Case Law Details
IN THE ITAT MUMBAI BENCH ‘D’
Devji Nenshi Palani
Versus
Income-tax Officer
IT APPEAL NO. 7881 (MUM.) OF 2010
[ASSESSMENT YEAR 2007-08]
SEPTEMBER 12, 2012
ORDER
Rajendra Singh, Accountant Member
This appeal by the assessee is directed against the order dated 29.10.2010 of CIT(A)-24, Mumbai for the A.Y. 2007-08. The assessee in this appeal has raised the disputes on four different grounds.
2. The first dispute is regarding the disallowance of motor car expenses including the depreciation. The A.O. noted that the assessee had claimed total expenditure of Rs. 7,26,416/- including the depreciation of Rs. 2,01,565/- in respect of motor car. The A.O. also noted that the assessee could not produce the log book maintained in respect of the motor car. He, therefore, disallowed 20% of such expenses on estimate amounting to Rs. 1,45,283/- towards personal usages. In appeal, the CIT(A) reduced the disallowances to 5% of such expenses aggrieved by which the assessee is in appeal before the Tribunal.
2.1 Before us, the ld. AR for the assessee reiterated the submissions made before the lower authorities that the motor car had been used for the purpose of business to approach various customers and for follow up of meetings and, therefore, no disallowance should be made. The ld. DR on the other hand, supported the order of the CIT(A).
2.2 We have perused the records and considered the matter carefully. The dispute is regarding the estimated disallowance out of motor car expenses including the depreciation. The A.O. had disallowed 20% of such expenses for personal usages which in appeal has been reduced by the CIT(A) to 5% which comes to around Rs. 3,000/- per month. There is no dispute that the assessee is not maintaining any log book and, therefore, there is no proof that the car has been used only for the purpose of business. Therefore, in our view, the estimate disallowance of such expenses @5% is justified. We accordingly confirm the order of the CIT(A) on this point.
3. The second dispute is regarding the estimate disallowance out of telephone expenses. The assessee had claimed the total telephone expenses of Rs. 5,39,273/-. The A.O. had disallowed 20% of such expenses amounting to Rs. 1,07,854/- for personal usages. In appeal, the CIT(A) has reduced the disallowance to 5% of such expenses which comes around Rs. 2,200/- per month.
3.1 Before us, the ld. AR for the assessee submitted that the expenses were on account of telephones and mobiles which were used for the purpose of business only and, therefore, no disallowance should be made. The ld. DR supported the order of the CIT(A).
3.2 We have perused the records and considered the matter carefully. The dispute is regarding the estimate disallowance of telephone and mobile expenses for personal usages. Personal usages of telephone/mobile is quite common and cannot be ruled out and in the absence of full details of call records etc., it is not established that these have been used only for the purpose of business. Therefore, the estimated disallowance is justified. The disallowance made by the CIT(A) @ 5% which comes to Rs. 2,200/- per month is reasonable. Therefore, the order of the CIT(A) is upheld.
4. The third dispute is regarding the estimate disallowance out of business promotion expenses, conveyance expenses, miscellaneous expenses and office expenses. The A.O. noted that the assessee had claimed total expenditure of Rs. 9,21,860/- under these fourheads. The A.O. observed that there were no proper vouchers which were only self made or generated by the assessee and, therefore, the expenditure was not supported by the proper evidence. He, therefore, disallowed 20% of such expenses amounting to Rs. 1,84,372/-. The assessee disputed the decision of the A.O. and submitted before the CIT(A) that the entire expenses were incurred for the purpose of business and the nature of expenses was such that no proper evidence could be kept. The CIT(A) after considering the explanation of the assessee reduced the disallowance to 10% of expenses aggrieved by which the assessee is in appeal before the Tribunal.
4.1 Before us, the ld. AR for the assessee reiterated the submissions made by the lower authorities, whereas the ld. DR supported the order of the CIT(A).
4.2 We have perused the records and considered the matter carefully. The dispute is regarding the estimated disallowance out of business promotion expenses, conveyance expenses, miscellaneous expenses and office expenses which aggregated to Rs. 9,21,860/. There is no dispute that the expenditure was not supported by proper bills and vouchers. The A.O. had disallowed 20% of such expenses on estimate which has been reduced by the CIT(A) to 10%. The case of the assessee is that the nature of many of the expenses under these heads is such that no proper vouchers are possible. We agree that it may not be possible to have proper evidence in respect of conveyance and miscellaneous expenses etc, but since the expenses are not supported by the proper evidence, the estimated disallowance of such expenses is justified. In our view, on the facts of the case the estimate disallowance of Rs. 50,000/- out of these expenses will meet the ends of justice. We, therefore, set aside the order of the CIT(A) and uphold the disallowance to the extent of Rs. 50,000/-.
5. The fourth dispute is regarding the nature of income from sale and purchase of shares. The A.O. noted that the assessee had shown Short Term Capital Gain on the sale of equity shares at Rs. 10,50,596/-. The A.O. also noted that the number of transactions was very large with high frequency involving 3000 transactions. The A.O. further noted that the assessee while giving the details had himself mentioned “Speculative Short Term Capital Gain” which clearly indicated the business nature of transactions. The A.O., therefore, treated the Short Term Capital Gain declared by the assessee as “business income”. The assessee disputed the decision of the A.O. and submitted before the CIT(A) that the assessee was an investor in shares and in the past the capital gain declared by the assessee had been accepted. It was also submitted that the assessee was doing full time business in the name of Maharashtra Traders and there was no scope of carrying out independent business of trading in shares. The CIT(A) however, was not satisfied by the explanation given. Considering the high frequency of transactions and low holding period, he considered that the intention of the assessee was to trade. However, he noted that the assessee had also derived gain from sale of bonus shares. The bonus shares had arisen from the share held as investment and, therefore, these could not be treated as trading. The CIT(A) accordingly directed the A.O. to treat the gain arising from sale of bonus shares amounting to Rs. 650890.24 as “Short Term Capital Gain” and the balance amount of Rs. 3,99,706/- as “business income”. Aggrieved by the decision of the CIT(A), the assessee is in appeal before the Tribunal.
5.1 Before us, the ld. AR for the assessee reiterated the submissions made before the lower authorities that the assessee had been an investor and in the earlier years, investments had been accepted. It was thus argued that the claim of Short Term Capital Gain should be accepted. Reliance was placed on the decision of Tribunal in the case of Gopal Purohit v. Jt. CIT [2009] 29 SOT 171 (Mum.) which has been upheld by the Hon’ble High Court of Bombay CIT v. Gopal Purohit [2011] 336 ITR 287/[2010] 188 Taxman 140 (Bom.). The ld. DR, on the other hand, argued that considering the high frequency and large number of transactions, the said transactions have been rightly treated as trading activity. It was also pointed out that in most of the cases shares have been sold on the same day which showed that sales have been made even without taking delivery and, therefore, it was clear case of the speculation activity. It was accordingly urged that the order of the CIT(A) should be upheld.
5.2 We have perused the records and considered the rival contentions carefully. The dispute is regarding nature of income from share transactions entered into by the assessee. The issue whether the share transactions in a particular case should be treated as investment activity or trading activity has been highly a debatable issue. There are decisions of the Tribunal on both the sides. Each case will depend on its own facts and circumstances. There are various factors such as frequency, volume, entry in the books of account, nature of funds used, holding period etc. which are relevant in deciding the true nature of transactions and no single factor is conclusive. The most important factor is the intention of the assessee at the time of purchase which has to be gathered from the actual conduct of the assessee while dealing with the shares subsequently and not only on the basis of entry in the books of account or the objects in the memorandum of association. This view is supported by the judgment of the Hon’ble Supreme Court in the case of CIT v. Madangopal Radhey Lal [1969] 73 ITR 642. The actual conduct has to be evaluated by analyzing of the holding period etc. An investor makes purchases with long term goal of earning income from the investment and he is not tempted to sell the shares on every rise and fall in the market which are the attributes of a trader. Since income from investment in shares which is in the form of dividend is received annually, normally an investor is expected to hold the shares for more than a year. However there may be situations when the investor may also sell the shares after short holding in order to reshuffle portfolio when prices are falling or to encash investment in case of exceptional gain or for some personal exigencies. Each case is required to be examined carefully to ascertain the true nature of transactions.
6. In this case, the details of share transactions giving the date of purchases and sale have been placed on record. It is clear from the details given that in most of the cases shares have been sold on the very date of purchase which shows that sales have been made even without taking delivery. Thus most of the transactions are speculative in nature. In fact the assessee while giving the details of the transactions has himself mentioned “Speculative Short Term Capital Gain”. The other shares have also been sold after a short duration of holding. The numbers of transactions are very large and the assessee is almost buying or selling on the daily basis. There are 3000 transactions and the details run through several pages. The pattern of transactions clearly shows that the assessee is trading in shares and is not an investor. Therefore, we do not find any merit in the claim of the assessee that the shares have been bought and sold as an investment activity.
7. The ld. AR for the assessee has relied on the decision of the Tribunal in the case of Gopal Purohit (supra) to argue that income from all delivery based transactions has to be assessed as income as held by the Tribunal in the said case. We have carefully perused the order of the Tribunal in the case of Gopal Purohit (supra), but we find that there is no universal finding in that case that all delivery based transactions have to be treated as investment. It is pertinent to note that the Tribunal in case of Gopal Purohit (supra), had decided the case following the decision of Tribunal in case of Sarnath Infrastructure (P.) Ltd. v. Asstt. CIT [2010] 124 ITD 71 (Luck.) holding that facts in the case of Sarnath Infrastructure (P.) Ltd. (supra), were identical. However, it is noted that in Sarnath Infrastructure (P.) Ltd. (supra), the shares sold out of investment account had been held that 2-3 years and revenue could not show any shares sold which had been purchased during the year or in the immediately preceding year. Therefore, only in respect of such cases, the decision in case of Gopal Purohit (supra), could be applied. The Hon’ble High Court of Bombay had upheld the decision of the Tribunal in the case of Gopal Purohit (supra), on the ground that there was no substantial question of law involved. Even before Hon’ble High Court there was no question raised that all delivery based transactions have always to be treated as investment activity. Thus the decision of the Tribunal as well as the Hon’ble High court in case of Gopal Purohit (supra), cannot be considered as a precedent for the proposition that all delivery based shares have to be treated as investment activity. The assessee can also be a trader in case of delivery based purchases and sales, which is a normal feature of any trading activity. Therefore, in our view reliance placed by the ld. AR on the decision in the case of Gopal Purohit is misplaced. Each case has to be decided based on its own facts. Considering the facts of this case, we hold that the share transactions from which the assessee has shown short term capital gain were of the nature of trading activity of the assessee and accordingly we set aside the order of the CIT(A) treating the short term capital gain as business income.
8. In the result, the appeal filed by the assessee is partly allowed.
