KARODIA CONSTRUCTION PVT. LTD.,MUMBAI vs. D.C.I.T. 9(2), MUMBAI

2. The CIT(A) has erred in fact and in law in confirming the addition of Rs.1,74,580/- u/s. 14A.” Brief Facts: 2.Assessee-company,engaged in the business of real estate and dealing in shares,filed its return of income,on 30.9.2008,declaring total income at 73.57 lacs.The Assessing Officer (AO)completed the assessment,u/s. 143(3) of the Act,on 01.12.12,determining its income at Rs.75,39,340/-.While finalising the assessment,the AO made addition of Rs.73.64 lacs under the head business income.He further made a disallowance u/s. 14A of the Act of Rs. 1.74 lacs.Aggrieved by the order of the AO,the assessee preferred an appeal before the FAA, who upheld the order of the AO.

The assessee carried the matter before the Ld. CIT(A) and reiterated its stand that it is only an investor and not a trader. The Ld. CIT(A) rejected the submissions made by the assessee and confirmed the findings of the AO.

Aggrieved by this finding of the Ld. CIT(A), assessee is before us.

The Ld. Counsel for the assessee argued that both the lower authorities have treated the capital gains from shares as business income only on the basis of the volume of transactions entered by the assessee, the frequency of transaction made and there being borrowed funds. It is the say of the Ld. Counsel that merely on the basis of these allegations, the nature of transaction cannot be changed from investment to business activity. The Ld. Counsel for the assessee further argued that during the year the assessee has transacted only 24 scrips . The assessee has shown the investment in the balance sheet under the head ‘investment’. The Ld. Counsel for the assessee further submitted that the assessee has itself bifurcated the income in its profit and loss account under the head profits from Future and Options, speculation transaction and investment in shares. The Ld. Counsel also relied upon the Circular of the CBDT No. 4/2007 dt. 15.6.2007 and submitted that even the CBDT has recognized that a tax payer can have two portfolios i.e. an investment portfolio and trading portfolio.

Per contra, Ld. Departmental Representative strongly supported the findings of the lower authorities.

We have carefully considered the rival submissions and perused the orders of the lower authorities. The dispute is regarding the nature of income on sale and purchase of shares by the assessee. The issue, whether the income from sale and purchase of shares in a particular case should be treated as capital gain or as business income has been a debatable issue and there are conflicting decisions of the Tribunal on this issue. Each case is, therefore, to be based on its own factual situation. A perusal of the profit and loss account of the assessee shows that the assessee has separately shown share trading profit, long term capital gains on shares and profit from business. In the balance sheet, the assessee has shown shares under the head ‘investment’. These investment shares have been valued at cost . The Hon’ble Supreme Court in the case of CIT Associated Industrial Development Co Pvt. Ltd. 82 ITR 586, which decision has also been considered by the CBDT in its Circular No. 4/2007 dt. 15.6.2007, has observed that : “Whether a particular holding of shares is by way of investment or forms part of the stock-in- trade is a matter which is within the knowledge of the assessee who holds the shares and it 2

The assessee had opening investment at Rs. 4,01,49,296/- and the investment as on 31.3.2007 was at Rs. 3,97,99,072/-. This clearly shows that the assessee had brought forward investment in shares. The borrowed capital of Rs. 1,36,23,246/- has come down to Rs. 2,396/- at the close of the current financial year. The allegation of the Revenue authorities is that the assessee has indulged into high frequency transaction. This in itself could not mean that trading activities have been carried out. A prudent investor always keep a watch on the volatility of the market and makes sound investment decision in accordance with such market fluctuation and has the liberty to liquidate its investments in shares as and when necessary. The law itself has recognized this fact by treating the same as short term capital gains for shares held less than 12 months and long term capital gains where the shares are held for more than 12 months. Had this been not the case, all the gains on shares would have been considered as business income only. The fact that the law recognizes such volatility and has specifically provided a separate holding period in respect of such shares makes it very clear that gains on such shares having a holding period of less than 12 months and held as investment would be considered as short term capital gains only. Thus the assessee’s claim cannot be negated on the basis of frequency of transaction as held in the case of Gopal Purohit (supra). 9.1. As regards the allegation that the borrowed funds had been applied for investment in shares, it has been held by the Tribunal, Delhi Bench in the case of Narendra Gehlaut Vs JCIT 21 Taxmann .com 82 that “ it cannot constitute a factor as in none of the case laws or CBDT Circular it has been held that borrowings will not be allowed in investment transactions. The investment in capital assets can also be carried out by way of borrowed funds, there being no bar notified by the law, judicial pronouncement or CBDT circular.” 9.2. Considering the entire facts in totality in the light of the judicial decision discussed here in above,we find that it has not been disputed that the assessee has shown shares as investment right from the date of purchase and that was shown as such in the balance sheet of the assessee which was filed before the AO. In our humble opinion, the shares have to be treated as an investment and therefore any profit earned on the sale thereof is to be treated as capital gain. Findings of the Ld. CIT(A) are reversed. The AO is directed to treat the profits on sale of shares as capital gain, short term or long term as the case may be. Ground No. 1 & 2 are accordingly allowed.

Ground No. 3 relates to the addition of Rs. 2,23,900/- u/s. 14A of the Act.

The AO observed that the assessee has received dividend income of Rs. 4,52,588/- which was claimed to be exempt from tax. The assessee was asked to explain why provisions of Sec. 14A r.w. Rule 8D should not be invoked since dividend income is shown as exempt. The assessee stated that no expenditure has been incurred for earning the dividend income. The AO did not accept this contention of the assessee and went on the rely upon the decision of the Special Bench of the Tribunal Mumbai Bench in in the case of Daga Capital Management and computed the disallowance u/s. 14A r.w. Rule 8D at Rs. 2,23,900/-. 3

The assessee carried the matter before the Ld. CIT(A) and submitted that applicability of Rule 8D has been held to be prospective from A.Y. 2008-09 by the decision of the Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. 328 ITR 81. The Ld. CIT(A) was convinced that Rule 8D is not applicable for the year under consideration. However, confirmed the disallowance made by the AO holding that there is no other parameter or yardstick, therefore, method prescribed under Rule 8D is correct even though the same is not applicable to the current year.

Aggrieved by this, assessee is before us. As the issue is well settled that applicability of Rule 8D is from A.Y. 2008-09, we therefore do not find any merit in the observations of the Ld. CIT(A). However, in the interest of justice and fair play, we restore this issue back to the files of the AO. The AO is directed to re-compute the disallowance, if any, u/s. 14A without invoking Rule 8D. Ground No. 3 is allowed for statistical purpose.” Respectfully,following the above order,we decide ground no.1 in favour of the assessee. Ground no.2 is allowed in favour of the assessee,in part.The AO is directed to re-compute the disallowance after hearing the assessee.