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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: SHRI SHAILENDRA KUMAR YADAV, JM & SHRI RAMIT KOCHAR, AM
आदेश / O R D E R
PER SHAILENDRA KUMAR YADAV, JM This appeal by the Revenue is directed against the order dated 31.01.2011 passed by CIT(A)-26, Mumbai and it pertains to A.Y. 2007-08.
2. Following grounds were raised by the Revenue in this appeal: - "On the facts and in the circumstances of the case and law, the Learned CIT(A) erred in accepting the income earned by the assessee on sale of shares as short term capital gain and long term capital gain by ignoring tile finding by the Assessing Officer who had treated this income as "Business Income" based on the facts available on record. On the facts and in the circumstances of the case and in law, the Learned GIT(A) has erred in not appreciating the fact that Smt. Pansy D. Mehta all share transaction had been done by the assessee in a systematic manner and volume was also very huge and intention of the assessee was to earn profit on sale of shares and not to hold the investment to earn dividend. On the facts and in the circumstances of the case and law, the Learned CIT(4) erred in law in restricting the disallowance of expenditure from Rs. 75,249 to 56,234, relying on the recent judgement of the Hon 'b/c Bombay Court in the case of Godrej Boyce Mfg. Co., by ignoring the facts that assessee failed to produce any evidence and justification that all such expenditure were incurred wholly and excessively for the business purpose."
3. Assessee has earned rental income and also investor and trader in shares, derivatives and other securities. Assessee is following mercantile basis of accounting. Assessee has shown capital gain of `1,19,62,170/- out of which an amount of `1,06,78,515/- has been claimed as exempt under section 10(38) of the Income Tax Act which according to the Assessing Officer is not eligible. So he asked the assessee to explain as to why claim of long term gain should not be treated as business income. After rejecting the submission made on behalf of the assessee the Assessing Officer held as under: -
"The Authorized Representative was asked vide order sheet dated 12.11.2009 as to why the LTCG and STCG should not be treated as business income of the assessee. In response to the same, the Authorised Representative failed to satisfactorily explain and justify the reason for treating the incomes as LTCG. In the absence of any satisfactory reply from the assessee's side the LTCG of Rs.1,19,62,1701- is being treated as business income. Further on perusal of the details filed it is clearly evident that the motive of the assessee was not to make investment and earn dividend income from the same. Moreover, the frequencies as well as the volume of the transactions are also huge which clearly proves that the assessee was more interested in trading rather than investment. The contention of the assessee is that she has taken delivery of shares, hence to Smt. Pansy D. Mehta treat as an investor and not as a trader. If the delivery of share transaction is taken into consideration for treating assessee as investor then every trader becomes an investor. Thus, the net income from the business activity of trading in shares and securities comes to Rs.1,16,77,476/-. The assessee earned profit on share trading transaction and claimed LONG TERM CAPITAL GAIN instead of showing of income as business income with the willful intention to evade the taxes. Therefore, this is a fit case to invoke provisions of section u/s. 271(1)(c) of the I.T. Act, 1961. The proceedings u/s. 271(1)(c) are being initiated along with this order accordingly for furnishing inaccurate particulars of income by the assessee.” 3.1 The matter was carried to the first Appellate Authority wherein the assessee filed written submission dated 07.04.2010 which is extracted as under: -
"With reference to the above appeal and under instruction from our client we give hereunder the brief facts of her case and the injustice suffered by her: Our client aged 60 years, has been maintaining separate accounts of her investments as well as stock in trade of share, since last several years. Both the activities viz, the investments in shares and trading in shares, have been totally Difference, Distinct and Separate as per the separate accounts maintained by her. The separate account of investment proved the intention of the assessee of keeping the said shares for Long term purposes and was not at all mixed up with her trading activities. To enable Your Honour to appreciate this fact we enclose herewith copies of all the statement that were filed with the A.O. and which are on the record viz. balance sheet, profit and loss account and list of share investment for assessment years 1999-2000 to 2004-05 at pages 84 to 165. We also enclose herewith the detailed statement of Long term capital gain as regards the transactions that were entered into by her and which were also filed before the A.0 during the course of assessment proceedings.
Smt. Pansy D. Mehta It is also to be noted that this fact of Trading in Shares as well as earning of Long term capital gain, was accepted by the Department during past several years. To enable Your Honour to appreciate the said fact, the assessment orders for assessment year 2004-05 and assessment year 2006-07, are also enclosed herewith. During the above assessment year also, assessee had earned Long term capital gain on sale of shares, which were held as investment as required under the law. Further, vide letter dated 27.11.2009, attention of the A.0 was drawn to the following facts of the case viz: I. The movements of all the shares on which Long term capital gain was claimed, clearly proved that the said shares were held with the sole intention of Long term in mind.
At no point of time in the past, assessee has mixed her stock business with her Long term investments and Long term capital gain in all the years has been separately worked out and offered for taxation.
It is the past practice and consistently followed by the assessee over the years and the department has accepted for all these years as assessments of assessment years 2003-04, 2004-05 and 2006-07 have all been completed by Ld. Predecessors u/s. 143(3) of the Act and accordingly Your Honour is requested not to deviate from the Accepted Practice.
It is very clear that assessee is an investor as well as Trader and keeps both the activities distinctly different and is able to clearly establish and differentiate between both the a activities. It is also evident from the assessment order that the Ld. AO has not found any discrepancies in the details filed by our client in respect of Long term capital gain claimed by her as exempt. However, instead of taxing the same as Long term capital gain as claimed in the return of income, the Ld. AO has considered it as business income against Principle Law as also disregarding the consistently followed method of accounting as accepted by the department in past. In addition to the above facts and details, which establish the bonafide of our client's claim of Long term capital gain, the same is also supported by the decision of the Bombay High Court in the case of “SHRJ GOPAL PUROJHIT" and Mumbai
Smt. Pansy D. Mehta Tribunal in the cases of SHRJ SURESH KUMAR SEKSARJA and SMT. URMILA SEKSARIA, which have laid down that where the activity of investment and trading are separate then the Long term capital gain cannot be taxed as Business income” 3.2 Having considered the same the CIT(A) granted relief to the assessee. Aggrieved, Revenue is in appeal before us inter alia supported the order of Assessing Officer and requested to set aside the order of CIT(A). On the other hand the learned A.R. of the assessee supported the order of CIT(A).
3.3 Having gone through the submissions and material placed before us we find that Assessing Officer has not assigned any convincing reason or pointed out any specific facts which could reveal that there is no investment portfolio and assessee was only doing share trading. Assessee is maintaining two account, one for investment in shares and second one for trading in shares, which are definitely different, distinct and separate one. In A.Y. 2004-05 Assessing Officer has accepted the fact of investment of the assessee. Similarly in A.Y. 2006-07 also the claim of the assessee was accepted by the concerned Assessing Officer. In view of the above the CIT(A) was justified in observing that at no point of time in past assessee had mixed business stock with long term investment.
It is an undisputed fact that long term capital gain in earlier years has been separately worked out and shown in the return of income.
This past practice of the assessee has consistently been accepted by Smt. Pansy D. Mehta concerned Assessing Officers and also followed by the assessee over the years. Therefore there was no reason, whatsoever, to deviate from such consistency. Further, Assessing Officer has neither pointed out any fact of intermixing of two accounts nor has explained in the assessment order as to how assessee does only share trading and not investment. Evidence on record reveals that in addition to trading in shares assessee does investment and earns dividend due to that.
During the year assessee has received dividend of `20,70,430/- on equity shares, which is exempt under section 10(34) of the Income Tax Act. The long term capital gain of `1,06,78,515/- is in respect of old shares, therefore the Assessing Officer was not justified in disallowing the claim of the assessee without bringing on record any evidence which may establish otherwise. Delivery based transactions are to be treated as investment transaction and the profit received there from is to be treated as short term or long term capital gain depending on the period of holding of shares. In case any party maintains two separate accounts for investment as well as trading, the fact has to be looked into in that perspective only. The Assessing Officer has not made any case for adopting the divergent approach in this case. The volume and number of transactions is not decisive in understanding the true nature of the transactions. Volume and number will depend upon the quantum of investments being made. If funds invested are huge, obviously the number of transactions and Smt. Pansy D. Mehta volume will be high. In case of large number of transactions are confined within the same year, i.e. both the purchases and sales are within the same year, this will obviously would give the indication that assessee is trading in shares but in case the number of transactions is large and sales made during the year are in respect of purchases made long ago then it could not be said that the assessee is trading shares merely because volume is heavy and the number of transactions is large. Assessee is at liberty to keep separate portfolio for trading and investment. There is no basis for treating the assessee as a trader in shares when his intention was to hold shares in Indian companies as an investment and not as stock in trade. The transactions as a whole has to be taken into consideration and magnitude of the transaction does not alter the nature of transaction.
In the light of our discussion above the Assessing Officer was not justified in treating capital gain as business income. We, therefore, find no reason to interfere with the order of the CIT(A). Same is upheld.
4. The next issue is with regard to disallowance of expenditure of `75,249/- by virtue of provisions of section 14A of the Income Tax Act. Assessing Officer has mentioned in the assessment order that assessee has made investment in equity shares and mutual funds and has earned dividend income from the same. However, assessee
Smt. Pansy D. Mehta has not disallowed any expenses directly related to these investments as per Rule 8D therefore he has disallowed an amount of `75,249/- @ 0.5% of average value of investment and has added to the total income of the assessee. The matter was carried before the first Appellate Authority wherein the addition was restricted to `56,234/- instead of `75,249/-.
4.1 Aggrieved, Revenue is in appeal before us. On behalf of the Revenue it was submitted that on the facts and circumstances of the case the CIT(A) erred in law in restricting the disallowance from `75,249/- to `56,234/- relying on the recent decision of the Hon'ble Bombay High Court in the case of Godrej Boyce Manufacturing Co.
Ltd. The learned D.R. prayed before us that the order of the CIT(A) be set aside and that of the Assessing Officer be restored. The learned A.R. for the assessee strongly relied upon the order of the CIT(A).
4.2 After going through the rival contentions and material on record we find that Rule 8D is applicable from A.Y. 2008-09as held by the Hon'ble Bombay High Court in the case of Godrej Boyce Manufacturing Co. Ltd. (ITA No. 626 of 2010 dated 12.08.2010). The disallowance of expenditure cannot be made as per Rule 8D in A.Y. 2007-08, nevertheless, by virtue of provision of section 14A some reasonable expenditure is to be disallowed considering the exemption
Smt. Pansy D. Mehta of the income. Assessee has claimed dividend of `20,70,430/- as exempt and also long term capital gain of `1,06,78,515/- whereas various expenses have been debited to Profit & Loss Account which are related with earning of such income. In the Profit & Loss Account assessee has shown net loss of `5,49,962/- mainly because of loss of future set off of `12,29,896/- hence rest of the loss is in respect of other expenditure of `1,87,448/-, therefore considering the expenditure directly relatable to earning of such long term capital gain and dividend income, an amount of `56,234/- being 30% of such expenses was found reasonable for disallowance by the CIT(A).
Accordingly the Assessing Officer was rightly directed to restrict the disallowance of such expenditure to the tune of `56,234/- instead of `75,249/-. This reasoned factual finding of the CIT(A) does not require any interference from our side. We uphold the same.