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2016 (11) TMI 959 - ITAT MUMBAI

2016 (11) TMI 959 - ITAT MUMBAI - TMI - Treatment of gains arising out of sale of shares - whether short term capital gains or business profit - Held that:- No infirmity in the order of CIT(A) for treating gain arising out of sale of shares held for more than 12 months as long term capital gains. This issue is also covered by the order of Tribunal dated 21.02.2014 in assessee’s own case. - Addition u/s 14A - Held that:- We have carefully gone through the orders of the authorities below and f .....

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esidential unit or attached to the house property. The CIT(A) observed that these fixtures and fittings cannot be let out independently without letting out the flat in question to which these are attached. Under these circumstances, we do not find any infirmity in the order of CIT(A) for treating the rental income in respect of these amenities as income from house property. - ITA No.3541/Mum/2012, ITA No.3542/Mum/2012, ITA No.3543/Mum/2012, ITA No.4571/Mum/2012 - Dated:- 30-9-2016 - SHRI R.C.SHA .....

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aced on record the order of the tribunal for the assessment year 2006-2007 dated 21/02/2014 in assessee s own case wherein Tribunal observed as under:- 11. Rival contentions have been heard and record perused. We have also deliberated on the judicial pronouncements referred by the lower authorities in their respective orders as well as decision cited by learned AR and DR during the course of hearing before us in the context of factual matrix of the case. The question as to whether the assessee h .....

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to find out whether the shares were held as investment or stock in trade. If the shares are bought with the intention of earning capital gains thereon and also dividend income by keeping the same as investment, the gain arising there from is required to be treated as capital gains. On the other hand, if the shares are purchased with the intention to earn profit thereon and the same is treated as stock in trade in the books of account, the profit arising out of sale of such shares are liable to .....

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tment and there is no material change in the method of accounting and manner of earning of income during the year under consideration as compared this earlier years. Thus, the fact of the assessee investing in shares in earlier years is not in dispute.There is also no dispute to the fact that the assessee has treated the Shri Mohan K.Jain, Mumbai 28 I.T.A.No. 1033 & 748/Mum/2010 A.Y.2006-07 equity shares of Indian Companies as investment i.e. capital asset all along. The assessee has also va .....

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l asset will remain a capital asset unless a person holding the asset himself changes the nature by a specific action like conversion of capital asset into stock in trade. In the instant cases before us, the assessee has not treated the investment in equity shares of Indian Companies as stock in trade. In view of the decision of Hon'ble Supreme Court in the case of Ram Kumar Agarwal & Brothers, 205 ITR 251, the AO and the ld. CIT(A) was not justified in treating the capital gain earned f .....

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ed on the decision in case Shri Mohan K.Jain, Mumbai 29 I.T.A.No. 1033 & 748/Mum/2010 A.Y.2006-07 of S.M.K. Shares and Stock Broking Private Limited, I.T.A.No.799/Mum/09 order dated 24.11.2010. For this proposition, the decision of Hon'ble Supreme Court in the case of Gopal Purohit, 228 CTR 582, is very much relevant and important. From the record, we found that assessee was investing in shares as well as trading in shares. He has maintained two portfolios of share transactions i.e deliv .....

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rate ledger accounts. Transactions were recorded separately at the time of purchase of shares. In respect of shares held as investment assessee had valued the same at the year end at cost and in respect of shares held in is trading portfolio, he has valued the same at cost or market price, whichever is lower. In the assessment year under consideration the assessee had consistently followed the same system of accounting as followed in preceding years. The profit earned on investment was disclosed .....

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of transactions in respect of each and every share and found that in respect of transactions in shares of Coromandel Fertilizers Ltd., Dharani Sugar & Chemicals Ltd., Dewan Housing Finance Ltd & Heritage Foods Ltd., frequencies were more and transactions were entered repeatedly as if the assessee was a trader in shares. The CIT(A) discussed various judicial pronouncements and the guidelines laid down therein with regard to treatment of gains arising out of sale of shares. The CIT(A) app .....

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x(STT) on the sale & purchase of shares and other derivative transactions. The CIT(A) also discussed the exemption brought in under Section 10(38) in respect of LTCG and levy of taxation on STCG at the concessional rate of tax of 10% by this Finance Act. The CIT(A) observed that along with these amendments, the Revenue has also Shri Mohan K.Jain, Mumbai 31 I.T.A.No. 1033 & 748/Mum/2010 A.Y.2006-07 levied security transaction tax to the effect that only after a suffering the burden of sec .....

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found in its earlier assessment year. The CIT(A) also elaborately dealt with the consistency in the treatment of profit arose on similar transaction of sale and purchase of shares. The CIT(A) also considered volume, frequency and continuity of transactions, average holding period in respect of each and every shares entered into by the assessee during the year under consideration. The CIT(A) found that no interest was paid on the amount borrowed from associates. The CIT(A) had also considered dif .....

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e order is not necessary to be completed Shri Mohan K.Jain, Mumbai 32 I.T.A.No. 1033 & 748/Mum/2010 A.Y.2006-07 by a single transaction of entire quantity of shares. Likewise, in the case of sales, the same may be divided as per the requirement of the purchaser at stock exchange; The fact that in all the preceding years, where the assessee had liquidated his investment in equity shares in Indian Companies, the Department has accepted the position except the assessment year in question, where .....

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, when all the surrounding circumstances, indicate otherwise. No where the AO has indicated any transaction of purchase of shares without taking delivery and making full payment of such investment. Even in the case of investment it is for the assessee to decide when to dispose them off so as to have a maximum return out of them. There is no theory that the shares held as investment should be disposed of only at the time of need or in emergency. The assessee had all the rights to dispose the inve .....

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stment in shares. The law itself has recognized this fact by taxing these transactions under the head "Short Term Capital gains" being shares which are sold within 12 months of its acquisition. Under these circumstances, if the contention of the AO is accepted, then it would be against the legislative intent itself. 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 a .....

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xed @ 20%, after adjusting for inflation by indexing the cost of acquisition. For listed securities, the taxpayer had an option to pay tax on long-term capital gains @ 10% but without indexation. For Foreign Institutional Investors (FIIs), the long-term capital gains and short-termShri Mohan K.Jain, Mumbai 34 I.T.A.No. 1033 & 748/Mum/2010 A.Y.2006-07 capital gains were taxed at the rate of 10% (without indexation) and 30% respectively. In case of a trader in securities, however, the gains we .....

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ered in a recognized stock exchange. With a view to simplify the tax regime on securities transactions, a tax at the rate of 0.015 per cent. (see: change in rates on securities transactions, by Finance Acts, at appropriate head) is levied on the value of all the transactions of purchase of securities that take place in a recognized stock exchange in India. This tax is collected by the stock exchange from the purchaser of such securities and paid to the exchequer. The provisions relating to the s .....

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gains arising from sale of such securities to an investor including FIIs shall be charged at the rate of ten per cent. These amendments apply to assessment year 2005-2006 and subsequent years. Through Finance Act, 2008, sections 111A and 115AD have further been amended whereby the rate of tax on such short-term capital gain has been raised to fifteen percent. Thus, w.e.f. 01.10.2004; on the share transactions subjected to STT; concessional tax rate of 10% (which has been increased to 15% from AY .....

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case of Smt. Sadhana Navera (supra) as relied by learned DR and found that Shri Mohan K.Jain, Mumbai 36 I.T.A.No. 1033 & 748/Mum/2010 A.Y.2006-07 on the basis of finding of both the lower authorities that most of the shares were purchased and sold immediately and there were no shares which were acquired prior to 1st April, 2004 and held after 31st January, 2005, the gain arising out of sale of such shares were held to be business income. However, in the instant case before us, the CIT(A) ha .....

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ned DR and found that on the basis of findings recorded by both the lower authorities to the effect that there were high number of transaction in shares with borrowed funds and the sale of shares was the only activity of the assessee within a very short holding period, it was held that the profit arose on sale of such shares were liable to tax as business income. However, the facts in the instant case before us are distinguishable and the CIT(A) has appreciated not only frequency and continuity .....

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will not decide the issue but the total effects i.e. frequency and volume of transaction, intention of assessee while purchasing and holding the shares etc. are to be considered for arriving at a conclusion. Thus, it is a mixed question of law and fact to find out as to whether the assessee has earned capital gain or business income.The gain arising on delivery based share transaction are essentially in the nature of STCG and LTCG and not in the nature of business income, except where such gains .....

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delivery based transactions were treated as STCG or LTCG depending on the period of holding. Even in respect of transaction in respect of these four companies, the CIT(A) given a specific direction for recomputing the profit or loss after revaluing the closing stock held therein at cost or market price, whichever is lower. If the conclusion drawn in the Shri Mohan K.Jain, Mumbai 38 I.T.A.No. 1033 & 748/Mum/2010 A.Y.2006-07 impugned orders, observations made from the assessment orders, asser .....

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tment against the decision of Bombay High Court and the same was dismissed by Hon'ble Apex Court vide order dated 15.11.2010. In the speech by Hon'ble Finance Minister regarding Direct Tax Cases (Union Budget - 2004-05), especially clause 111, the intention of Government for introducing the security transaction tax and exempting the long term capital gain from sale of share and levying 10% tax on short term capital gain also supports the case of assessee. The idea behind introduction of .....

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rd 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 expression of human thought and, as pointed out by Lord Denning, it would be idle to expect every statutory provisions to be drafted with divine prescience and perfect clarity.‟ We can do better than repeat the famous words of judge Learned Hand when he said.̶ .....

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n (A) Pvt. Ltd vs CIT (2008) 301 ITR 309 (SC), it was held that (Page 323):- Rules of executive construction in a situation of this nature may also be applied. Where a representation is made by the makers of legislation at the time of introduction of Bill or construction thereupon is put by the executive upon its coming into force, the carries great weight.‟‟ 13. The Hon'ble Delhi High Court in ARJ Security Printers, 264 ITR 276 and Neo Pollypack Pvt Ltd. 245 ITR 492 (Del.) held .....

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under:- "3. We have considered the submissions put forth by the learned Senior DR and also perused the material available on record. Brief facts are that in the past the assessee was engaged in road building contractor and was deriving income from contract receipts as well as from sale of gitti and during the impugned year, ventured into investment in share market. The income arising from F&O transactions and daily trading in shares (without physical delivery) reflected as speculative .....

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d loss account by not showing the same as short term capital gain and also in Form 3CD the assessee has mentioned the nature of business as trading/dealing in shares/securities and mutual funds. The frequency of transactions was also considered, consequently he treated the amount of ₹ 49,81,915/- as business income from share trading. However, before the learned Commissioner of Income Tax (Appeals) the basis of additions was explained as evident from para 3.1.1 onwards. The crux of claim o .....

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basis of relevant statements by placing reliance on the decision of the Mumbai Bench of the Tribunal in the case of JM Shares & Stock Brokers v. JCIT dated January, 2009. Briefly, the claim of the assessee before the learned Commissioner of Income Tax (Appeals) was that the delivery based transactions were made with an investment motive and as such the income therefrom was in the nature of short term capital gains whereas the income arose from F&O transactions and daily trading in shares .....

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treated as capital asset and trading port folio comprising stock in trade which are to be treated as trading asset, was considered. The Board further clarifies that no single principle would be decisive and the total proposition needs to be considered. The assessee has maintained only one port folio and claimed that to be an investment folio. Undisputedly, the period of holding is less than one year, consequently, there is no infirmity in holding that these transactions would be treated as short .....

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e of shares transactions, the Assessing Officer cannot ignore the rule of consistency to treat the gains on sale of shares as STCG. In that case, the assessee was engaged in the business of trading in shares and also investment in shares and securities offered ₹ 1.54 crores as short term capital gain and ₹ 2.91 crores from long term capital gain.The long term capital gain was accepted whereas short term capital gain was held to be business profit. Since in earlier assessment years th .....

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ofit 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 holds the shares in his books as investor, no interest was paid on the funds. 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 Deve .....

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g, it was also explained by the learned Counsel for the assessee that accounts were maintained by the assessee in two separate capacities i.e. trader and investor and never treated the same as holdings of shares as stock in trade which clarifies the intention of the assessee. This assertion was not controverted by the Revenue. 16. The Board Circular No. 4.2007 dated 15-06-207 also emphasizes that it is possible for a tax payer to have two portfolios namely, an Shri Mohan K.Jain, Mumbai 43 I.T.A. .....

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res. Instruction No.1827 dated 31st August, 1989 was supplemented by CBDT circular no. F.No.149/287/2005-TPL [reported in 210 CTR 29 (St.)], advising the Assessing Officers that the principles contained in the circular should guide them in determining whether, in given cases, the shares are held by the assessee as investment (and therefore, giving rise to capital gains) or stock-in-trade (and therefore, giving rise to business profit) by further opining that no single principle would be decisive .....

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earning fix income. 17. The CIT(A) after applying the proposition laid down in the various decisions as discussed above with respect to the facts of the instant Shri Mohan K.Jain, Mumbai 44 I.T.A.No. 1033 & 748/Mum/2010 A.Y.2006-07 case and also keeping in view frequency and continuity of transactions, it recorded categorical finding to the effect that profit earned in respect of four companies as discussed above amounting to ₹ 18,41,027/-was liable to be taxed as business income rathe .....

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do not find any infirmity in the order of CIT(A), which is being upheld. 18. In the result, both the appeals filed by the assessee as well as Revenue are dismissed. 3. We have considered rival contentions and carefully gone through the orders of the lower authorities as well as order of the Tribunal dated 21/02/2014 in assessee s own case, wherein exactly similar issue with regard to treatment of profit arising out of sales of shares has been dealt with to decide whether it was capital gain or .....

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o aggrieved for disallowance made under Section 14A read with Rule 8D. In the assessment year 2007-2008 Rule 8D is not applicable, however, reasonable disallowance is required to be made. However, in the assessment year 2008-2009 Rule 8D is applicable. The main contention of the learned AR was that assessee was holding major shares as stock in trade, profit earned there on was offered for tax, therefore, no disallowance was warranted on the investment blocked in these shares. 5. Reliance was pla .....

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g the disallowance under Section 14A by excluding the amount blocked in shares meant for trading purpose. We direct accordingly. 6. In the Assessment year 2009-2010 revenue is aggrieved by the action of CIT(A) for treating profits of sales of shares held for more than 12 months as long term capital gains instead of business income. The precise observation of CIT(A) was as under:- I have considered tile arguments of the Ld. AR. The decision of the AO is primarily, based on the findings in the ass .....

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ssessed both short term capital loss and long term capital gains as business income. The matter was taken up by the assessee before the CIT(A) for Ay 2006-07 who vide order dared 27-11-2009 partly allowed the appeal of the assessee by holding that the profit from sale of shares whether short term or long term, was assessable as capital gains except for the shares wherein the assessee has made purchase and sales for more than 4 times in a year for any particular scrip. The scrips (whether held as .....

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erm or long term, was assessable as capital gains except for the shares where in the assessee has made purchase and sales for more than 4 times. He also directed the closing stock of shares in respect of the transactions which have been treated as business income to be worked out on the basis of cost or market price whichever is lower and also to allow the credit of STT paid in respect of such shares, the profit from which has been assessed as business income. 3.4. Since there a change in addres .....

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e Courts as well as the CBDT in circular no. 4/2007, have held that an assessee can be investor as well as trader simultaneously. In the case of Raja Bahadur Wisheshwara Singh 41 ITR 685 (SC), it has been held that the magnitude, frequency, ratio of purchase & sales and holding will indicate the whether assessee was dealing in shares as business. Similar views have been held in 81 ITR 179(Cal), 74 ITR 692(Bom), 42 ITR 743(SC), 41 ITR' 685,692(SC). Hence the overall effect of far-t or s l .....

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ssee is investor or trader. The magnitude is not to be seen in absolute terms but only in relative terms i.e it has to be seen W.r.t the total capital available, price of shares, etc. Sale and purchase of same share several times within the year would be another indication of intention of transactions to be for earning quick profit and not to enjoy appreciation of investments over a period. Where the delivery is not taken, profit from such transactions would definitely fall in business income as .....

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investments . The observation of the Supreme Court in case of G Venkatswami Naidu & Co. 35 ITR 584(SC) on page 610 is relevant the presence of all the relevant circumstances mention in any of them may hold the court to draw a similar inference but it is not a matter of merely counting the number of facts and circumstances pro & con; what is important to considered is their distinctive character. In each case it is the' total effect of all relevant factors and circumstances that dete .....

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In case of V Nagesh (ITA No5410/mum/2008) on page 5 of the order the Hon'ble ITAT while holding that sale and purchase of shares frequently would amount to trading, has observed that "in case of Investment, a person usually watches a market over a longer period of time before selling the shares. The earning of dividend and appreciation of shares is primary concern". Though the nature of treatment given in books would be a guiding factor but the same cannot be applied as decisive f .....

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cular no 4/2007, have also held that an assessee can be investor as well as trader simultaneously but the sanction between trading activity and investment activity has to be apparent from the relevant facts. Thus the activity of an assessee amounts to trading or investment can change from year to year depending upon various other factors' such as volume and number of transactions, period of holding, repetitive dealing in same scrip, utilization of borrowed funds, existence of speculative act .....

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? 3.6. If the above parameters are applied to the facts of the appellant's case then it is clear that the total transactions of sale of short term shares are 227 with a turnover of 11 Crores which will be high volume and frequency suggestive of the activities like a trader in shares and not an investor It is also noted that on large number of occasions the assessee has purchased or sold the same scrip several time in the same year which suggests that the assessee conducted himself in the man .....

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, and by repeated sales purchases on several times during the year in same scrip, the see conducted in the manner like trader in respect of the shares or less than 12 months. The closing balance out of the shares hold short term shares for quick rotation of turnover. The appellant has also done speculative transactions in the same scrips without taking delivery. Besides this, the appellant has also been done business activity of dealing in futures & options till immediately preceding years t .....

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effect of other factors as already discussed above indicates the appellant to be a trader. Under these circumstances, it is clear that the assessee has conducted like a trader in respect of the shares held for less than 12 months and hence the profit derived on the equity shares held for less than 12 months will have to be assessed as business income only. The action of the AO in treating the Short term capital loss of ₹ 1,67,02,188 as business loss is therefore confirmed. He shall howeve .....

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ce no one can be expected 'to be doing trading in shares by holding the same for very long period i.e., more than 12 months. Holding period of 12 months can only be with the intention of trading. Hence for the shares held for more than 12 months there cannot be any reason to treat the same also as a part of trading activity. The mere fact that the assessee has been treated as trader for shares held for less than 12 months, doesn't mean that he is required to be treated as trader in share .....

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than 12 months, which is suggestive of intention of investment. Further such investments have been made out of capital only and there are no borrowed funds. The period of holding is also sufficiently large i.e. from 365 days 1095 days. Most of the long term shares have been sold after holding them for 2 to 3 years. More than 85% of LTCG earned is on shares which were held from 551 days to 1095 days which clearly shows the intention of holding shares for investment only. From the perusal of the .....

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IT(A) 31 Mumbai also while passing order for AY 2006-07 to 2008-09 in case of appellant has also held the profit on shares held for more than 12 months to be assessable as LTCG 'with only exception made by him in respect of scrip where the appellant had made purchase and sales for more than 4 times in a year for any single scrip. With due respect to my colleague's findings, I am unable to agree with the exception made by Ld CIT(A)-31 in treating the profits on sale of long term shares wh .....

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han 12 months than mere fact that an assessee sells the same in more than 4 lots also does not take away the intention of investment which is evident by the fact that the shares were held for more than 12 months. If that were held to be so, than the shares of any scrip held for more even than three years will get treated as business income instead of LTCG just because it is sold in more than 4 times, thereby leading to a distorted conclusion. Thus the sale of single scrip more than 4 times after .....

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upon the market conditions. So these transactions of sale on same day cannot be treated as separate sale transactions on the part of seller who had all the shares for sale at one lot only. Thus the intention should discernible from period of holding and not from the fact that in how many lots the shares are sold. Under these circumstances it cannot be said that the appellant was acting like a trader in respect of the shares which have peep held for very long period of more than 12 months just b .....

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e order of Tribunal dated 21.02.2014 in assessee s own case. 8. Revenue is also aggrieved for deleting the disallowance of ₹ 2,67,243/- made by AO under Section 14A. 9. The disallowance made by the AO to the extent of ₹ 2,67,243/- was deleted by CIT(A) after having the following observation:- 4.2. I have considered the arguments of the Ld. AR. It has been contended that no expenditure has been claimed against the taxability of income offered by the assessee. It only for the sake of c .....

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lation profit of ₹ 6,50,574/-, bank interest of ₹ 98,786/-, commission of ₹ 4,OOO/-, rent of ₹ 27,20,000/- and profit on sale of property ₹ 51 ,00,000/ -. From perusal of the statement of income it is noted that the above income has been offered as it is in various heads without claiming any expenditure as appearing in the P&L a/c. Regarding capital gain of ₹ 51 lakhs the appellant has that the same has been claimed as exempt u/s.54EC by investment in REC .....

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urred in relation to income which does not form part of the total income, is correct. The AO must in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having regard to the accounts of the assessee. The satisfaction of the AO must be arrived at on objective basis. It is only when the AO is not satisfied with the claim of the assessee, that the legislature directs him to follow the method that may be prescribed. ) Similar v .....

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has made disallowance without giving any finding as to whether there was any expenditure claimed as deduction in relation to exempt income. The findings so recorded by CIT(A) has not been controverted, accordingly we do not find any reason to interfere in the order of the CIT(A). 11. Last grievance of revenue relate to CIT(A) s direction to the Assessing Officer to treat ₹ 9 lakhs as rental income.The facts of the case are that it was noted by the AO from the leave and license agreement i .....

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tc. The AO asked the assessee to explain as to why amount received towards amenities may not be treated as income from other sources. It was replied by the AR of the assessee that the letting out of amenities is inseparable to that of letting out of house property and hence the same has to be assessed under the head income from house property and not as income from other source.However, the AO did not agree with the assessee s contention and treated the income as income from other sources. 12. B .....

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