TMI Blog2014 (11) TMI 1118X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the department as investment were converted into stock in trade so as to attract the provisions of Section 43(5) of the Act. Since the shares held as investment in earlier years and also accepted by the department as such, the assessee having not converted its shares in "stock in trade", there was no reason to assess the profit arising out of sale as business income in place of capital gains. Addition u/s 14A - Held that:- Assessee has not invested interest bearing funds in the shares and securities in terms of detailed discussion made hereinabove. Since no interest expenditure was incurred during the year in respect of additional investment put in the shares which were fully financed out of the sale proceeds of shares held as long term capital investment and same also offered as long term capital gains, there is no reason for disallowance of interest expenditure by invoking provisions of Section 14A read with Rule 8D. With regard to the other expenditure debited in the profit and loss account, we found that common expenditure have been debited which are in the nature of insurance expenses, bank charges, audit fees, repairs and maintenance, stamp duty, etc., which amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue are in appeal before us. 3. The assessee has taken following grounds of appeal:- 1. Ld. Commissioner of Income Tax (Appeals) erred in upholding applicability of Rule 8D and further holding that Id. Assessing Officer recorded a categorical satisfaction that appellant incurred expenditure relating to earning of the exempt income and dividend and merely directing the Assessing Officer to re-calculate disallowance as made u/s 14A without properly considering:- (i) The fact that no borrowed funds were used by the appellant in acquisition of investments on which dividend is received, no part of interest is disallowable u/r 8D(2)(ii) of the I.T. Rules. (ii) The fact that no administrative expense is being incurred for earning of dividend as dividend is received in the bank account of the appellant in the normal course without spending any expenditure for the same. 2. The appellant pray that disallowance upheld u/s 14A be deleted as no expense has been incurred by the appellant for earning of the dividend. 4. The Revenue has taken following grounds of appeal:- 01 On the facts and in the circumstances of the case and law, the Ld. CIT(A) erred in directing the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee was to earn profit from the sale of shares in the capacity of a trader or the appreciation in share values have been earned by the assessee as capital gains on the investments. It is also seen that the principles laid down in the case of Gopal Purohit has also been applied in quite a few other recent decisions of Hon'ble ITAT, such as the case of Shri Mahendra C. Shah in ITA No. 6289/Mum/2008-09. In this case also, almost the same points were seen as pointed out in the case of Gopal Purohit. Further in the case of Hitesh Chandra Joshi - ITA No. 6497/Mum/2009 also, this issue has been extensively dealt with in the light of the decision in the case of Shri Mahendra C. Shah (supra). In all these cases the income from sale of shares has been held as capital gains, short term or long term, if the assessee has consistently disclosed the closing balance of shares as investment, there was no substantial utilization of fresh borrowed money for making investment in shares and the assessee was not a trader or registered broker with stock exchange. In the instant case also, there is no borrowing for the purpose of purchase of shares as the own capital of the appellant (Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Bharat Ruia (HUF), wherein it is held that after the amendment, the derivative transactions in shares would not come within the ambit of speculative transactions u/s. 45(3) of the I.T. Act. In the instant case, it is an undisputed fact that these transactions have been carried out through recognized stock exchange, accordingly, the profit/loss on such transactions will be treated as normal business profit/loss and it cannot be treated as notional loss. Therefore, the finding of the AO in this regard is reversed. 7. We have considered rival contentions, carefully gone through the orders of the authorities below and also statement of investment and own funds vis- -vis statement of sources of funds for investment during the year under consideration. We have also deliberated upon various case laws cited by the ld. Authorized Representative and ld. CIT DR and in the context of factual matrix of the case. We had also deliberated on the case laws referred to by lower authorities in their respective orders. The question as to whether the assessee has earned capital gain or business profits on the shares sold by him depend on the facts and circumstances of each case. Such decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent in books of account. There is also no dispute to the well settled legal proposition that res judicata do not strictly apply to the income tax proceedings, but at the very same time, it is well settled that principle of consistency under the same facts and circumstances is the fundamental of judicial principle, which cannot be brushed aside without proper reasoning. 8. Merely because the assessee liquidates its investment within a short span of time, which had given better overall earning to the assessee, would not lead to the conclusion that the assessee had no intention to keep on the funds as investor in equity shares, but was actually intended to trade in shares. 9. Here, it is pertinent to mention the intention of Government for introducing the security transaction tax and exempt the long term capital gain earned from sale of shares and levying 10 % tax on short term capital gain earned on sale of shares. It is noted that under the old provisions of the Income-tax Act, profits or gains arising to an investor from the transfer of securities were charged to tax either as long term capital gains or short term capital gains depending on the period of holding of the said s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hare transactions subjected to STT; concessional tax rate of 10% (which has been increased to 15% from AY 2009-10) are applicable in respect of STCG whereas no tax is chargeable in respect of LTCG. It is also noted that the CBDT vide its Circular no.4/2007, dated 15.06.2007 has also recognized possibility of two portfolios, i.e. one 'Investment portfolio' comprising of securities which are to be treated as capital assets and the other 'Trading portfolio' comprising of stock in trade which are to be treated as trading assets. In view of these facts, profit arose on shares in respect of delivery based transaction are liable to be taxed as capital gain and not as business income. 10. Even the Hon'ble Apex Court in the case of K.P. Verghese vs TO, 131 ITR 597 (SC) observed as under:- The task of interpretation of a statutory enactment is not mechanical task. It is more than a mere reading of mathematical formulae because few word possesses the precision of mathematical symbols. It is an attempt to discover the intent of the legislature from the language used by it and it must always be remembered that language is at best an imperfect instrument for the expre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erm capital gain. Identically in the case of Nagindas P Seth (ITA No.961/Mum/2010) it was held that despite large number of transactions in shares, the profit can be assessed as capital gains under the facts of the case. The case of the assessee is further fortified by these decisions more specifically when the assessee was hold the shares in his books as investor, as well as tock-in-trade separately. The decision in the case of Janak S Ranawala, 11 SOT 627 (Mum.) further supports the case of the assessee. Likewise, the decision from Hon'ble Madras High Court in CIT vs N.S.S. Investment Pvt Ltd. 227 ITR 149 (Mad), CIT vs. Associated Industrial Development Company, 82 ITR 526 (SC) supports the case of the assessee. In the present appeal, we note that the assessee made investment in shares with intention to earn dividend income on appreciation of price of shares. Therefore, it cannot be said that the assessee was doing business. 14. From the record, we found that the assessee has made investment in shares and securities out of sale proceeds of shares held as long term investment on which assessee has declared long term capital gains of ₹ 10.91 crores. Since the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d vide order dated 15.11.2010. There is no dispute to the fact that in its books of accounts also the assessee has treated the same as investment by proper disclosure in its audited balance sheet. The investments held by the assessee consisted of investment in quoted shares of ₹ 6.60 crores and investment in unquoted shares and shares warrants of ₹ 11.14 crores which were valued at cost. Similarly in assessment year 2007-08, assessee was holding quoted shares at cost of ₹ 7.10 crores and unquoted shares of ₹ 2.26 crores. The disclosure of the investment in the accounts is a material fact to ascertain the intention of the assessee to hold the shares as investment‟ or stock in trade‟. In the case of Gopal Purohit (supra), the Tribunal held that presentation in the books of accounts is most crucial source of gathering intention of the assessee with regard to the nature of transaction. It is also not the case of AO that the shares which were held as investment in earlier assessment years i.e. 2005-06, 2006-07 2007-08 and accepted by the department as investment were converted into stock in trade so as to attract the provisions of Section 43(5) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard to disallowance made by the AO u/s.14A read with Rule 8D, we found that assessee has not invested interest bearing funds in the shares and securities in terms of detailed discussion made hereinabove. Since no interest expenditure was incurred during the year in respect of additional investment put in the shares which were fully financed out of the sale proceeds of shares held as long term capital investment and same also offered as long term capital gains, there is no reason for disallowance of interest expenditure by invoking provisions of Section 14A read with Rule 8D. 18. With regard to the other expenditure debited in the profit and loss account, we found that common expenditure have been debited which are in the nature of insurance expenses, bank charges, audit fees, repairs and maintenance, stamp duty, etc., which amounts to ₹ 65,925/-. Since this expenditure was also attributable for the earning of exempt income, we direct the AO to confirm the disallowance of these expenditure of ₹ 65,925/- u/s.14A. We direct accordingly. 19. With regard to short term capital gain of ₹ 1,34,14,682/- earned by the assessee, we found that after considering the a ..... 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