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2016 (3) TMI 87 - ITAT MUMBAI

2016 (3) TMI 87 - ITAT MUMBAI - TMI - Income from sale and purchase of shares - LTCG/ STCG OR business income - Held that:- Merely because the rate of tax has been reduced in respect of short term capital gains and long term capital gains have been exempt during the year by way of an amendment to the provisions as discussed above, that itself, cannot be a ground for the AO to depart from its consistent stand of treating the assessee as an investor and thereby to charge the income earned by the a .....

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tax implications as discussed above. The intention of the assessee, while purchasing the share, is the important and guiding factor as to whether the same was purchased with an intention of investment or for trading. The facts of the case as discussed above, clearly reveal that the assessee had treated the shares as investments in his account. As discussed above, if during the mid of the relevant Financial Year, certain tax benefits have been given in respect of capital gains, that cannot, in an .....

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investor. It is also pertinent to mention here that as discussed above, in subsequent assessment years the department has again accepted the assessee as an investor. It is for the first time that in this year under consideration i.e. A.Y. 2005-06 the assessee had been treated as a trader because of certain tax benefits granted to an investor in securities by way of amendment in the relevant provisions of the Income Tax Act and subsequently for the A.Ys 2006-07 to 2008-09, the assessee was treat .....

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per the provisions of rule 8D - Held that:- For the years for which Rule 8D is not applicable and in the event of that the AO is not satisfied with the explanation/working given by the assessee, disallowance under section 14A has to be made on a reasonable basis. We restrict the disallowance u/s 14A in the case of the assessee @ 5% of the tax exempt income earned by the assessee during the year. - ITA Nos.5442/M/2008, 4475/M/2012, 3053/M/2011, 5303/M/011, ITA Nos.5441/M/2008, 2469/M/2009, 4476/ .....

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this common order. 2. First we take up the Revenue s appeal in relation to assessee Suresh K. Jajoo in ITA No.5442/M/2008 in relation to A.Y. 2005-06. ITA No.5442/M/2008 for A.Y. 2005-06 3. The sole issue taken by the Revenue in this appeal is as to whether the income earned by the assessee from sale and purchase of shares is to be assessed as capital gains or business income. The assessee in the return of income claimed income from the share transactions as capital gains and set off of the same .....

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and there were voluminous transactions. He therefore held that the assessee could not be treated as investor in shares but a trader. He accordingly assessed the short term capital gains and long term capital gains claimed by the assessee as business income of the assessee. 4. In appeal, the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] considering the treatment given by the assessee to the shares in the earlier assessment years observed that the assessee had consi .....

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cts of the present year and that the AO should not have disturbed the treatment given to the assessee as an investor only because the rate of tax in respect of short term capital gains had changed. He therefore held that since the assessee had consistently been treated by various AOs as an investor in past years and therefore to treat the assessee as trader for the year under consideration and denying the set off of carry forward loss was not correct and justifiable. He accordingly allowed the a .....

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e said letter Page 1 to 62. In case of Suresh K. Jaioo 1. A.Y.1996-97 - Scrutiny assessment Order u/s. 143(3) passed by JCIT, SpI. Range-49 dated 24.12.98, accepts the assessee's position of being an investor in shares. 2. A.Y.1997-98 - Scrutiny assessment Order u/s. 143(3) passed by JCIT, SpI. Range-49 dated 31.1.2000, accepts the assessee's position of being an investor in shares. 3. A.Y.1998-99 - Scrutiny assessment Order u/s.143(3) passed by JCIT, SpI. Range-49 dated 29.3.2001, accep .....

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Y.2005-06 have been passed by the ACIT-4(2), Mumbai. In the reassessment order also, the appellant has been held to be an investor in shares and not a trader in share. The order u/s. 143(3) r.w,s, 147 dated 26.12.2007, however contains finding of the A.O. that the long term capital gain declared by the appellant is a short term capital gain. But so far as the issue of assessee being trader or investor is concerned, the A.O. has not given any finding that the appellant is a trader but has accepte .....

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t Order u/s.143(3) dated 16.9.2005 was passed by A.O. accepting the assessee's position that he is an investor. The CIT-4, Mumbai vide order u/s.263 dated 28.12.2005 held that assessee's transaction on sale of share were around 230 for total consideration of ₹ 56.18 crores which may be treated as business transaction and not capital transaction. The order u/s.143(3) r.w.s 263 dated 27.12.2006 by ACIT-4(2) held the assessee to be a trader and not an investor. The order u/s.263 of CI .....

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ently, the case was reopened and order u/s.143(3) r.w.s. 147 was passed on 26.12.2007, ie. the same date on which the order for A.Y.2005-06 have been passed by the ACIT-4(2), Mumbai. In the reassessment order also, the appellant has been held to be an investor in shares and not a trader in share. The order u/s.143(3) r.w.s. 147 dated 26.12.2007, however contains finding of the A.O. that the long term capital gain declared by the appellant is a short term capital gain. But so far as the issue of .....

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ssed u/s.143(1)(a) 4. A.Y.2003-04 - In the order u/s.143(3) dated 26.8.2005, the short term capital gain of ₹ 42,98,683/- was assessed as declared by the as sessee and hence not t reated as income f rom bus iness or profession. The order of the A.O. was set aside by CIT-4, Mumbai u/s.263 and the order of CIT was quashed by ITAT as ment ioned above . Vide corrigendum dated 27.11.2006 it was clarified that in the ITAT order dated 31.10.2006, the assessment year should have been 2003-04 inste .....

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ioned at Para 1.3.6 in case of Shri Suresh K. Jajoo and Para 1.3.7 in case of Smt. Vimla Jajoo that upto A.Y.2004-05, Shri Suresh K. Jajoo and Smt. Vimla Jajoo have been held to be an investor in share by all the Assessing Officers whenever they made scrutiny assessment order u/s.143(3). The CIT-4, Mumbai for A.Y.2002-03 and A.Y.2003-04 in case of Shri Suresh K. Jajoo and for A.Y.2003-04 in case of Vimla Jajoo did pass order u/s.263 setting aside the order of A.O. but as discussed above, those o .....

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and from 1.10.2004 the rate of tax on short term capital gain has been reduced to 10%. (iii) In both the cases, Shri Suresh K. Jajoo and Vimla Jajoo, the treatment of A.O. of thei r short term capital gain as Income from business has got two effects - (i) the assessee is taxed at a higher rate and (ii) the short term capital loss of A.Y.2001-02 which is being carried forward now cannot be set off against short term capital gain of A.Y.2005-06. (iv) The loss which has taken place in A.Y.2001-02 w .....

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. (v) For A.Y.2000-01, scrutiny assessment order u/s.143(3) r.w.s. 147 was pas sed on 26.12.2007 by ACIT-4(2) , Mumbai , the same Assessing Officer who has passed the order for A.Y.2005-06 in case of Shri Suresh K. Jajoo and Vimla Jajoo exactly on the same day, ie. 26.12.2006. Despite large number of transactions leading to short term and long term capital gain of the assessee's, the A.O. has held both Shri Suresh K. Jajoo and Vimla Jajoo as investor and not a trader. (vi) When the events of .....

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rt from such decisions. The limitations of this general rule have been succinctly explained in Shah & Co (HA) v. CIT (1956) 30 ITR 61 624-25 (Born). In terms of this decision, while it is true that a tax authority is entitled to go back upon an earlier finding, such entitlement is hedged with clear limitations. If a given case falls into the parameters of these limitations, the tax authority would not be entitled to unsettle the earlier finding. Thus, in the following circumstances, a tax au .....

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ision had taken into consideration all material evidence, CIT v. Kusum Bader (1990) 185 ITR 70 (Raj). (v) Where unsettling the earlier decision leads to injustice to the assessee. Without expressly stating that the above decision has been followed, the ratio of the above decision has percolated into a number of later decisions (CIT v. Velimalai Rubber Co. Ltd. (1990) 181 ITR 299 (ker); CIT v. Hindustan Motors Ltd. (1991) 192 ITR 619 (Cal)." (vii) The appellant has consistently been treated .....

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he above findings of the Ld. CIT(A). 6. We have heard the rival contentions of the Ld. Representatives of both the parties and have also gone through the records. The Ld. A.R. of the assessee has submitted that the assessee is an individual and has been offering the income from sale and purchase of shares as capital gains even prior to 01.10.04. He has drawn our attention to assessment order passed under section 143(3) of the Act for the A.Y. 2001-02 wherein the claim of the assessee of short te .....

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t during the year under consideration security transaction tax was introduced by way of Chapter-VII of Finance (2) Act, 2004 w.e.f. 01.10.2004. By the same Finance Act, Section 10(38), Section 111A and 88E were inserted bringing in a special scheme for taxation of trading and investing in respect of securities w.e.f. 01.10.2004. As per the said scheme, all the transactions of securities on stock exchange done on or after 01.10.2004 would entitle securities transaction tax. All long term capital .....

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er consideration, the AO therefore ventured into the share transaction activity of the assessee and treated the assessee as trader, whereas, in the earlier assessment years, where such benefit of concessional rate of tax was not available to the assessee, the assessee s claim of investor in shares had continuously and consistently been accepted. The Ld. A.R. has further brought our attention to the assessment order passed under section 143(3) of the Act for A.Y. 2009-10 i.e. subsequent year to t .....

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capital gains has again been accepted by the department. For the A.Y. 2012-13 also, the AO had accepted the claim of short term capital loss and long term capital gain of the assessee treating the assessee as an investor. The Ld. A.R. has further submitted that the assessee from the beginning had been treating itself as an investor irrespective of the rebate/concession, if any, given subsequently to the investors in shares and securities. The Ld. A.R. has further submitted that prior to the yea .....

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rtment is supposed to maintain consistency in its stand. By treating an assessee as investor in a year and a trader in another year and then again treating him as an investor in subsequent year would not only create uncertainty in the mind of the assessee but also disentitle him from the eligible claims. In the year in which the assessee would be treated as a trader, the assessee would lose the benefit of set off of capital loss of the earlier assessment year. Then by treating the assessee as an .....

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e situations as discussed above. The Ld. A.R. has therefore submitted that the assessee was essentially an investor and was required to be treated so by the Revenue, while computing the income from sale and purchase of shares for the year under consideration. 7. The Ld. D.R., on the other hand, has drawn our attention to the observations made by the AO with regard to volume and frequency of transactions. He, therefore, has contended that the profits earned by the assessee from sale and purchase .....

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ents and had claimed capital gains relating to the shares. It is also a fact on the file that by the amendment brought by Finance Act, 2004, by insertion of provisions of section 111A and section 10(38), the levy of tax has been reduced to 10% on short term capital gains and long term capital gains have been made exempt. Under the old provisions of the Act, profits or gains arising to an investor from the transfer of securities were charged depending on the period of holding of the said securiti .....

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hares as regards to short term capital gains and business income was at par. The issue of treatment of income from share transaction as short term capital gains or business income has in fact arisen after the amendment brought with Finance Act, 2004 w.e.f. 01.10.2004. It is an admitted fact on the file that prior to the amendment when the tax of short term capital gains, as discussed above, was at par with that of business income, the department has been consistently accepting the treatment of i .....

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of purchase of shares even during the year but prior to 01.10.2004, the assessee was not guided or influenced by lower tax rate in case of short term capital gains as the rate for business income and short term capital gains was at par. The assessee, however, was treating himself as an investor and keeping the shares as investments in his account irrespective of the probable tax implication as there were no such tax implications as discussed above. The intention of the assessee, while purchasing .....

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e time of purchase of shares was that of a trader and not of an investor. The treatment of the investment in the account books of the assessee was also a relevant guiding factor. The AO has also not pointed out as to in what manner the activity of the assessee for the year under consideration had been changed from investor to that of a trader especially when the department had consistently been treating him as an investor. It is also pertinent to mention here that as discussed above, in subseque .....

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d the assessee for the impugned assessment years i.e. A.Y. 2005-06 to A.Y. 2008-09 as investor. Though the principle of resjudicata is not applicable in income tax proceedings but the principle of consistency requires that the view taken in one year should be followed in subsequent years unless the facts or the legal position justify departure there from; reliance can be placed in this respect on the authorities of the Hon ble Bombay High Court in CIT vs. Darius Pandole [(2011 330 ITR 485 (Bom.) .....

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ove discussion, the appeal of the Revenue is hereby dismissed. ITA No.4366/M/2012 for A.Y. 2005-06 (Assessee s appeal) 11. The assessee, in this appeal, has agitated the action of the lower authorities in making the disallowance under section 14A as per the provisions of rule 8D of the Income Tax Rules. The appeal of the assessee is time barred by 1402 days. The assessee has moved an application for condonation of delay wherein it has been stated that the Ld. CIT(A) vide impugned order dated 18. .....

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rder dated 15.12.08 applied Rule 8D and computed a disallowance of ₹ 13,46,829/- u/s. 14A of the Act in addition to ₹ 107,181/- disallowed in the assessment order u/s. 143(3) of the Act. Subsequently, the Honorable Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (328 ITR 81) rendered a decision on 12.8.10 wherein it was held that provisions of Rule 8D shall apply with effect from Assessment Year 2008-09, the assessee filed a request for rectification before the AO t .....

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of the above contentions. The Ld. A.R. of the assessee has further submitted that the application of the assessee for rectification order was rejected on 11.05.12 and the assessee immediately on 26.06.12 i.e. within the period of one month preferred the appeal against the original order of the Ld. CIT(A) realizing its mistake that the proper course was to file the appeal against the order of the Ld. CIT(A) and not the rectification application before the AO. 12. We have considered the above sub .....

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time and again that where under a mistaken but bonafide belief the assessee/applicant pursues a remedy before the improper forum and after realizing mistake he immediately files appeal before the right forum, then under such circumstances the period consumed in pursuing the remedy before the improper forum is required to be condoned. Further, we find that the assessee has relied upon the decision of the Jurisdictional High Court on this issue which, though, has come subsequently to the date of t .....

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lowance under section 14A for the year under consideration by way of applying rule 8D of the Income Tax Rules. It may be observed that in the case of Godrej & Boyce Manufacturing Co. Ltd. (supra) the Hon'ble Bombay High Court has held that Rule 8D r.w.s. 14A(2) is not arbitrary or unreasonable but can be applied only if the assessee's method is not satisfactory. It has been further held that Rule 8D is not retrospective and applies from A.Y. 2008-09. For the years for which Rule 8D i .....

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It is also not the case of the Revenue that the exempt income earned by the assessee was very less or not in proportion to the investments made by the assessee for this purpose. Under such circumstances the different coordinate benches of this Tribunal have observed that in such cases certain percentage of exempt income can constitute a reasonable estimate for making disallowance for the years earlier to assessment year 2008-09. The Hon'ble Bombay High Court in the case of CIT vs. 'Godr .....

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2006-07) & 3053/M/2011 (for A.Y. 2007- 08) (Revenue s appeals) 15. The sole issue raised by the Revenue in these appeals is relating to the treatment of income earned by the assessee from share transactions whether to be treated as business income or capital gains. In view of our findings given above while deciding the Revenue s appeal for A.Y. 2005-06, we decide this issue in favour of the assessee and against the Revenue. These appeals of the Revenue are therefore hereby dismissed. ITA No .....

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the Ld. CIT(A) in deleting the disallowance of ₹ 7,56,556/- made by the AO under section 14A of the Act. 18. We find that the Ld. CIT(A) in the impugned order has observed that the AO had made the disallowance as per rule 8D without taking into consideration the fact that the assessee itself in its computation of income had added back certain expenses debited to profit & loss account and thus had never claimed the expenses amounting to ₹ 35,48,740/- and ₹ 24,368/-. Similar .....

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essee himself had disallowed certain expenditure and further that disallowance can not be made more than the expenditure claimed. Considering the facts of the case and the impugned order, we do not find any infirmity in the order of the Ld. CIT(A) on this issue also. This ground of the appeal of the Revenue is therefore dismissed. 19. In the result, this appeal of the Revenue is also dismissed. 20. Now coming to the appeals in relation to the assessee Smt. Vimala S. Jajoo. ITA No.2469/M/2009 for .....

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the conditions of section 36(2) were not fulfilled. The assessee carried out the matter by way of appeal before the Ld. CIT(A). 22. However, the Ld. CIT(A) while deciding the appeal of the assessee vide order dated 18.06.08 failed to decide this issue under consideration. The assessee moved a rectification application under section 154 of the Act before the Ld. CIT(A) in this respect. The Ld. CIT(A) in the rectification application considered the issue and decided the same by observing as under: .....

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course of business and the loss is incidental to the business. The appellant has deposited a sum of ₹ 10,50,000/- as deposit with Calcutta Stock Exchange out of which ₹ 7,50,000/- was towards Base Minimum Capital (BMC) and Settlement Guarantee Fund which was forfeited/ utilized towards payment crisis during 2001. 3.4 The deposit was made in the course of business for the purpose of business of the appellant and the forfeiture/ utilization of the sum towards payment crisis by Calcutt .....

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(A.Y. 2006-07) Revenue s appeals) 24. The common issue raised in both the appeals is as to whether the income from share transactions is to be assessed as business income or capital gains. The facts and issues involved in these appeals are identical to that of the appeals in relation to Shri Suresh K. Jajoo. Even the Ld. CIT(A) has also discussed the case of the present assessee in the impugned order which has also been reproduced above while deciding the appeal of the assessee Shri Suresh K. J .....

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