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TMI Blog2014 (9) TMI 519X X X X Extracts X X X X X X X X Extracts X X X X ..... file of the CIT(A) to pass a speaking order on the facts and circumstances of the case duly considering the factual issues raised by the AO in his order about the intermixing and interlacing of the funds and possibility of internal transaction from business account to investment account portfolios – also , the shares of M/s. Share Street (P) Ltd. needs to be correctly worked out and also the disallowance u/s 14A should be considered – thus, the matter is remitted back to the CIT(A) for fresh adjudication – Decided in favour of revenue. X X X X Extracts X X X X X X X X Extracts X X X X ..... activities and these are audited u/s 44AB. (iii) The assessee invested his surplus funds from FY 2004- 05 in shares and stock for capital appreciation and to this end he gave these funds to K.B. Capital & Market P. Ltd., Portfolio Management Scheme. These investments had consistently been classified as investments by the assessee in his accounts every year since FY 2004-05. It was submitted that the gains resulting from such investments were capital gains in accordance with sections 2(29A)/2(42A). The period of holding would determine whether it was long term capital gain or short term capital gain. It was mentioned that in case of short term capital gains if STT had been paid then short term capital gain was taxable at a specific rate u/s 111A of IT Act, 1961 and long term capital gain was exempt u/s 10(38). Since the assessee fulfills all the conditions and has rightly shown ₹ 20,40,619/- as short term capital gain taxable u/s 111A and long term capital gain of ₹ 29,27,833/- exempt u/s 10(38), the addition made was required to be deleted. Reliance was placed on the judicial pronouncements in the cases of Hitesh Satishchand Doshi vs. JCIT, ITAT Mumbai Bench (2011) 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from business. Therefore, the first two grounds of appeal of the assessee are allowed.'' 3.6 Apropos the third issue of the assessee, the ld. CIT(A) deleted the entire addition made by the AO u/s 14A of the Act by following observations. "8.2 The AR of the assessee submitted that investments listed on page 20-21 of the assessment order are old investments out of the capital of the assessee and any variation therein is either from assessee's capital account or from the current income of the assessee and no borrowings were made for this investment. It was submitted that the interest of ₹ 1,63,409/- was paid by the assessee during the course of money lending business and interest was claimed as deduction from the interest income earned during the year. The other expenditure incurred by the assessee was claimed against income from share business and interest income both of which form part of the total taxable income and thus no part of interest and expenditure is attributable to exempt income. The small dividend income of ₹ 189937/- was received by assessee on its old investments in shares made from his own capital for which no expenditure has been incurred which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of trade. The assessee has not been able to give any specific reason for such a frequency, multiplicity and volume in respect of all the scrips. The nature of transactions in all of them is such that it does not fit in the criteria of the investment. There can be no claim of investment when these scrips were sold without any reason for sale except for profit-earning. 3.5.5 As would be noted in the succeeding paragraphs of this order the treatment of so called Long term capital gain as business income and discussion about the real nature of the transactions in shares and securities is the key issue. It would indeed be very pertinent to note here at the very outset that given the enormous volume, periodicity, frequency and multiplicity of transactions of purchase and sale of shares, a question of most significant import arises in this case, which is that given the nature of transactions of the type entered into by the assessee, can it be said that the shares / securities have been held really as assets or is there a larger scheme of maximizing profits from repeated and multifarious transactions by merely using the cloak of so-called investment activity? It must be noted here duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... realized the amount of ₹ 18,55,815/- @ ₹ 65/- per share. The AO was of the view that the assessee in order to generate capital has overvalued the sale consideration at ₹ 65/- per share for which a proper working is given and according to which the value of the share comes to ₹ 5.50 per share by following observation. ''4.3 Thus, it becomes amply clear that the assessee had overvalued the shares in order to pay tax at subsidized rates under the head 'Long term capital gains' as is clear from the B/S of M/s. Share Street (P) Ltd. which happens to have incurred loss since years and whose total of c/f loss for the year ending 31-03-2010 is at ₹ 8,89,657/-, as is apparent from its profit and loss account. It appears that the audit report of the company that no dividend has been distributed by M/s. Shares Street (P) Ltd. during the year under consideration.'' The assessee filed his reply. The AO thus held that the shares were sold at overvalued rate. However, since all the shares were treated under the head 'business income'. No separate addition was made by the AO by following observation. ''4.5 The fact that the shares have been overvalued by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd perused the materials available on record. In our considered view, the AO and ld. DR contentions apropos the frequency of intermixing and interlacing of funds have not been objectively answered by the ld. CIT(A) besides the crucial fact whether there was intra-account transfer from business stock to investment stock of shares or vice versa has not been spelt out before us. It is acceptable that the assessee can maintain business & investment portfolio separately which an ideal situation should be taxed under the head business income and capital gains respectively. But this presupposes the neat and clean state of affairs in which there is neither intermixing nor interlacing of funds and there are no internal / journal transfer from one account to other to keep the check in clandestine method. 3.12 Similarly, in respect of shares of M/s. Share Street (P) Ltd., there is a huge gap between the valuation of private company's equity shares arrived at by the AO and claimed by the assessee as facts emerges that the assessee has claimed these shares in investment account and they are available at reduced rate of taxation. The ld. Counsel for the assessee did not spell out any market cre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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