherein the holding period is less than 15 days, the holding period of 15 transaction is less than 30 days, the holding period of 11 transactions 2 is less than 45 days, the holding period of 19 transaction is less than 60 days, the holding period of 18 days is less than 90 days, holding period for 26 transaction is less than 180 days. There are 7 transactions where the assessee on different dates entered into transactions of sale and purchase, where holding period is more than 180 days. In view of this holding period mentioned, the assessee claim that there is no trading in sales and purchase of shares rather the assessee first invested the amount in shares and hold the same as investment in its investment portfolio and the transactions routed through DEMAT account. This fact is noted by the Assessing Officer that the assessee consistently is holding the investment and he has given the following in his assessment order:

On the other hand Ld. DR supported the order of Lower authorities.

Going through the facts of the case and arguments of both the sides, we find that the assessee has maintained the investment portfolio and all the sales and purchase of shares are routed through the same portfolio as noted above. The assessee has kept the entire investment of shares as an investment and not in the trading account. The assessee is not in the business of share trading 3 rather he is partner in firm and doing share transactions as part time. We find that the AO considering the volume and frequency and considering that the assessee has applied for borrowed funds for making investment in shares, treated the activity of purchase and sale of shares as business activity and assessed the profits arising there from as business income as against declared by the assessee as Short Term Capital Gain. We find that the allegation of Revenue that the assessee is indulging into high frequency transactions but this itself could not mean that the trading activity has been carried out by the assessee because the assessee has kept the entire investment in shares in investment portfolio and his intention is clear that he has to earn capital appreciation on the same. The assessee acted accordingly. The assessee has also kept these shares in DEMAT after taking delivery of the same. Even otherwise in earlier years and future years the assesses transaction of sale and purchase of shares was treated by Revenue as investment and profit or loss arising out of the same was assessed as capital gain i.e; either Long Term Capital Gain or Short Term Capital Gain as the case may be. We find that this case is covered by the decision of Bombay High Court in the case of Gopal Purohit (supra) wherein it is held as under:

The next issue in the appeal of the assessee is against the order of Ld. CIT(A) confirming the action of the AO in disallowing interest expenditure of Rs. 2,93,652/-.

We have heard the rival contention and going through the facts and circumstances of the case. The Assessing Officer noticed from the account of the assessee that it has declared income of Rs. 8,90,546/- on fixed deposit, RBI Bonds and other securities. The assessee claimed deduction of interest payment of Rs. 2,94,707/- on loans and Bank Over Draft. The AO required the assessee to explain the same from the details. The Assessing Officer noted that the assessee has taken loan on which it is paying interest and claimed deduction of Rs. 2,94,707/-. According to AO, the assessee has given interest free loan to his son Shaishav Dharia after taking interest bearing loan from his wife Deepika Dharia. Accordingly he disallowed the interest expenditure of Rs. 2,93,652/- related to his wife and also interest paid to Shri. Farooq Hawa amounting to Rs. 1005/-. Aggrieved, assessee preferred the appeal before the Ld. CIT(A), who also confirmed the action of the AO in respect to disallowance of interest expenditure relating to payment made to his wife Deepika Dharia. Assessee came in second appeal before the Tribunal.

Now before us Ld. Counsel for the assessee stated that the loan taken from wife Deepika Dharia on 13/07/2016 amounted to Rs. 5,00,000/- has no nexus with advance of interest free loan because the same was invested by assessee in the FDR’s maintained with Bank of India and on which interest income was earned and disclosed to the department. Ld. Counsel for the assessee filed copy of bank account of Deepika Dharia and copy of bank FDR’s in its Paper Book at pages 54 & 55. Similarly the assesses received loan from Deepika Dharia amounting to Rs. 4,00,000/-on 10/11/2006, which was invested in FDR from where assessee has earned interest income. Copy of relevant bank account of Deepika Dharia and copy of FDR receipt is included in assessee’s Paper Book at page no. 56 & 57. In view of this Ld. Counsel for the assessee before us argued that the direct nexus of loan taken has been proved and no disallowance on this account can be made.

We have gone through the documents and noticed that assessee has earned interest income on the FDR’s, which were made out of loan taken from Deepika Dharia. There is a direct nexus between the loan taken and amount invested in FDR’s and it has not gone into interest free advances. Once it is a case, the disallowance made by AO cannot be sustained. Accordingly, we are 5 of the view that the assessee has explained the nexus of interest bearing loans invested in income earning instruments and not in the interest free advances. In view of this fact, we delete the disallowance and allow this issue of assessee’s appeal.

In the result, appeal of the assessee is allowed.