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Income Tax Appellate Tribunal, DELHI BENCH “F” DELHI
Before: SHRI CHALLA NAGENDRA PRASAD & SHRI PRADIP KUMAR KEDIA
PER PRADIP KUMAR KEDIA, A.M.: The captioned appeal has been filed by the Revenue against the order of the Commissioner of Income Tax (Appeals)-XXXVIII, New Delhi [‘CIT(A)’ in short] dated 20.03.2019 arising from the assessment order dated 26.12.2017 passed by the Assessing Officer (AO) under Section 143(3) of the Income Tax Act, 1961 (the Act) concerning AY 2015-16. 2. The grounds of appeal
raised by the Revenue read as under: “1. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was right in holding that long term capital gain/loss of Rs.3,48,35,294/- should be assessed under the head capital gains not under the head income from business and profession.
2. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was right in deleting the addition made by the AO under section 14A Rs.1,23,33,363/- ignoring the fact that the provisions under section 14A are mandatory provisions.”
3. When the matter was called for hearing, the ld. counsel for the assessee in the Revenue’s Appeal submitted at the outset that identical issue came up in Assessee’s own case for Assessment Years 2010-11, 2012-13, 2013-14 and 2014-15 wherein the benefit of Long Term Gains arising to the assessee was denied by the Revenue by re-characterizing such income as business income of the Assessee. The ITAT restored the position taken by the assessee holding the gain arising on such all shares and mutual funds to be taxable under the head ‘capital gains’. For ready reference the relevant operative paragraph of the order of the Co-ordinate Bench in Assessment Year 2014-15 order dated 14.10.2021 in Assessee’s own case is reproduced hereunder: 4.3 We find that the learned CIT(A) upheld the finding of the Assessing Officer following the decision of the Tribunal in ITA No. 118, 942 & 943/Del/2010, dated 31.01.2012. However, in subsequent assessment year 2008-09 to 2013-14, the Tribunal has treated the activity of purchase and sale of the mutual funds under the head of ‘capital gain’. The relevant finding of the Tribunal for assessment year 2013-14 in ITA No. 3785/Del/2017 is reproduced as under: “3.6 We have heard rival submission of the parties on the issue in dispute. The issue in dispute of treating long-term capital gain shown by the assessee as business income has been raised in the case of the assessee for last so many years. The Tribunal in assessee’s own case for assessment years 2005-06 to 2007-08 (ITA No.1118, 942 and 943/Del./2010 order dated 31/03/2012) held the activity of purchase and sale of the shares as business income. The relevant finding of the Tribunal is reproduced as under: “8. We are of the opinion that the character of a transaction cannot be determined solely on the application of any abstract test or rule and the cumulative factors affecting the transactions have to be seen. Habitual dealing in a particular item and that too since inception is indicative of the assessee's intention of trading. Merely for taking benefit of provisions of sec. 111A of the Act applicable from the AY 2005-06, the assessee cannot be categorized as an investor, especially when the aforesaid facts speak otherwise and the ld. AR did not place any material, other than resolution dated 22.4.2005, before us while the auditor reports and facts for the years under consideration ,reflecting intention of the assessee, lead us to the conclusion that the assessee is continuing its activities as in earlier years of a trader in shares. .As observed in Sutlej Cotton Mills Supply Agency Ltd. (supra), it is a matter of first impression with the Court whether a particular transaction is in the nature of trade or not. , it is not even the assessee's case that they had held all the shares for a long duration. The facts and circumstances of the case before us, when viewed in the light of principles laid down in the various decisions referred to above, lead us to the conclusion that the voluminous share transactions were in the ordinary line of 24 ITA nos.1118,942&943/Del./2010 the assessee's business; purchase of shares by them was not for the purpose of earning dividend, but with the dominant intention of resale in order to earn profits; the profit made by them is not of mere enhancement of value of the shares, but is a profit made in the carrying on of a business scheme of profit making; huge volume of share transactions, the repetition and continuity of the transactions, give them a flavour of "trade"; the magnitude, frequency and the ratio of sales to purchases on the total holdings is evidence that the assessee had not purchased the shares as an investment, but with the intention to trade in such scrips. In the light of view taken in the aforesaid decisions, including in Wallfort Financial Services Ltd.(supra) relied upon by the ld. DR, we are of the opinion that the ld. CIT(A) was not justified in accepting the claim of the assessee as investor in shares ,especially when the nature of transactions in the years under consideration was similar to what the assessee had undertaken hither to and turnover of the assessee continually increased in the years under consideration. Accordingly, we vacate the findings of the ld. CIT(A) and restore the order of the AO. Therefore, ground no.1 in these appeals is allowed.”
3.7 Subsequently, the Tribunal in assessment year 2008-09, 2009-10 and 2011-12 (ITA No.3078/2011, 820/2013 and 5054/2015 in order dated 20/08/2018) analysis of various decisions and the circulars issued by the Central Board of the Direct Taxes (CBDT) held the activity of purchase on sale of the shares as assessable under long-term capital gain and not business income. The detailed finding of the Tribunal is reproduced as under:
“14. We have heard the rival submission and also perused the relevant findings given in the impugned orders as well as matter referred to before us. The core issue before us is, whether the amount of Rs.15,41,96,869/- which has been classified as business income by the Assessing Officer which income has been offered to tax by the assessee under the head ‘capital gain’ is to be assessed as business income or capital gain. The Assessing Officer has summarized the following income shown under the head ‘Capital Gain’ as business income:
Long Term Capital gain Rs. 32,39,427 (Except Dabur India Ltd.) Long Term Capital Gain Rs.10,13,29,232 (without indexation) Long Term Capital Gain Rs. 2,93,99,990 (with indexation after removing Indexation) Short Term Capital Gain Rs. 1,85,41,338 Short Term Capital Gain With PMS (Net) Rs. 16,86,882 Total Rs. 15,41,96,869/- The assessee company is a NBFC, which was also in the business of sale and purchase of shares and mutual fund. In so far as transactions in mutual funds are concerned, the same has been offered under the head ‘Profits and Gains of Business and Profession’. However, various shares which has been held under the investment portfolio on which assessee has been shown under the head Long-Term Capital Gain and Short-Term Capital Gain as per the details incorporated above. The income earned by the assessee from various sources was as under: - Particular Asset Type Amount s Income a)Trading in units of 360,77,965 from Mutual Funds; Business b) Income from Interest; (A) c)Incentive and Miscellaneous Income Income Income from Capital 13,51,06,96 from Assets - Investment in 0 Capital EquitiesLTCG11,48,78,74 Gains (B) 0 (85%) STCG2,02,28,220 (15%) Income Dividend earned from 8,19,14,172 from other investment in equities Sources (C)
One of the main contentions of the Revenue which has been strongly harped by the Tribunal in the earlier years is that, assessee prior to 31st March, 2004 was holding shares as ‘stock in trade’, hence intention was to do business only and mere classification in books as investment by making entries is not decisive factor. It was on 01.04.2004 the shares were converted into investment portfolio and since A.Y. 2005-06; assessee has segregated the income under the head ‘Capital Gains’ and ‘Business Income’. Apart from that, Assessing Officer has noted that magnitude of the transaction and the volume shows that assessee was into sale and purchase of share for the intention of business only and has also referred to the huge turnover and also highlighted various facts it has been discussed and incorporated in detail in the earlier part of the order. Now from the perusal of the schedule of investments especially investment made in the shares under the head ‘Long- Term Capital Gain’, we find that the major amount on amount of Long-Term Capital Gain is arising on account of sale of shares of Punjab Tractors Ltd. which is at Rs.10,13,29,232/-, out of total Long-Term Capital Gain of Rs. 15,41,96,869/-, which has been treated as business income by the Assessing Officer. Shares of Punjab Tractors were acquired in the years 2005 and 2006 and since the date of purchase it was shown under the head ‘investment’, because these shares were acquired by the assessee for having controlling stake/interest in the said company. Later on, these shares were sold to Mahindra & Mahindra as a part of takeover deal which is evident from sale purchase agreement dated 08.05.2007. Thereafter Mahindra & Mahindra has given a letter of offer for purchase of equity shares from public at large after the acquisition of the shares of Punjab Tractors from the assessee in accordance with SEBI rules. In so far as Long-Term Capital Gain shown on the sale of the Punjab Tractors Ltd., it cannot be disputed that it was never a part of stock-in-trade, prior to 1.4.2004, because, firstly, they were acquired much later to this date; and secondly, it was acquired for the purpose of acquiring controlling stake/interest. Hence such an acquisition cannot be held to be for trading purpose. The transfer of such shares on a takeover of Punjab Tractors Ltd. by Mahindra & Mahindra also goes to prove that this was an investment held by the assessee. Similarly, in the case of ABN Amro Bank they were always held as investment and since the stock was not a tradeable in the stock market, therefore it could have been held as stock for the purpose of trade. Thus, the shares of ABN Amro Bank can never be treated as acquired for trading purpose. Hence any gain arising from sake of these two shares has to be assessed as ‘capital gain’.
Further, from the perusal of details shown under LTCG of other scrips also, we find that the same have been acquired in the years 2005, 2006 and 2007 and were treated as part of investment and the holding days of these shares are ranging from 372 days to 828 days. These shares were not converted from stock as on 01.04.2004, because they have been acquired in the later years and from the date of acquisition, always been kept as investment in the books and later on sold after more than a year on which gain has been shown under the head ‘Long Term Capital Gain’. Nowhere it has been laid down that the assessee who is dealing in shares cannot maintain two separate portfolios, one for the trading purpose and other for the investment purpose and there is no provision that shares held in investment portfolio have to be treated as part of stock. The most paramount factor which needs to be examined in such cases is, whether the intention of the assessee while acquiring shares was for investment purpose or for trading in future for profit. However, we find that in the earlier years the Tribunal has taken a different view and held that even if the shares have been held under investment portfolio also, it can be taxed as business income. One of the core reasoning for arriving to this conclusion was that the assessee has been trading in shares and the audit report also suggest that the assessee is dealer in shares and prior to 31st March, 2004 assessee was a full- fledged trader of share. Thus, the intention of the assessee at the time of purchase became the decisive factor to hold that it was only for the business purpose. The conclusion of the Tribunal in this regard reads as under:
8. We are of the opinion that the character of a transaction cannot be determined solely on the application of any abstract test or rule and the cumulative factors affecting the transactions have to be seen. Habitual dealing in a particular item and that too since inception is indicative of the assessee’s intention of trading. Merely for taking benefit of provisions of sec. 111A of the Act applicable from the AY 2005-06, the assessee cannot be categorized as an investor, especially when the aforesaid facts speak otherwise and the Id. AR did not place any material, other than resolution dated 22.4.2005, before us while the auditor reports and facts for the years under consideration reflecting intention of the assessee, lead us to the conclusion that the assessee is continuing its activities as in earlier years of a trader in shares. As observed in Sutlej Cotton Mills Supply Agency Ltd’ (supra), it is a matter of first impression with the Court whether a particular
transaction is in the nature of trade or not., it is not even the assessee’s case that they had held all the shares for a long duration. The facts and circumstances of the case before us, when viewed in the light of principles laid down in the various decisions referred to above, lead us to the conclusion that the voluminous share transactions were in the ordinary line of the assessee’s business; purchase of shares by them was not for the purpose of earning dividend, but with the dominant intention of resale in order to earn profits; the profit made by them is not of mere enhancement of value of the shares, but is a profit made in the carrying on of a business scheme of profit making; huge volume of share transactions, the repetition and continuity of the transactions, give them a flavour of “trade”; the magnitude, frequency and the ratio of sales to purchases on the total holdings is evidence that the assessee had not purchased the shares as an investment, but with the intention to trade in such scrips. In the light of view taken in the aforesaid decisions, including in Wallfort Financial Services Ltd.(supra) relied upon by the Id. DR, we are of the opinion that the Id. CIT(A) was not justified in accepting the claim of the assessee as investor in shares especially when the nature of transactions in the years under consideration was similar to what the assessee had undertaken hither to and turnover of the assessee continually increased in the years under consideration. Accordingly, we vacate the findings of the Ld. CIT (A) and restore the order of the AO. Therefore, ground no.1 in these appeals is allowed.”
If the aforesaid ratio and principle of the Tribunal is to be followed as it is, then as observed in the earlier part of the order, in so far as the transaction of shares of Punjab Tractors Ltd. and ABN Amro are concerned, right from day one it was acquired as a part of investment only and was classified as such in books right from the day of acquisition and it is not the case that these shares were earlier part of stock-in-trade which has been converted into investment after 01.04.2004. We have already held that the shares of Punjab Tractors Ltd. were acquired for controlling interest and ABN Amro shares are not tradeable in stock market and if one goes by the intention part, then these two scrips could never be held to be intended for trading purposes. Thus, the aforesaid decision will not be binding at least for these two scrips. For the other scrips also, if we see the volume of transaction and the period of holding, then we find that the transaction in the shares which was held for more than a year constitute 98.38%. For the sake of ready reference, the period of holding, volume of shares dealt, percentage of shares held in LTCG and other percentage of gain in shares are incorporated hereunder:-
Period of More than 365 81 to 364 91 to 180 60 to 90 30 to 59 Less than Holding days days days days days 30 days Quantity 1,33,65,009 53,003 1,01,571 43,971 78,813 67,802 of shares Percentag 97.48% 03.8% 0.74% 0.32% 0.57% 0.49% e to Total Quality Gain or 1,19,85,50,36 86,05,05 20,57,84 21,45,60 22,70,96 19,21,58 loss 9 1 1 5 2 0 Percentag 98.34% 0.70% 0.16% 017% 0.18% 0.15% e of Capital gain to Total capital gain *inclusive of shares of Dabur India Ltd., Punjab Tractors Ltd. and ABN Amro Securities Pvt. Ltd. Total Capital Rs. Long Term Capital Gain claimed exempt u/s. 10(38) 1,06,78,21,147 Long Term Capital Gain on sale of shares of Punjab Tractors 10,13,29,232 Ltd. Long Term Capital Gain on sale of shares of ABN Amro 2,93,99,990 Securities Pvt. Ltd. Short Term Capital Gain 2,02,28,140 Total 1,21,87,78,509
Now, it has been well settled that if the shares which has been acquired and treated as investment from day one and held for more than a year, then sale of such shares has to be taxed under the head ‘Long Term Capital Gain’. This has been clarified by the CBDT in its following two circulars: -
“Circular No.6/2016; dated 29/02/2016 Sub: Issue of taxability of surplus on sale of shares and securities — Capital Gains or Business Income — Instructions in order to reduce litigation - reg.-
Sub-section (14) of Section 2 of the Income-tax Act, 1961 (Act') defines the term "capital asset" to include property of any kind held by an assessee, whether or not connected with his business or profession, but does not include any stock-in-trade or personal assets subject to certain exceptions. As regards shares and other securities, the same can be held either as capital assets or stock-in- trade/ trading assets or both. Determination of the character of a particular investment in shares or other securities, whether the same is in the nature of a capital asset or stock-in- trade, is essentially a fact-specific determination and has led to a lot of uncertainty and litigation in the past.
2. Over the years, the courts have laid down different parameters to distinguish the shares held as investments from the shares held as stock- in-trade. The Central Board of Direct Taxes ('CBDT') has also, through Instruction No. 1827, dated August 31, 1989 and Circular No. 4 of 2007 dated June 15, 2007, summarized the said principles for guidance of the field formations.
3. Disputes, however, continue to exist on the application of these principles to the facts of an individual case since the taxpayers find it difficult to prove the intention in acquiring such shares/securities. In this background, while recognizing that no universal principal in absolute terms can be laid down to decide the character of income from sale of shares and securities (i.e. whether the same is in the nature of capital gain or business income), CBDT realizing that major part of shares/securities transactions takes place in respect of the listed ones and with a view to reduce litigation and uncertainty in the matter, in partial modification to the aforesaid Circulars, further instructs that the Assessing Officers in holding whether the surplus generated from sale of listed shares or other securities would be treated as Capital Gain or Business Income, shall take into account the following-
a) Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income, b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years; c) In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT.
4. It is, however, clarified that the above shall not apply in respect of such transactions in shares/securities where the genuineness of the transaction itself is questionable, such as bogus claims of Long Term Capital Gain / Short Term Capital Loss or any other sham transactions.
It is reiterated that the above principles have been formulated with the sole objective of reducing litigation and maintaining consistency in approach on the issue of treatment of income derived from transfer of shares and securities. All the relevant provisions of the Act shall continue to apply on the transactions involving transfer of shares and securities.”
17.1 Later on CBDT again clarified in the following manner:-
F. No. 225/12/2016/ITA.II Government of India Ministry of Finance Department of Revenue (CBDT)
North Block, New Delhi, dated the 2nd of May, 2016
To Principal Chief-Commissioners of Income-tax/ Principal Directors General of Income-tax
Subject: - Consistency in taxability of income/loss arising from transfer of unlisted shares under Income-tax Act, 1961-regd Regarding characterization of income from transactions in listed shares and securities, Central Board of Direct Taxes (‘CBDT) had issued a clarificatory Circular no. 6/2016 dated 29th February, 2016, wherein with a view to reduce litigation and maintain consistency in approach in assessments, it was instructed that income arising from transfer of listed shares and securities, which are held for more than twelve months would be taxed under the head 'Capital Gain' unless the tax-payer itself treats these as its stock- in-trade and transfer thereof as its business income. It was further stated that in other situations, the issue was to be decided on the basis of existing Circulars issued by the CBDT on this subject.
Similarly, for determining the tax-treatment of income arising from transfer of unlisted shares for which no formal market exists for trading, a need has been felt to have a consistent view in assessments pertaining to such income. It has, accordingly, been decided that the income arising from transfer of unlisted shares would be considered under the head ‘Capital Gain', irrespective of period of holding, with a view to avoid disputes/litigation and to maintain uniform approach.
It is, however, clarified that the above would not be necessarily applied in the situations where: i. the genuineness of transactions in unlisted shares itself is questionable; or ii. the transfer of unlisted shares is related to an issue pertaining to lifting of corporate veil; or iii. the transfer of unlisted shares is made along with the control and management of underlying business; and the Assessing Officer would take appropriate view in such situations.
The above may be brought to the notice of all the necessary compliance.
17.2 Now this circular has been approved and upheld in many judgments including that of Hon'ble Gujarat High Court in the case of PCIT vs. Ramniwas Ramjivan Kasat, reported in 248 Taxman 484. (Guj). Following the above two circulars, the Tribunal in assessee’s own case in the A.Y. 2011-12 has decided the issue in favour. Apart from that, there are many judgments now including that of Hon’ble Jurisdictional High Court rendered after the judgment of Tribunal order for the earlier years (supra), wherein it has been consistently held that if the shares have been held under the portfolio of investment which is separate from the shares then same cannot be brought to tax under the head capital gain. Some of the judgments are as under: -
CIT vs. Gopal Purohit, 336 ITR 287 (Bom.) [Also confirmed by Hon’ble Supreme Court] 2. CIT vs. Vinay Mittal, 208 taxman 106 (Del. HC) 3. ITO vs. Rohit Anand, (2009) 34 SOT 42 (Del.) 4. CIT vs. Amit Jain, 374 ITR 550 (Del.) 5. CIT vs. Sahara India Housing Corporation Ltd., (Del.)
In the light of the catena of decision Hon'ble Jurisdictional High Court and also some of the judgment affirmed by the Hon'ble Supreme Court and the facts as discussed above, the earlier years Tribunal order cannot be held to have any binding precedence and accordingly, we hold that in so far as transaction in sale of shares shown under the head ‘Long Term Capital Gain’ same cannot be taxed under the head business income especially in the light of the categorical clarification by the CBDT.
3.8 Further, the Tribunal in the assessee’s own case for assessment year 2010-11 (ITA No. 701/2015 in order dated 02/01/2019) following the order of the Tribunal for assessment year 2008-09, 2009-10 in 2011-12 upheld the activity of the parties on sale of the shares assessable under the head capital gain. The relevant finding of the Tribunal reproduced as under:
5. Thus, respectfully following the precedents of the earlier years and as a principle of consistency, we uphold the order of the CIT(A) that long term capital gain/capital loss cannot be treated as business income or loss and also long-term gain cannot be treated as business income. Accordingly, ground no. 1 raised by the Revenue stands dismissed.
3.9 Further, in assessment year 2012-13 i.e. immediately preceding assessment year, the Tribunal in in order dated 26/03/2018 held the activity of purchase on sale of the shares assessable under the head capital gain. The relevant finding of the Tribunal is reproduced as under:
“6. We have carefully considered the rival contentions and also perused the orders of the lower authorities. The assessee is Non Banking Financial Company and income from capital gains were investment made in equities are sold. The assessee treated long term capital gain from sale of equities held for more than 12 months exempt u/s 10(38) of the Act. The Assessing Officer treated it as business income, Now, the above issue is squarely covered in favour of the assessee by Circular No. 6 dated 29.02.2016 issued by CBDT. The above circulars peaks that if shares are held for more than 12 months, if assessee shows it as LTCG, same should be accepted.
In view of above facts we are of the opinion that when the assessee himself has treated the income arising from sale of securities held for more than 12 months as capital gains, there is no reason to dispute it by Assessing Officer.
In view of this ground No. 2 of the appeal of the assessee is allowed holding that long term gain from listed securities of Rs.25,13,359 is chargeable to tax under the head capital gain and not business income. Ground no. 2 of the appeal is allowed.”
2.10 In view of the consistent finding of the Tribunal since assessment year 2008-09, respectfully following the finding of the Tribunal for assessment year 2008-09 to 2012-13, we set aside the order of the lower authorities and hold the activity of purchase and sale of shares in question as investment activity to be assessed under the head capital gain.” 4.4 Hence, respectfully following the finding of the Tribunal (supra) the Grounds 1 and 2 are accordingly allowed in favour of the assessee.
4. In parity with the observations made by the Tribunal in earlier years in identical fact situation, we see no reason to entertain a different view. We thus see no error in the action of the CIT(A) which has rendered by the Tribunal in earlier years.
5. In the result, Ground No.1 of the appeal of the Revenue is dismissed. 6. As per Ground No.2, the Revenue has challenged the relief granted by the CIT(A) of Rs.1,23,33,363/- under Section 14A of the Act. 7. The CIT(A) has dealt with the issue as under: “Submission of the appellant:- The Appellant in the return of income had disallowed Rs.27,29,268 u/s. 14A give the fact in the Profit and Loss account only Rs.11.36 crores was incurred on an income turnover of Rs.80 crs. Majority f expenses had no connection with the dividend income. However, the Ld. Assessing Officer disagreed with the Company and disallowed Rs 1.26 crs, which represents 11.50% of total expenses as per AO were incurred for tax free income. The Appellant attached copy of tax computation to explain the how tax has been worked out. That on Rs 14.62 crores full taxes @ 30% has been paid of Rs 4.40 crs and LTCG of Rs 3.36 crs @ 10% has been paid of Rs 33.59 lakhs. The Ld AO without assigning any reasons, applied the formula of 8D in mechanical manner @ 0.5% of total avg investments which worked out to Rs 1,53 crores. Regarding disallowance of expenses related to exempt income, it is hereby submitted that the assessee is a non banking financial company and also engaged in interest bearing financial activities. The assessee company suo motto disallowed a sum of Rs 2729268/- as expenses related to exempt income U/s 14A of the IT Act. Regarding discount claimed in disallowance of expenses in relation to the exempt income , it is hereby submitted that during the period under consideration Appellant had earned dividend of Rs 43.16 crores out of which 98% of dividend was received from Dabur India Ltd. The Appellant is a promoter group company of Dabur India Ltd. And there is no investment activity had been conducted by the assesse company in the holding with Dabur India Limited. As per Note 9 Non Current Investment of the Balance sheet it can be observed that there is no substantial change in the holding of the shares of Dabur India limited. It is also submitted that no direct or indirect cost/ expenses has been incurred to earn the tax free income in form of dividends. However,, to avoid any dispute u/s 14A the Appellant voluntarily disallowed Rs 2729268/-. Recently, Hon' Delhi Court in case of Holcim India has ruled that no cost can be disallowed if the tax free income is in form of dividends. Copy of the judgement attached for your kind consideration. In view of this it not justified to disallow the entire 12633363/- U/s 14A of the IT Act, 1961. In view of above assessee also submit: The Appellant in the return of income of disallowed Rs 2729268/- u/s 14A. However you are proposing to increase the same to the tune of 0.5% of the avg investment by following step 3 of Rule 8D. The Appellant during the AY 2015-16 had earned dividend of Rs 43.16 crores on the various investments made by it in the equity shares. During the year, the Appellant had net gain on account of sale of long term equity shares on which STT is paid , of Rs 32772137/- . Besides, this Appellant had taken a position that any investment in equity shares over a period of less than one year shall be taken as income from business and hence offered for tax at full rate of 30%. The Appellant contends that disallowance u/s 14A should only with respect to actual expenditure and such expenses should be directly co-related with the exempt income. There was no such expense so the disallowance was restricted to Rs. 2729268/-. The only disputed point in this regard is 0.5% was has applied on the average investment figures. The Appellant contends that earning dividends is not an assured activity, no business man will ever incur a recurring expenditure in anticipation of non assured returns especially dividends. The declaration of dividend depends on lots of factors and there cannot
be guarantee or assurance that investments would dividend. As there cannot be any assurance on the earnings of dividends, how can a rational businessman ever incur a running cost to earn dividend. The Mandate of section 14A requires to disallow such expenses which were incurred for the purpose of earning tax free dividends. At this juncture it is important to note that what Hon' Delhi High Court has held in case of CIT vs Holcim India (P) Ltd and 299/2014 (Annexure )- "Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax" Further, in Holcim India's case (supra), Hon' Delhi High Court has held that AO was wrong is disallowing the entire expenditure as if there was no expenditure incurred by the respondent Appellant for conducting business. The expenditure had to be incurred to protect the investment made. The genuineness of the expenditure for the business activities has not been doubte4 by the AO and thus in given circumstances there is no merit in disallowing such expenses. Elucidating further, the Hon' Delhi Court in Holcim India's case (supra) held that Income exempt under Section 10 in a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessment year. For example, long term capital gain on sale of shares is presently not taxable where security transaction tax has been paid, but a private sale of shares in an off market transaction attracts capital gains tax. It is an undisputed position that respondent Appellant is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not an improbability. The, above ruling of Hon' Delhi High Court is a land mark judgment as per the Appellant, as the facts of the case are same or similar to the Appellant. In the above ruling the Ld. Courts quashed the disallowance u/s 14A of Rs 8.61 crores for AY 2007-08 and Rs 6.60 crores for AY 2008-09 holding that no expenses can be disallowed as the Ld AO has not shown any tax free income earned in the income schedule. The Hon' High Court also held that dividend income is an discretionary item of income and what would be important is whether any tax free return is earned on sale of shares.
In case of the Appellant too discretionary dividend income; alone cannot be made the basis to disallow substantial expense of Rs 12633363/-. In net summary, the Appellant prays before you to accept the disallowance of Rs. 27292.68/- made by the Appellant. The Appellant states dividend earning was never the objective of the Company. The Appellant has already stated that dividend earning was not its motive as dividends does assure a definite return, thus no definite expenditure can be incurred on regular basis pure, on windfall income under dividend category. Thus it is not clearly pointed out the expenses incurred by the Appellant to earn the dividends. Therefore disallowing a genuine business expenses of Rs 12633363/- is highly unjustified and bad in law. Moreover, Hon' High Court in Holcim India's case has rebutted the theory of dividends of dividends and upheld that taxability of shares to be taken as basis to allow or disallow the expenses u/s 14A of the Act. Moreover, time and again it has been held by various tribunals that strategic investment would fall outside the purview of 14A. Till 31 March 2015, the Appellant has not disposed any strategic holding in investments of Dabur India Limited . Given the long term holding, it cannot be said that the Appellant was holding the shares to earn the dividends, Thus, when stakes are with a view of long term, no disallowance can be made of genuine expenses made u/s.14A. Decisions:- I have gone through impugned order, facts of the case and submission filed by the appellant. This issue has been dealt in the assessee's own case for A.Y. order dated. 26.03.2018, for A.Y.2012-13. The relevant para is as below:- "The Ld. Assessing Officer did not say that how the claim of the assessee is not correct. Assessing Officer has not recorded satisfaction that how the claim of the assessee is incorrect. He also did not comment upon the argument of the assessee that on the dividend received form Dabur Ltd. expenditure is incorrect. The provisions of section 14A(2) mandatorily provides that Ld. Assessing Officer should record satisfaction about the correctness of the claim of the assessee. In the present case there is not such satisfaction recorded by the Assessing Officer. In view of this the addition made by Ld. Assessing Officer and confirmed by the Ld. CIT(A) cannot be sustained. Accordingly ground no.3 of the appeal of the assessee is allowed and Assessing Officer is directed to delete the disallowance Rs. 43,75,447/-." Therefore, respectfully following the Hon'ble ITAT's decision, the addition on this ground is ALLOWED.”
8. When the matter was called for hearing, it transpires that the CIT(A) has taken a favourable view in the light of the decision rendered by the Tribunal in Assessment Year 2012-13 in order dated 26.03.2018. However, the ITAT in the later year, i.e., Assessment Year 2014-15, ITA No.2087/Del/2018 order dated 14.10.2021 has taken a view that the impugned disallowance under Section 14A need not be disturbed. No difference in the fact situation has been pointed out. In parity with the latest order of the ITAT relevant to Assessment Year 2014-15, we find merit in the plea of the Revenue. The impugned additions made under Section 14A by the Assessing Officer is thus restored in tune with the decision of Co-ordinate Bench.
Ground No.2 of the Revenue appeal is allowed. 10. In the result, the appeal of the Revenue is partly allowed. Order pronounced in the open Court on 25/11/2022.