ACIT 9(1), MUMBAI vs. ENVISION INVESTMENT AND FINANCE P. LTD, MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार PER RAJENDRA, AM- अनुसार Challenging the order dated 12.09.2011 of the CIT(A)-19,Mumbai,the Assessee and the Assessing Officer(AO)have filed cross-appeals for above mentioned Assessment Year (AY.). ITA/8041/Mum/2011-AY- 2008-09: 2.Assessee-company,engaged in the business of share trading,filed its return of income on 30. 06.2008,declaring total income of Rs.78.52 crores.Later on,a revised return was filed on 07. 10.2009.The AO completed the assessment on 10.12.2009,u/s.143(3) of the Act,determining the income of the assessee at Rs.1,00,13,51,457/-. 3.First ground of appeal is about treating the gain on transfer of shares under the head business income in place of Short Term Capital Gains(STCG).During the assessment proceed -ings,the AO found that assessee has shown STCG and Long Term Capital Gains(LTCG) of Rs.2.07 and Rs.7.14 Crores respectively for the year under appeal. Considering the factors like motive of the assessee,disclosure by the assessee and its auditors,volume and frequency of transactions,funds for investment,treatment in the earlier years, the AO held that there was no change in the attitude of the assessee as far as regular purchase and sale of shares was concerned.Referring to the order of the immediate previous year, the AO held that income arising out of STCG(Rs.2.07 crores) and LTCG (Rs.7.14 crores) had to be treated as business income of the assessee for the year under consideration. 3.1.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority(FAA)and made elaborate submissions like the earlier AY.The FAA, following the order for the earlier year,held that profit arising out of STCG had rightly been taxed under the head business income.He further held that 6,08,807 shares of Idea Cellular were purchased on 5.3.2007 and were sold on 24.4.2007 resulting in gain of Rs.2.05 crores, that the said transaction was clear in the nature of business transaction.Finally,he upheld the

8041/11&7896/11-Envision order of the AO as far as STCG is concerned.However, with regard to LTCG he held that gains on shares held for more than 12 months were to be taxed under the head LTCG. 3.2.During the course of hearing before us,the Authorised Representative (AR)made the same contention that were made for the earlier AY.i.e.for AY.2007-08.He relied upon the case of Niraj Amidhar Surti(Tax Appeal No.836 of 2009)of Hon’ble Gujarat High court.The Departmental Representative(DR) supported the order of the FAA and relied upon the cases of Jaishree Pradeep Shah(12taxmann.com44),Immortal Financial Services P.Ltd. (44SOT 88) and Tripura Prasad N. Pandya(10taxmann.com77). 3.3.We have heard the rival submission and perused the material before us. We find that similar issue had arisen in the earlier year and we had decided it against the assessee.In the case under consideration the FAA had given a categorical finding of fact that the shares of Idea Cellular(6,08,807) were purchased on 5.3.2007 and were sold on 24.4.2007, that the said transaction resulted in STCG of Rs.2.05 crores out of the total STCG of Rs.2.07 crores, the volume of the shares and the conduct of the assessee to maximise the profit indicates that transaction in question cannot be termed an investment-rather it was a pure and simple business transaction. As stated earlier, similar issue has been deliberated upon by us in the earlier year.Following the same,we uphold the order of the FAA In the case of Neeraj Amidhar surti(supra),the issue was use of borrowed funds for purchasing the shares.In our opinion,the facts of the present case are totally different from the facts of that case.The cases relied upon by the DR support the view taken by the FAA. Considering the above,ground No.1 is decided against the assessee. 4.Ground No.2 is about disallowance made by the AO under Rule 8D of the Income tax Rules,1962(Rules).During the assessment proceedings the AO found that the assessee had credited dividend income of Rs.1.99 crores in its P&L Account, that same had been claimed exempt u/s.10(34) of the Act, that while computing taxable income it had not allowed any expense. He directed the assessee to file details of expenses attributed to earning of dividend income as per section 14A r.w.Rule 8D of the Rules.The assessee submitted the working and disallowance was worked out at Rs.78.48 lacs. However, the AO did not find it reasonable and reworked the disallowance. An addition of Rs.7.83 crores was made to the income of the assessee. 4.1.During the appellate proceedings, it was argued that AO had not given any reason for applying Rule 8D, the assessee had itself added expense of Rs.32.24 lacs in the computation of income, that the expenditure of Rs.7.18 crores was incurred specifically against F&O segment. After considering the submission of the assessee, the FAA held that the assessee had not seriously objected to application of Rule 8D. The FAA, after considering the rival submissions, held that AO had committed mistakes in applying Rule 8D correctly.He directed the AO to verify the direct expenses, the interest expenses indirectly relatable to exempt income and the average value of investment. 4..Before us, the AR argued that the Rule 8D was applied mechanically, that considering the facts of the case disallowance was not warranted, that the assessee itself had offered disallowance of Rs.78.14 lacs, that the AO had made a disallowance of Rs.7.83 crores. He referred to the page No.23,25, and 29 of the paper book and relied upon the cases of Orissa Corporation (P) Ltd. (159 ITR 78), K. Raheja Corpn. P.Ltd. (Income tax Appeal No.1260 of 2009-Hon’ble Bombay High Court), Joint Investments Pvt. Ltd. (ITA No.117 of 2015- Hon’ble Delhi High Court) and Justice S.P. Bahrucha (53 SOT 39). He further stated that while giving appeal effect to the order of the FAA the AO had upheld the disallowance of Rs.78.50 lacs only.The DR supported the order of the FAA.

8041/11&7896/11-Envision 4.3.We have heard the rival submissions and perused the material before us.We find that the assessee had credited dividend income of Rs.1.99 crores,that the assessee itself had prepared a working of disallowance to be made u/s.14A of the Act,that as per that working disallowance could be made of Rs.78.48 lakhs only,that the AO had made a disallowance of Rs.7.83 crores,that during the appellate proceedings, the FAA had directed the AO to verify the direct expenses, indirect expenses relatable to exempt income and the average value of investment,that while giving effect to the order of the FAA the AO restricted the disallowance to Rs.78,48,876/-,that before us, the assessee made an alternate submission in that regard.We find that on 24.11.2010 the assessee had worked out disallowance at Rs.78.48 lacs and while giving effect to the order of the FAA,the AO had accepted the same figure.In our,opinion there is no need to disturb the working given by the assessee and accepted by the AO.Therefore,confirming the order of the FAA we decide ground no.2 against the assessee.

5.Ground No.3 is about not allowing the assessee credit of Security Tax Transaction (STT) paid u/s.88E of the Act, amounting to Rs.30,24,783/-. The AO is directed to verify the claim and allow the credit of STT paid,after verification. Ground No.3 is allowed for statistical purposes. ITA 2322/Mum/2011 6.First ground raised by the AO pertains to treatment given by the AO to the gains arising out of the shares sold by the assessee under the head LTCG.While dealing with the ground no.1 of the assessee, we have discussed the facts of the case.We find that the FAA had held that the shares held by the assessee for a period of more than one year should be assessed under the head LTCG. 6.1.Before us,the DR stated that the issue could be decided on merits and the AR supported the order of the FAA. 6.2We have heard the rival submission and perused the material before us.In the case under consideration the assessee had acquired shares of RNRL,Reliance Capital Ltd.,Reliance Communications Ltd.and Reliance Industries Ltd.and the profit arising out of sale proceeds of these shares was shown under the head LTCG.Shares of first two companies and the last company (i.e.except the shares of Reliance Communications Ltd.)were acquired in the month of January,2006 and were sold in the Month of Sept./July,2007and February, 2008 respectively. Shares of Reliance Communications Ltd. were purchased in May,2006 and were sold on 13.02.2008.In our opinion,the FAA had rightly held that the shares were rightly offered under the head LTCG.The pattern of purchase of sale and holding period clearly prove that the behavior of the assessee was of an investor and not of a businessman.In our opinion the basic ingredients of business are missing in the above referred transactions. Therefore, confirming the order of the FAA,we decide ground no.1 against the AO.

7.Next ground is about disallowance made u/s.14A of the Act.The AO found that assessee had credited dividend income of Rs.90.18 lacs in its P&L account, that it had shown as exempt u/s.10(34) of the Act,while computing taxable income it had not disallowed any expenditure in respect of the exempt income. He asked the assessee to explain as to why disallowance u/s.14A r.w.Rule 8D of the Rules should not be made.After considering the submission of the assessee the AO referred to the decision of Daga Management Private Limited 20.10.2008-A.Y.2001-02.Finally,he made disallowance of Rs.3.76 cores u/s.14 r.w. Rule 8D of the Rules.

8041/11&7896/11-Envision 7.1.In the appellate proceedings,before the FAA it was argued that Rule 8D was not applicable for the year under appeal as decided by the Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co.Ltd.(328 ITR 81),that the disallowance was to be made on a reasonable basis as per provision of section 14A of the Act. He held that it would be reasonable to allocate the expenses in proportion to the income. 7.2.During the course of hearing before us the DR relied upon the order of the AO and the AR supported the order of the FAA. 7.3We have heard the rival submissions and perused the material before us.We find that the AO applied the Rule 8D of the Rules,while making the disallowance,that the FAA had held that the provisions of the Rule were not applicable for the year under appeal,that he had directed the AO to allocate the expenses in proportion to the income.In our opinion,his order does not suffer from any legal infirmity,Therfore,confirming the order of the FAA,we decide ground no.2 against the AO. 8.Ground No.3 deals with addition of Rs.6.63 crores made u/s. 68 of the Act, by the AO. During the assessment proceedings, the AO found that the assessee had raised loans from Vinayak Gifts and Securities Ltd. (Rs.2.35crores) , Rockway Equities Pvt. Ltd.(Rs.15.00 lacs),Axiom Commercial Pvt. Ltd. (Rs.2.03crores) and Aakriti Marketing P. Ltd. (Rs. 2.10 crores).As per the AO the assessee had filed confirmation from the above parties situated in Kolkatta,but did not produce them before him.The assessee requested the AO to issue summons to the creditors.After examining the bank statement of the creditors and the confirmation, the AO held that in respect of all creditors huge amount was credited in bank on the same day/alternate days, that the creditors were merely providing entries.Finally, he added Rs.6.63 crores to the total income of the assessee as unexplained cash credit. 8.1.During the appellate proceedings before the FAA,the assessee contended that confirmations and bank statements along with the PAN of the creditors were submitted before the AO,that the creditors were not related to the assessee, that all the creditors were income tax assessees and had substantial gross total income for the year under consideration. After considering the submission of the assessee and the assessment order the FAA observed that confirmation from the creditors and the bank statements were filed by the assessee before the AO, that all the four creditors were corporate entities having PAN and were assessed to tax, that they had filed their return of income for the year under appeal, that the payment had been received through banking channels, that in the current account of the creditors there were large number of transactions of receipt and payment, that the AO had not proved that any of the credits prior to debits in favour of the assessee were actually routing of funds of the assessee, that in three out of four accounts there were large balances even after debits to the assessee, that the AO’s observation that the creditors did not have sufficient balance was factually incorrect, that identity of the creditors genuineness and the credit worthiness of the transactions had been established by the assessee.Finally, he deleted the addition made by the AO. 8.2.During the course of hearing before us the DR left the issue to the discretion of the Bench whereas the AR supported the order of the FAA. 8.3.We have heard the rival submissions.We find that the assessee had filed details asked for by the AO in respect of all the four creditors,that the creditors were having PAN.s. and were assessed to tax in Kolkata,that they were filing their returns of income regularly,that the AO had disputed the fact that the payments were not received through banking channels,that the DR could not controvert the finding of fact given by the FAA that there were large number of transactions of receipts and payments and that out of four creditors three creditors had large balances even after debits to the assessee,that the genuineness and creditworthiness of the 4

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