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Income Tax Appellate Tribunal, DELHI BENCH ‘G’, NEW DELHI
Before: Sh. N. K. ChoudharyDr. B. R. R. Kumar
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the revenue against the order of ld. CIT(A)-33, New Delhi dated 19.01.2017.
Following grounds have been raised by the revenue: “1. On the facts and in the circumstances of the case and law, the ld. CIT (A) has erred in deleting the addition of Rs.4,01,26,422/- on account of Long Term Capital Gains treating as business income.
On the facts and in the circumstances of the case and law, the ld. CIT (A) has erred in deleting the addition of Rs.1,04,43,140/- on account of Short Term Capital Gains treating as business income.”
The issue relates to deletion of the addition by the ld. CIT (A) on account of capital gains (long term/short term) treating it as business income.
2 ITA No. 1893/Del/2017 VIC Enterprises Pvt. Ltd. 4. The similar issue in the assessee’s own case stands adjudicated by the Co-ordinate Bench of the Tribunal for the assessment years 2006-07, 2008-09 and 2010-11 in ITA Nos. 2863/Del/2010, 3911/Del/2011 and 3635/Del/2011.
At the outset, both the parties accepted to the preposition that there has been no change in the factum except the amounts involved. Since, the matter already stands adjudicated in the absence of any material changes, we hereby dismiss the appeal of the revenue. For the sake of ready reference, the relevant portion of the ground no. 2 and ground no. 5 in the order dated 22.12.2015 is hereby reproduced:
“The following additions/disallowances were made by the Assessing Officer in the assessment framed under sec. 143(3) of the Income-tax Act, 1961:
S. Nature of addition/issue Amount in(Rs.) Grounds of appeal No. raised 1. Long Term Capital Gain treated as 34,61,63,879 GroundNos.1 to 9 business income. 2. Short term capital gain 6,71,16,180 GroundNos.10 to 18 Treated as business income. 3. Interest income 9,00,000 Ground No.19 4. Disallowance u/s.14A 5,33,768 GroundNos.20 to 22 (not pressed)
The assessee questioned the above addition before the Learned CIT(Appeals) raising the issue regarding taxing the profits realized on sale of shares as business income against capital gain offered by the assessee either under long term capital gain or short term capital gain depending upon the period of holding of the shares. The view of the Assessing Officer was that the assessee’s intention was to do trading in shares, securities and units. The Assessing Officer did not accept the explanation of the assessee and held that the assessee has carried on a regular trading in shares, securities and units. The
3 ITA No. 1893/Del/2017 VIC Enterprises Pvt. Ltd. voluminous transaction carried on by the assessee during the year on various scripts is self- explanatory. The Assessing Officer noted that 5 the assessee had shown income from business to the tune of Rs.1,15,44,84,872.67 and purchase of shares shown as Rs.1,46,27,37,974.36. It had also shown increase or decrees in stock to the tune of Rs.30,84,64,940.67 whereas other income was shown at Rs.53,69,66,060.68. Noting these aspects, the Assessing Officer came to the conclusion that assessee is carrying on business of trading in shares, securities and units. In support, he also noted the frequency of trading in different scripts except Dowar India Ltd.’s shares done on regular basis. The Assessing Officer tried to distinguish the case laws relied upon by the assessee and held that all the alleged long term capital gain of Rs.34,61,63,879 shown by the assessee in its return of income is business income and taxed the same accordingly. On the submission of the assessee regarding the principles of consistency, the Assessing Officer rejected the same with this finding that each assessment year is a different unit.
The Assessing Officer also treated the short term capital gain claimed by the assessee at Rs.6,71,16,180 as business income adopting the same observation as made by him hereinabove in relation to the claimed long term capital gain.
The Learned CIT(Appeals) did not agree with the Assessing Officer regarding treatment given by the Assessing Officer to the claimed long term capital gain of Rs.34,61,63,879 as business income and allowed the claim of the assessee with this finding that the assessee has rightly treated the amount as long term capital gain and thus is eligible for exemption under sec. 10(38) of the Act. This action of the Learned CIT(Appeals) has been questioned by the Revenue before us.
The Learned CIT(Appeals) has, however, upheld the action of the Assessing Officer treating the claimed short term capital gain of Rs.6,71,16,180 and loss of Rs.47,82,051 (net gain Rs.6,23,34,128)
4 ITA No. 1893/Del/2017 VIC Enterprises Pvt. Ltd. as business income. This action of the first appellate authority has been questioned by the assessee in its above appeals.
In support of ground Nos. 1 and 2 of the appeal preferred by the Revenue, the Learned CIT(DR) has basically placed reliance on the assessment order. He referred contents of page Nos. 17 to 20 of the assessment order with the submission that frequency and volumes of the transactions suggest that it was not a case of investment but business. The assessee has converted stock in trade to investments. He placed reliance on the decision of the Authority for Advance Ruling in the case of Fidelity 7 Group reported in 288 ITR 641 (AAR). He submitted that where a company purchases and sells shares, it must be shown that they were held as stock in trade and that existence of the power to purchase and sell shares in the Memorandum of Association is not of decisive of the nature of transaction. He submitted that the substantial nature of transactions, the manner of maintaining books of account, the magnitude of purchases and sells and the ratios between purchases and sells and the holding period would furnish a good guide to determine the nature of transaction. He contended that ordinarily the purchase and sale of shares with the motive of earning a profit would result in transaction being in the nature of trade/adventure in the nature of trade but where the objects of investment in shares of a company is to derive income by way of dividend etc. then the profits accruing by change in such investment “by sale of shares” will yield capital gain and not Revenue receipts. The learned CIT(DR) also referred the decision of Hon'ble Supreme Court in the case of CIT vs. H. Holck Larsen – 160 ITR 67 (S.C) holding that as to whether transactions of sale and purchase of shares were trading transaction or whether these were in the nature of investment is not a question of law but it is a mixed question of law and facts. The learned CIT(DR) referred page No. 18 of the assessment order to support his submissions that there were lot of frequency and volumes of transaction. The 8 assessee had also not paid security transaction tax on the sale of shares.
5 ITA No. 1893/Del/2017 VIC Enterprises Pvt. Ltd. He submitted that before the Assessing Officer, the assessee had not pointed out that it is promoter of Dawar India. The Learned CIT(DR) submitted that finding of the Learned CIT(Appeals) on the payment of security transaction tax (STT) is misleading. He submitted that the assessee had not maintained two portfolios to support its submission that it was trading in shares as well besides making investment in shares. The assessee is in the business of nonbanking finance, hence the shares transaction was part of its business. The Learned CIT(Appeals) on general findings has given the relief to the assessee by accepting the claimed long term capital gain as such.
The Learned AR on the other hand placed reliance on the First Appellate Order on the issue. He submitted that the assessee is one of the holding company of Dawar India. He submitted that investment therein was made 20 years back and the same are being shown as investment in the books of account. He submitted that during the year, the assessee had sold 23,55,000 shares of Dabur India Ltd. and realized profit under the head “long term capital gains” and claimed exemption under sec. 10(38) of the Act. Similarly, the assessee sold shares of certain other companies and the gain realized was offered under the head “long term capital gain” as period of holding was more than one year and claimed exemption. In support, he referred page No. 137 of the paper book having details of such shares. In 9 addition to the above, the assessee also sold shares of various other companies (approximately 170) and offered the gains under the head “short term capital gain”, since the period of holding in those transactions was less than one year. In support, the Learned AR referred page Nos. 142 to 146 of the paper book. The assessee had also applied special rate of taxation thereon as prescribed under sec. 111A of the Act, made available at page No. 141 of P.B. The Learned AR also referred Board Resolution (Page No. 215 of P.B), extract of investment ledger account (Page No. 216-217 of P.B.), financial statement with audit report (page
6 ITA No. 1893/Del/2017 VIC Enterprises Pvt. Ltd. Nos. 218 to 244 of P.B.) and Memorandum of Association (page Nos. 243 to 263 of P.B.).
The Learned AR submitted that as submitted above, the shares of Dawar India Ltd. have been held by the assessee as investment as a promoter for controlling interest and this position was accepted by the Department up to the assessment year 2005-06. The intention of the assessee behind the transaction is significant and frequency of transaction alone would not decide the issue ipso facto. He submitted that the assessee can hold shares either as investment or as stock in trade as clarified by the CBDT Circular No. 4 of 2007 dated 15.6.2007. He pointed out that entries in the books of account prove that shares in question were held as investment. He submitted that in the case of group companies, the profit on sale of shares of Dawar India Ltd. was allowed to be taxed under the head “capital gain”. The Learned AR referred computation of income, details of long term capital gain on which STT was paid and benefit under sec. 10(38) of the Income-tax Act, 1961 was claimed, and details of short term capital gain on which STT was paid and benefit under sec. 111A of the Act was claimed, made available in concise form at page Nos. 1 to 11 of the paper book. He submitted that up to assessment year 2004-05, the assessee had been maintaining two portfolios. Since assessment year 2005-06, the assessee is dealing only in investment and major component is shares of Dawar India Ltd. There is no prohibition in law to convert stock in trade to investment account. In this regard, he placed reliance on the decision of Hon'ble High Court of Delhi in the case of CIT vs. Express Security Pvt. Ltd. - 364 ITR 488 (Del.). The Learned AR submitted further that the contents of memorandum cannot be a sole basis but entirety of facts relating to the transaction is to be examined to find out the nature of the transaction as to whether it is investment or trade. The Learned AR submitted that STT was very much paid on the said transaction and referred page No. 236 (Schedule K) of the paper book. The learned AR submitted further that so far shares of Dabur India Ltd. are concerned, the assessee is also
7 ITA No. 1893/Del/2017 VIC Enterprises Pvt. Ltd. enjoying the managing/majority control on the group and in the books, its shares have been valued on cost price as investment. In this regard, he placed reliance on the following decisions: i) Felspar Credit and Investment Pvt. Ltd. vs. CIT - 346 ITR 121 (Madras); ii) Raja Bahadur Kamakhya Narain Singh vs. CIT - 77 ITR 253 (S.C)
The Learned AR submitted further that in its books of account, the assessee has valued the shares at cost price as investment and referred page No. 228 of the paper book in support. He submitted further that assessee had sufficient interest income and referred page No. 236 of the paper book in support. He submitted that dividends were also received during the year. The Learned AR also placed reliance on the following decisions:
i) CIT vs. Chowdry Associates – ITA No. 544/2013 – order dated 30.1.2015 (Delhi High Court): ii) CIT vs. Ashok Wadia – 2014-TIOL-518-H.C-Del-IT; iii) Bengal & Assam Investors Ltd. vs. CIT – 2002 – TIOL-705- S.C-IT. iv) Slocum Investment Pvt. Ltd. vs. DCIT – 2006- TIOL-300- ITAT-Delhi; v) Ram Narain Sons Pvt. Ltd. vs. CIT – 41 ITR 534 (S.C); vi) Karnataka State Ind. Investment & Dev. Corpn. Ltd. vs. DCIT – 59 ITD 643 (Bang,.); vii) CIT vs. Gopal Purohit – 2010-TIOL-129-S.C- MUM-IT; viii) CIT vs. Devasan Investment P. Ltd. - 365 ITR 452 (Del.);
Considering the above submission, we find that in its recent decision, the Hon’ble jurisdictional High Court of Delhi in the case of CIT vs. Ashok Wadia (supra) has been pleased to hold that the legal standards concerning whether income is to be treated as business income or short term capital gain have been the subject matter of various decisions of the Hon'ble Supreme Court and Hon'ble Delhi High Court. Suffice it to say that there is no single, universal standard to distinguish the two. The court
8 ITA No. 1893/Del/2017 VIC Enterprises Pvt. Ltd. must instead look into the nature of the shares, the volume and frequency of the transaction, the manner in which the shares have been shown by the assessee in its books of account, dividend earned on the shares, if any. Rarely will any one factor be conclusive, the purpose of the exercise is to ascertain the true intention through a composite test. In some cases, volume becomes determinative, in others, the duration of times, it is held, at times it can be the manner it is shown in the books, whereas still, the use of borrowed funds could be decisive.
The decision relied upon by the Learned AR referred above suggest that the very intention with which the shares have been purchased is the basic test to arrive at a conclusion as to whether the share transaction is investment or trade and this intention can be gathered on the basis of surrounding circumstances including the factors like period of holdings, volume and frequency of transactions in shares. What was the intention of the assessee at the time of purchase of these shares can be found out from the treatment it gives to such purchase in its books of account whether the assessee has borrowed money to purchase and paid interest thereon as normally money is borrowed to purchase goods for the purposes of trade and not for investing in an asset for retaining. What is the frequency of such purchases and disposal in that particular item. Whether purchase and sale is for realizing profit or purchases are made for retention and appreciation in its value. How the value of items has been taken in the balance sheet and how the assessee is authorized in memorandum of association/article of association. These are the main factors to draw an inference that the transaction in question is with intention to invest or to trade. When we examine facts of the present case in view of these tests, we find that the assessee, a non-banking finance company registered with Reserve Bank of India, is one of the promoter company of Dawar India Ltd.
15.1 The Learned CIT(Appeals) has dealt with the issue as under:
9 ITA No. 1893/Del/2017 VIC Enterprises Pvt. Ltd. “7. I have gone through the assessment order and the written submissions filed by the AR in this regard.
As already stated the assessee is a NBFC and the assessee company is one of the promoter companies of Dabur India Ltd. and the 'controlling interest of all the group companies as on 31.03.2005 is as under:
Promoters of Dabur India Ltd. No. of shares % age of held on holding 31.03.2005 1. VIeEnterprisesPvt.Ltd. 37430000 13.07% 2. Gya~ Enterprises Pvt. Ltd. 37250330 13.01% 3. Chowdry Associates 37438340 13.07% 4. Puran Associates Pvt. Ltd. 37352000 13.04% 5. ACEE Enterprises 37191990 12.99% 6. ~atna Commercial 36456330 12.73% Enterprises Pvt. Ltd. Total promoters holding 223118990 77.90% 7. Public, Fls. Mutual Fund etc. 63300723 22.10% Total number of shares of DIL 286419713 100% (paid up)
9.1 The assessee company has been holding the shares of Dabur India Ltd. over a period of time and the same are shown as investments in the books of account. During the F.Y. 2005-06 relevant for the impugned assessment year, the assessee sold 23,55,000 shares of Mj s Dabur India Ltd. and realized profit under the head Long Term Capital Gains (LTCG) and claimed exemption ujs 10(38).
9.2 Similarly the assessee sold shares of certain other companies and the gain realized was offered under the head LTCG (since the period of holding is more than one year) and claimed exemption u/s.10(38) as detailed vide Annexure-A.
9.3 In addition to the above, the assessee sold shares of various other companies (approximately 170) and offered the gains under the head Short Term Capital Gains (STCG) - since the period of holding is less than one year - and applied special
10 ITA No. 1893/Del/2017 VIC Enterprises Pvt. Ltd. rate of taxation as prescribed u/s. 111A as 15 detailed vide Annexure-B.
10.1 The main contentions of the AO as seen from the assessment order are as under:
• One of the main objects of the assessee company is to do business in shares, stocks, debenture stocks, bonds, obligations, units, securities etc as per the Memorandum of the Association of the appellant company. • The assessee carried on the activity of purchase and sale of shares on regular basis. • The volume of purchase and sale of share (volume of business) is huge. • Frequency of transactions is very high except in shares of Dabur India Ltd. • Conduct of the assessee is that of a trader in shares. • No proper records are maintained as per report u/s 142(A) issued by the special auditor. • Certain Shares are held as investment to get tax exemption u/s. 10(38).
10.2 The AO relied on the following case laws:
• CIT vs. Associated Industrial Development Co. Ltd. 82 ITR 586 (Se) • Karampura Development Co. Ltd. Vs. CIT 44 ITR 362 (Se) • Dalmiya cements Ltd. vs. CIT 12 ITR 50 (Patna) • CIT vs. British Paints 188 ITR 44, 49 (SC).
11.1 The main contentions of the AR as gathered from the various submissions made are as under:
• Shares of Dabur India Ltd. have been held as investment is by the assessee as a promoter for controlling interest for over two decades. This position was accepted by the Department up to A.Y. 2005-06. • The intention of the assessee is of paramount significance and frequency of transactions would not decide the issue ipso facto.
11 ITA No. 1893/Del/2017 VIC Enterprises Pvt. Ltd. • The assessee can hold shares either as investment or as stock in trade as clarified in Board Circular No. 4 of 2007 dated 15th June 2007. • Entries in the books of account prove that shares in question are held as investment. • In the case of group companies, the profit on sale of shares of Dabur India Ltd. was allowed to be taxed under the head capital gain.
11.2 The AR relied on the following case laws:
• Bengal and Assam Investors Ltd. vs. CIT (2002- TIOL-705-SC-IT) 16 • Slocum Investment Pvt. Ltd. vs. DCIT (2006-TIOL- 300-ITAT-Del) • Ramnarain sons Private Limited vs. CIT 41 ITR 534 (sq • Karnataka State Industrial Investment and Development Corporation Limited vs. DCIT 59 ITD 643 (Banglore) • CIT vs. Gopal Purohit (2010-TIOL-129-HC-MUM-IT)
12.1.1 In the case of Sarnath Infrastructure (P) Ltd. Vs. Asstt.CIT (2008) 16 DTR (Lucknow)(Trib) 97, the Tribunal has considered almost all the important judicial decisions laying down legal principles to determine the nature of transaction i.e. trading transaction or investment in the light of CBDT Circular No. 4 of 2007. The Tribunal has summarized the principles in para 13 of the said order. For the sake of ready reference, the same are reproduced as under:
"After considering above rulings we cull out following principles, which can be applied on the facts of a case to find out whether transactions (s) in question are in the nature of trade or are merely for investment purposes:
1) What is the intention of the assessee at the time of purchase of the shares (or any other item)? This can be found out from the treatment it gives to such purchase in its books of account. Whether it is treated as stock-in-trade or investment? Whether
12 ITA No. 1893/Del/2017 VIC Enterprises Pvt. Ltd. shown in opening/closing stock or shown separately as investment or non-trading asset?
2) Whether assessee has borrowed money to purchase and paid interest thereon? Normally, money is borrowed to purchase goods for the purposes of trade and not for investing in an asset for retaining.
3) What is the frequency of such purchases and disposal in that particulars item? If purchase and sale are frequent, or there are substantial transactions in that item, it would indicate trade. Habitual dealing in that particular item is indicative of intention of trade. Similarly, ratio between the purchases and sales and the holdings may show whether the assessee is trading or investment (high transactions and low holdings indicate trade whereas low transactions and high holdings indicate investment).
4) Whether purchase and sale is for realizing profit or purchases are made for retention and appreciation in its value? Former will indicate intention of trade and later, an investment. In the case of shares whether intention was to enjoy dividend and not merely earn profit on sale and purchase of shares? A commercial motive is an essential ingredient of trade.”
The assessee has been holding shares of Dawar India Ltd. for almost two decades and the same were shown as investment in the books of account. During the year under consideration, the assessee sold 23,55,000 shares of Dawar India Ltd. out of total of its holding of 3,74,30,000 shares. The details of all these shares sold during the year on which the assessee has claimed long term capital gain are as under:
Promoters of Dabur India Ltd. No. of shares % age of held on holding 31.03.2005 1. VIeEnterprisesPvt.Ltd. 37430000 13.07% 2. Gya~ Enterprises Pvt. Ltd. 37250330 13.01% 3. Chowdry Associates 37438340 13.07%
13 ITA No. 1893/Del/2017 VIC Enterprises Pvt. Ltd. 4. Puran Associates Pvt. Ltd. 37352000 13.04% 5. ACEE Enterprises 37191990 12.99% 6. ~atna Commercial 36456330 12.73% Enterprises Pvt. Ltd. Total promoters holding 223118990 77.90% 7. Public, Fls. Mutual Fund etc. 63300723 22.10% Total number of shares of DIL 286419713 100% (paid up)
The assessee had offered the profit/gain on purchase and sale of units of mutual funds as business income on the basis that the said activity constitutes regular business activity. However, the profits/gains realized on purchase and sale of shares were offered under the head “capital gain” on the basis that the shares have been held as investment in the books of account. There is no dispute that intention and the entries in the books showing the shares as investment is the guiding and determining factors. This fact has also not been denied that the gain realized on sale of shares of Dawar India Ltd. in financial year 1989-90 (relevant for assessment year 1990-91) was offered to tax under the head “capital gain” by Gyan Enterprises Pvt. Ltd., which is one of the co-promoters of Dawar India Ltd. The Assessing Officer taxed the same as business income against which Gyan Enterprises Pvt. Ltd. preferred first appeal and the Learned CIT(Appeals) accepted the contention of the assessee that the gain should be assessed under the head “capital gain”. The said First Appellate Order was upheld by the ITAT vide its order dated 12.1.2004 in ITA No. 2160/Del/1990 for assessment year 1990-91.
The details of number of shares of Dabur India Ltd. held by the assessee over a period of time and the transaction/changes are follows:
Date as on No. of shares Remarks (in lakhs) 31.03.1996 37.15 No change in holding 31.03.1997 37.51 No change in holding 31.03.1998 37.41 Sold 1000 shares
14 ITA No. 1893/Del/2017 VIC Enterprises Pvt. Ltd. 31.03.1999 37.41 No change in holding 31.03.2000 37.41 No change in holding 31.03.2001 37.41 No change in holding 31.03.2002 37.41 No change in holding 31.03.2003 37.41 No change in holding 31.03.2004 37.41 No change in holding 31.03.2005 374.30 Paid up value of Rs.10 per Sh. Is reduced to Rs.1 each and purchased 20000 shares (37.41x10)+20=374.3 31.03.2006 725.78 Bonus of 1 share for 1 share held, allotted and Sold 1.41 lacs shares before bonus and sold 20 lacs shares after bonus (374.30- 1.41)x2=745.78 745.78-20=725.78
Thus, it is very clear from the above detail that shares of Dawar India Ltd. were held as investment. From the details of other shares given above, it is also apparent that those shares were held for considerable long time. Transaction of these shares has not been carried out on regular basis as gathered from the details of the number of shares and transactions. From the following table, it is apparent that in the following income from business, 20 investment at income from other sources, the assessee has earned dividend income of Rs.12,00,86,699:
Particulars Asset Type Income Amount in Rs
Income from Business(A) a)Trading in units of Mutual Gross Income Funds Of Rs33 lakhs Income from Capital Income from Capital Assets– Rs40.85 Gains, treated as Other Investment in Shares both listed crores Income in Profit and Loss And unlisted A/c(B) LTCG,-34,61,63,879(84.75%) STCG-6,23,34,129(15.25%) Income from other Dividend earned from 12,00,86,699 Sources(C) Investment in equities
15 ITA No. 1893/Del/2017 VIC Enterprises Pvt. Ltd. 19.1 The assessee has earned above dividend out of Rs.44.72 crores of investment in equities. During the year, the assessee has made purchase of Rs.45.07 crores against sale of only Rs.59.75 crores.
19.2 The treatment of income from above three income streams are based on accounting principles and standards as issued by Institute of Chartered Accountants of India and the assessee has consistently followed the same accounting principles over the years. The significant accounting policies adopted by the Company are disclosed in Schedule L – refer Annexure 2. The accounting policies are important here as it lays down how the treatment of various classes of assets is measured.
19.3 Schedule L (on Investments) to the Balance Sheet enclosed along with return that long –term investments are stated at cost less permanent diminution in value of investments only. The Investments (Other than Trade) of Rs 44.71 crores as on 31 March 2006 are detailed in Schedule F of the Balance Sheet. The aforesaid investments are made upon the decision made by Board of Directors and with clear intention to hold the aforesaid Capital Assets as investment. The intention of the assessee is therefore never to make profit from sales as in the case of trading activities. The intention is to have steady and substantial capital appreciation and earn dividends if any from such investment.
19.4 As regards, trading stock where the assessee intends to make profits, such stock has been disclosed in Schedule I of the Balance sheet showing a closing value of Rs 30.85 crores on 31 March 2006. The accounting policy for trading of shares is disclosed in Schedule L of the Balance sheet which states that “closing stock of securities is valued at cost of market price whichever is lower.
19.5 Thus, the intention of the assessee is very much clear as to what stocks are to be treated as business stock and what to be treated as investment stock. The Policy and treatment of stock transaction are
16 ITA No. 1893/Del/2017 VIC Enterprises Pvt. Ltd. clearly reflected in the Balance sheet of the assessee.
19.6 We thus fully concur with the finding of the Learned CIT(Appeals) that the profit of Rs.34,61,63,879 in respect of shares sold during the year (including gain of Rs.29,05,58,750 realized on sale of shares of Dawar India Ltd.) has been rightly treated by the assessee as long term capital gain and thus the Learned CIT(Appeals) has rightly held that the assessee is eligible for exemption under sec. 10(38) of the Act on the said long term capital gain. The First Appellate Order in this regard is thus upheld. The ground Nos. 1 and 2 are accordingly rejected.
19.7 From perusal of the above table, it is also clear that 84% gains from capital gains were long term and only 15% was from short term investment.
19.8 To determine the complexity whether an income from shares is business or investment, as has to look into the intention and manner of book 23 keeping and apparent nature of transactions. Volume of transactions alone cannot determine the nature of income. It is always material that the intention of the assessee, which is to be seen while determining the nature of the transaction conducted by the assessee. On perusal of the holding period of the shares it is seen that the assessee transacted in 85 scripts had holding period of more than 400 days ( Dabur India holding was more than 6900 days), 29 scripts had holding period of more than 365 days (Appendix A). Besides, all the scripts sold were STT paid and all were delivery based.
Ground No.3: In this ground, the Revenue has questioned First Appellate Order whereby the Learned CIT(Appeals) has held that Rs.9 lacs is not a real income. The learned CIT(DR) submitted that while holding so, the Learned CIT(Appeals) has ignored the fact that interest income of Rs.60 lacs had already accrued and accordingly received by the assessee during the year.
17 ITA No. 1893/Del/2017 VIC Enterprises Pvt. Ltd. 21. The Learned AR on the other hand placed reliance on the First Appellate Order.
We having gone through the orders of the authorities below, find that the Assessing Officer had made addition of Rs.9 lacs on the basis of special auditor’s report that assessee had not shown interest income of Rs. 9 lacs received from Dawar Foods Ltd. as the assessee had advanced ICD of Rs.6 crores to M/s. Dawar Foods Ltd. at the interest rate of 10%. The submission of the assessee remained that assessee had advanced an amount of Rs. 6 crores to Dawar Foods Ltd. initially at the interest rate of 10%, however, during the year on mutual consents the rate was reduced from 10% to 8.5%. The Assessing Officer had not accepted this explanation of the assessee but the Learned CIT(Appeals) has accepted the same with this finding that it is a settled principle of law that only real income is to be taxed. In this regard, he has followed the ratios laid down in the case of CIT vs. Shoorji Ballabdass & Co., 46 ITR 144 (S.C). We thus do not find reason to interfere with the First Appellate Order in this regard. The same is upheld. The ground No. 3 is accordingly rejected.
In result, the appeal preferred by the Revenue is dismissed.
The assessee (ITA No. 2240/Del/2010) on the other hand has basically questioned the First Appellate Order mainly on two grounds. Firstly, upholding of Rs.6,23,34,129 claimed by the assessee as short term 25 capital gain as business income (Ground Nos. 1 and 2) and secondly disallowance of expenses amounting to Rs.5,33,768 under sec. 14A of the Act against exempted income (Ground No.3).
Ground Nos. 1 and 2: Similar arguments have been adopted by the parties as advanced by them hereinabove on the issue of long term capital gain raised in the appeal preferred by the Revenue. The authorities below have treated the claimed short term capital gain of Rs.6,23,34,129 accrued on disposal of shares invested for a short term period as
18 ITA No. 1893/Del/2017 VIC Enterprises Pvt. Ltd. business income. The assessee had also claimed benefit under sec. 111A of the Act on the said short term capital gain.
The assessee had furnished list of shares and the number of scripts involved as 170. It had claimed short term capital gain of Rs.6,71,16,180 and loss of Rs.47,82,051 thus the net gain was claimed at Rs.6,23,34,129. The assessee had classified the gains into long term and short term, after taking into consideration the period of holding of shares. The Assessing Officer did not agree with the claim of the assessee on the basis that the number of shares and frequency of transactions were in the nature of regular business activities. He held that assessee had done the same with a motive to maximize the profits immediately rather than holding them as investment. 26 We do not agree with such approach of the Assessing Officer as earning of maximum profit is the object of the assessee in both type of transactions i.e. investment and trade, hence, it cannot be a sole criteria to test the nature of the transaction. If the assessee has sold a share within a short term period after purchase but the intention of the assessee behind the same remained investment still the gain will be treated as short term capital gain. The contention of the assessee remained that these shares were also purchased with intention to invest therein details of which has been made available at page No.142 to 146 of the paper book. In the details, the period of holding has been shown less than or equal to sixty days with all the other details as well as STT paid on the transaction.
26.1 Both the Ld AO and learned CIT(A) have erred in treating the income from sale of STT Paid listed equity shares from Short term capital gains to business income. It can be seen that the assessee is primarily an investor in shares. From the ratio of sale of income from shares, 84% of the income is determined from long term holding of STT paid listed equity shares. Only a small component 15% of income from shares is treated as short term. A look into the holding period of shares Appendix B would reveal that out of 560 scripts, the transactions
19 ITA No. 1893/Del/2017 VIC Enterprises Pvt. Ltd. pertained only to 60- 65 scripts which were sold in 27 at different times. 409 scripts out of 560 total scripts has a holding period of more than 60 days having a short term capital gain of Rs 5.13 crores out of Rs 6.23crores, only Rs 1.09 crores were earned from 151 scripts having a holding period of 15-60 days barring few which are than 10 days. Thus, the Appellant states that when shares are acquired after paying STT and taking complete delivery of shares keeping a long term in view as 84% of shares are held for more than one year, transacting in some shares in short term to alter its investment vision and goal cannot be considered as an action borne out to do trade. It happens when the vision is long term, some shares thought purchased are dropped out from portfolio either because sufficient funds are not available to make them reach to a level to accumulate capital or because of some other allied reasons.
26.2 It is not the finding of the Assessing Officer or the Learned CIT(Appeals) that these shares were shown as stock in trade or the assessee was not correct in showing these shares as investment. We thus do not find infirmity in the claim of the assessee that the profit accrued on sale of these shares was short term capital gain and the assessee was eligible for claiming charging of the gain under the provisions laid down under sec. 111A of the Act. We thus while setting aside the orders of the authorities below in this regard direct the Assessing Officer to accept the claim of the assessee and allow the benefit of charging of the gain under sec. 111A of the Act. The ground Nos. 1 and 2 are accordingly allowed.
The ground No. 4 has not been pressed by the Learned AR, the same is accordingly rejected.
In result, the appeal is partly allowed.”
“34. Ground Nos. 1 to 3 (Revenue) & Ground Nos. 1 to 4 (assessee): The facts in brief are that the
20 ITA No. 1893/Del/2017 VIC Enterprises Pvt. Ltd. assessee a non-banking financial company registered with RBI as such is one of the promoter company holding controlling interest in Dabur India Ltd. We have discussed the facts in detail about the assessee company, hereinabove, in the appeals for the assessment year 2006-07. The parties have also adopted similar arguments as advanced by them on an identical issues hereinabove in the appeals for the assessment year 2006-07.
During the year in the assessments framed under sec. 143(3) of the Income-tax Act, 196, following additions/disallowances were made by the Assessing Officer, some of which were contested before the Learned CIT(Appeals) mentioned therein:
S. Nature of addition/issue Amount in Grounds of No. (Rs.) Appeal raised 1. Long Term Capital Gain treated as 25,59,09,101 Ground No.2 business income. 2. Short Term Capital Gain 5,83,72,758 Ground Nos.2 Treated as business income and 5 3. Interest Expenses is allowed. 3,89,53,657 Ground No.7 4. Disallowance u/s.14A 24,57,661 Not contested 5. Disallowance u/s.94(7) 1,09,525 Not contested
The main issue involved in the appeals is regarding taxing the profits realized on sale of shares as business income against capital gain offered by the assessee either under long term capital gain or short term capital gain depending upon the period of holding of shares.
The assessee claimed Rs.25,59,09,101 as long term capital gain which has been treated by the assessee as business income. The Learned CIT(Appeals) has, however, accepted the claimed long term capital gain against which the Revenue is in appeal raising ground Nos. 1 to 3 in this regard.
In support of the grounds, the Learned CIT(DR) has basically placed reliance on the assessment order. He submitted that the assessee was holding shares mainly of group company including Dabur
21 ITA No. 1893/Del/2017 VIC Enterprises Pvt. Ltd. India Ltd. as investment since long back. The assessee was also engaged in the purchase and sale of shares and mutual funds mostly of Blue Chip Companies as stock in trade. Shares held as stock in trade were transferred from stock in trade to investment account. The intention of the assessee is of significance and volume as well as frequency of transaction would decide the issue. The Learned AR on the contrary submitted that the assessee can hold shares 34 either as investment or as stock in trade as clarified in CBDT Circular No. 4 of 2007 dated 15.6.2007. Entries in the books of account prove that shares in question are held as investment. In the case of group companies, the profit on sale of shares was allowed to be taxed under the head “capital gain”. The Learned AR adopted similar arguments as advanced by him hereinabove on an identical issue in the appeal for the assessment year 2006-07. He reiterated the case laws cited therein in support and pointed out that during the year the assessee had received dividend amounting to Rs.9.19 crores, which is very substantial to total taxable income of the assessee, and has been accepted by the Assessing Officer. He submitted further that the amount of Rs.25,59,09,131 includes the amount of Rs.24,64,46,699 arisen on account of sale of shares of Punjab Tractors Ltd. In Punjab Tractors Ltd., the assessee along with other group companies was enjoying management control. The shares of Punjab Tractors Ltd. along with other group companies were sold to Mohendra & Mohindra Ltd. vide agreement dated 8.3.2007. Though the Learned CIT(Appeals) has allowed the appeal of the assessee, thereby, holding the sale of shares of Punjab Tractors Ltd. as long term capital gain on the basis of period of holding, but the assessee wants to support the First Appellate Order in terms of Rule 27 of the ITAT Rules in relation to the long term capital gain arisen on sale of shares of Punjab Tractors Ltd. on another ground also that the investment in Punjab Tractors Ltd. was made by the assessee in order to enjoy the controlling states in the said company and not to trade in shares. He submitted that profit on sale of shares enjoying managing control is always considered as capital gain and not business income.
22 ITA No. 1893/Del/2017 VIC Enterprises Pvt. Ltd. In support, he referred following decisions cited above in the cases of Accra Investment Pvt. Ltd. vs. ITO (supra), Ram Narain & Sons Pvt. Ltd. (supra) and Raja Bahadur Kamakhya Narain Singh vs. CIT (supra).
Considering the above submission, we find that both the shares of MTNL and Punjab Tractors Ltd. have been shown as investment in the balance sheet as on 31.3.2007 and all the shares were sold and not many transactions are there in the scripts. As on 31.3.2008, no shares of MTNL and Punjab Tractors Ltd. are held. These shares were held for considerable long time and shares were being sold when there was appreciation in the market. Shares of ABN Amro Securities purchased in 1998-99 were sold on 14.7.2007 after a period of 7/8 years. In these shares, the assessee had not carried out the transactions on regular basis as evident from the numbers of shares and transactions. Besides, the investment in Punjab Tractors Ltd. was made by the assessee in order to enjoy the controlling shares in the said company and the profit on sale of shares enjoying managing control is always considered as capital gain as per the decision cited hereinabove in the cases of Accra Investment Pvt. Ltd. vs. ITO (supra), Ram Narain & Sons (P) Ltd. (supra) and Raja Bahadur Kamakhya Narain Singh vs. CIT (supra). He 36 also referred page Nos. 7 to 15 of the paper book i.e. investments as on 31.3.2008, 31.3.2007, 31.3.2006 and 31.3.2005, and page Nos. 149 to 181 i.e. computation of income with details of capital gain with balance sheet for the year.
Having gone through the orders of the authorities below, we find that the Learned CIT(Appeals) has dealt with the issue in detail meeting out respective cases of the parties and has come to the following conclusion:
“13. The facts of the case were examined from the perspective of ratio laid down in the above cases.
As already stated the assessee is a NBFC. The assessee has offered the profits/gains on purchase
23 ITA No. 1893/Del/2017 VIC Enterprises Pvt. Ltd. and sale of units of Mutual Funds as business income on the ground that the said activity constitutes regular business activity. However, the profits/gains realized on purchase and sale of shares were offered under the head capital gain on the ground that the shares have been held as investment in the books of account.
In a nutshell according to the AR, the intention and the entries in the books showing the shares as investment should be the guiding and determining factors and whereas according to the A.O., volume of business in shares and frequency of transactions and the objective of the assessee to trade in shares (as per Memorandum of Association of the company) should be taken into consideration while deciding the issue.
Long Term Capital Gain of Rs.25,59,09,100: From the facts brought on record as mentioned in Para 8 above, it is seen that both shares of MTNL and M/s. Punjab Tractors Ltd. have been shown as investment in the balance sheet as on 31.3.2007 and all the shares were sold and not many transactions are there in these scripts. As on 31.03.2008 no shares of MTNL and M/s. Punjab Tractors Ltd. are held. The said shares were held for considerable long time and shares are being sold when there is appreciation in the market. Similarly shares of ABN Amro Securities purchased in 1998-99 were sold on 14.07.2007 after a period of 7/8 years. In these shares the assessee has not carried out the transactions on regular basis as evident from the number of shares and transactions. In the light of the above facts and legal position, the profit of Rs.25,59,09,100 realized on sale of shares has been rightly treated by the assessee as long term capital gains to be taxed as special rates prescribed u/s. 112. The action of the A.O. in treating the gain as business income is not approved. Accordingly, Ground No.2 is allowed.”
The above material findings of the Learned CIT(Appeals) on facts regarding showing of the shares as investment in the balance sheet, their
24 ITA No. 1893/Del/2017 VIC Enterprises Pvt. Ltd. holding period, and volume and frequencies of their transactions, have not been rebutted by the Revenue. We thus do not find reason to interfere with the First Appellate Order on the issue. The same is upheld.
In result, ground Nos.1 to 3 of the appeal of the Revenue are thus rejected.
In ground Nos. 1 to 4 of the appeal of the assessee, the assessee has basically questioned treatment given to the gain of Rs.5,83,72,758 on disposal of shares by the authorities below as business income against the claim of the assessee as short term capital gain chargeable to tax under sec. 111 of the Act.
The relevant facts are that the Assessing Officer noted that during the assessment year under consideration, the assessee had shown short term capital gain of Rs.5,83,72,785. In the computation of income furnished during the assessment proceedings, an amount of Rs.3,53,22,682 was shown as “short term capital loss under sec. 111A”. Details of capital gains and losses were furnished. On perusal of the same, the Assessing Officer noted that in the computation of taxable income only an amount of Rs.3,53,22,682 was offered for tax at special rate under sec. 111A of the Act. The amount of Rs.2,30,50,076 being short term capital gain had not been included while computing the taxable income. The Assessing Officer also noted that during the assessment years 2005-06 and 2006-07 and 2007- 08, income from short term capital claimed by the assessee was treated as business income in the assessment order framed under sec. 143(3) of the Act. He accordingly rejected the claim of short term capital gain of Rs.5,83,72,758 by the assessee and treated the same as business income. The Learned CIT(Appeals) has upheld the same against which assessee is in appeal.
In support of the grounds, the Learned AR has adopted the similar arguments as advanced by him in support of ground Nos. 1 to 3 on an identical issue
25 ITA No. 1893/Del/2017 VIC Enterprises Pvt. Ltd. hereinabove in the appeal for the assessment year 2006-07. He submitted that the intention of the assessee is of paramount significance and frequency of transaction only would not decide the issue ipso facto. The assessee can hold shares either as investment or stock in trade as clarified in CBDT Circular No. 4 of 2007 dated 15.6.2007. He submitted that the entries in the books of account prove that the shares in question are held as investment. In the case of group companies, the profit on sale of shares was allowed to be taxed under the head “capital gain”. He pointed out that in the case of group company, Chaudhary Associates, the Hon’ble jurisdiction High Court of Delhi vide order dated 30.1.2015 in CIT vs. Chaudhary Associates – ITA No. 544/2013 has reverted the order of the ITAT under similar facts of the case that a sum of Rs.1,19,30,037 held by the ITAT in that case was not business income but the claimed short term capital gain. In that case also the assessee is a non-banking finance company and in the course of its finance activity, it has purchased and sold shares for the sum of Rs.1,19,30,037 and had claimed the income on that count as short term capital gain. The Assessing Officer rejected the contention holding that the said amount was business income and brought it to tax on that count. The assessee succeeded in the appellate proceedings. Hon'ble High Court observed that the bulk of shares held by the assessee were for a substantial period and income was derived on account of liquidation of investment. It was held that there cannot be a single factor or criterion to determine whether the income falls under the head of short term capital gain or of business income. He referred page Nos. 13 to 18 of the paper book wherein details of short term capital gains STT paid (benefit claimed under sec. 111A) and without STT(no benefit claimed under sec. 111A) have been furnished.
Learned CIT(Appeals) on the other hand tried to justify the orders of the authorities below and he has also adopted similar arguments as advanced by him hereinabove in the appeal for the assessment year
26 ITA No. 1893/Del/2017 VIC Enterprises Pvt. Ltd. 2006-07 in opposition of ground Nos. 1 to 3 of the appeal preferred by the assessee.
Considering the above submission, we find that the authorities below have denied the claimed short term capital gain mainly on the basis that the assessee carried on the activities of purchase and sale of shares on regular basis, volume of purchase and sale of shares was huge, frequency of transaction was very high, conduct of assessee was that of a trader in shares and no proper records were maintained as per report under sec. 142(A) issued by the special auditor. The authorities below have not discussed the submissions of the assessee supported with details of the transaction in detail. Instead on general observation and the approach of the Assessing Officer in the assessments for the assessment years 2005-06, 2006-07 and 2007-08 have held that the claimed short term capital gain was actually business income. They have not discussed as to how they have arrived to the conclusion that claimed short term capital gain is actually business income. The assessee had furnished the list of shares and the number of scripts involved around hundred. It had classified the gains into long term and short term after taking into consideration the period of holding of shares. The Learned CIT(Appeals) has simply noted that number of shares and frequency of transaction are in the nature of regular business activity ignoring the well established proposition of law that there are several criteria to arrive a conclusion about the nature of transaction as to whether it is investment or trade. Under similar facts in the assessment year 2006-07 in the appeal for the assessee hereinabove, we have adjudicated upon an identical issue in ground Nos. 1 to 3 hereinabove. Following the same, we hold that the authorities below were not justified in treating the claimed short term capital gain at Rs.5,83,72,758. We thus while setting aside orders of the authorities below in this regard direct the Assessing Officer to accept the claimed short term capital gain. The ground Nos. 1 to 4 of the appeal preferred by the assessee are accordingly allowed. 48. Ground No.4 (Revenue): The Assessing Officer
27 ITA No. 1893/Del/2017 VIC Enterprises Pvt. Ltd. disallowed interest expenditure of Rs.3,89,53,657 on the basis that there are interest free advances. He noted that assessee is using interest bearing funds by giving advances to various other group concerns and individuals without charging any interest from them. He noted that loans and advances (closing balance of which has been shown at Rs.1,06,86,15,255 as on 31.3.2008) have been given or used by the assessee for non-business purposes. He accordingly disallowed a proportionate interest expenses. The Assessing Officer noted that the total interest on advances given free of interest to various parties worked out to Rs.7,91,18,129. He noted further that the claim of interest expenses at Rs.3,89,53,657 was less than the amount of Rs.7,91,18,129 and accordingly the entire amount of Rs.3,89,53,657 being interest expense was disallowed. The Learned CIT(Appeals) has, however, deleted the disallowance being satisfied with the submissions of the assessee which has been questioned by the Revenue.”
In the result, the appeal of the revenue is dismissed. Order pronounced in the Open Court on 07/02/2020.
Sd/- Sd/- (N. K. Choudhary) (Dr. B.R.R. Kumar) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 07/02/2020 *Subodh* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5.DR: ITAT ASSISTANT REGISTRAR