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Income Tax Appellate Tribunal, MUMBAI BENCHES “E”, MUMBAI
Before: SHRI RAJESH KUMAR (AM) & SHRI RAM LAL NEGI (JM)
O R D E R PER RAM LAL NEGI, JM These appeals have been filed by the assessee against the orders dated 11.09.2018 and 21.09.2018 passed by the Commissioner of Income Tax (Appeals)-28 (for short ‘the CIT(A), Mumbai, for the assessment years 2012-13, and 2014-15 respectively, whereby the Ld. CIT(A) has dismissed the appeals Assessment Years: 2012-13 and 2014-15 filed by the assessee against the assessment orders passed u/s 143 (3) of the Income Tax Act, 1961 (for short the ‘Act’). The assessee an individual and partner/shareholder in partnership firm and promoter in a few closely held Pvt. Ltd. companies, having income from salary business and profession, capital gain and other sources, filed its return of income for the assessment year under consideration declaring the total income of Rs. 1,78,125/-. The AO passed the assessment order u/s 143 (3) of the Act determining the total income of Rs. 1,78,130/- inter alia making addition of Rs. 9,74,375/- on account of disallowance u/s 14A of the Act and treating the income of Rs. 74,05,599/- under the head income from business or profession against the claim of the assessee as Short Term Capital Gain. The assessee challenged the assessment order before the Ld. CIT (A). The Ld. CIT (A) after hearing the assessee dismissed the appeal. Against the said findings of the Ld. CIT (A), the assessee is in appeal before the Tribunal.
The assessee has challenged the impugned order passed by the Ld. CIT (A) on the following effective grounds:-
“The learned Commissioner of Income (Appeal) erred om treating an amount income of Rs. 74,05,599/- under the head ‘income from Business or Profession’ instead of ‘ income from Short Term Capital Gains’ disclosed by the appellant and while doing so he amongst others failed to appreciate that:- (a) The income arising on transfer of the capital assets held by the appellant by way of shares was on account of the investments held by the appellant. (b) The income disclosed by the appellant under the head ‘Short Term Capital Gains Loss’ was on account of the shares purchased with an intention of making an investment. (c) The appellant had maintained separate books for the investments made and the business activities carried on of trading in shares. Assessment Years: 2012-13 and 2014-15 (d) As in the earlier years, the appellant continued to be an investor in shares. (e) The appellant was not a trader vis-à-vis the shares, which have yielded income/Loss under the head ‘Short Term Capital Gains/Loss’, as disclosed in the return of income filed.”
2. The learned Commissioner of Income (Appeal) Tax erred in disallowing Rs. 9,74,375/- u/s 14A of the Income Tax Act as expenditure incurred in relation to earning of exempt income and in computing the disallowance u/r 8D(2) of Income Tax Rules. 3. The learned Commissioner of Income (Appeal) erred in charging interest u/s 234A, 234B, 234C and 234D and having regard to the facts and circumstances of the case and in law the appellant denied its liability for payment of any interest under the aforesaid sections. 4. The learned commissioner of Income (Appeal) erred in initiating penalty proceedings u/s 271 (1) (c) in spite of the fact that the Pappellant had neither concealed his income nor had filed inaccurate particulars of income.
3. Vide ground No 1 the assessee has challenged the action of the Ld. CIT(A) in treating the amount of Rs. 74,05,599/- under the head income from business and profession against the short term capital gain claimed by the assessee. The Ld. counsel submitted before us that this issue is covered in favour of the assessee by the order of the Tribunal rendered in assessee’s own case for the assessment year 2006-07. The Ld. counsel further submitted that the assessee has shown all the purchases under the investment portfolio and not under the head stock-in-trade. Since, there is no change in the facts of the present case the Ld. CIT(A) ought to have allowed the appeal of the assessee. The Ld. counsel further submitted that since the findings of the Ld. CIT(A) are contrary to the decision of the Tribunal in assessee’s case passed under the similar set of facts, the same is liable to be set aside.
On the other hand, the Ld. departmental representative (DR) supporting the decision of the Ld CIT(A) submitted that there is no infirmity in the order of the Ld. CIT(A) since each assessment proceeding is a separate and independent, the Ld. CIT(A) has rightly confirmed the action of the AO in the Assessment Years: 2012-13 and 2014-15 light of the facts of the case. However, the Ld. DR did not point out any material change of facts in the present case. 5. We have heard the rival submissions and perused the material on record including the decision of the coordinate Bench rendered in assessee’s appeal relied upon by the assessee. We notice that the coordinate Bench has dealt with the identical question in assessee’s own case for the assessment year 2006-07 and vide order dated21.08.2013, the Tribunal has decided the identical issue in favour of the assessee holding as under:-
7. After considering the order of AO, CIT(A) and the submission of the assessee, we find that the assessee deserves to succeed on the issue involved. It is seen that the assessee has shown all the purchases under the investment portfolio. It is further seen that the long term capital gain shown by the assessee has been accepted by the AO himself. Under the provision of law, it is clearly provided that if the holding of share is more than one year then the gain on account of sale of shares has to be treated as long term capital gain and if holding period of shares are less than one year then the gain on account of sale of shares has to be treated as short term capital gain. No where it is provided that if the transactions are frequent and voluminous then the claim of the assessee is not allowable as short term capital gain or long term capital gain as the case may be. The only question which is to be examined and seen by the AO as to what treatment has been given by the assessee in respect to purchase of shares. Whether the purchase of shares are shown under the head stock-in-trade or under the head investments. If purchases have been shown under the head stock-in-trade then the sale transactions has to be treated as business transactions and if the sales have been effected from investment account then the gain has to be treated as long term capital gain or short term capital gain, as the case may be. In the present case, the assessee has shown all the purchases under the head investment portfolio, therefore, in our considered view, the gain on account of sale of shares has to be treated as short term capital gain on the facts of the present case. Similar issue came before the E-Court of Nagpur Bench in the case of Shri Sanjay Ishwarlal Ranka, decided in vide order dated 8-2-2013. The final Assessment Years: 2012-13 and 2014-15 findings of the Tribunal has been recorded in paras 9 & 10, which are as under :- “9. We further noted that against the order of CIT(A) for assessment year 2006-07, the department preferred appeal before the Tribunal and the Tribunal discussing the issue in detail and placing reliance on various decisions of the Tribunal i.e. in the case of Dineshbhai C. Patel (HUF),passed in ITA616/Nag/2008, vide order dated 5-6-2009; Gopal Purohit, 20 DTR (Mum)(Trib) 99; the decision in the case of CIT Vs. V.A.Trivedi, 172 ITR 95 (Mum) and the decision of the Hon‟ble High Court in the case of CIT Vs. Gopal Purohit, 228 CTR 582, allowed the issue in favour of assessee. The findings of the Tribunal for the assessment year 2006-07 have been recorded in para 12 to 16, which are as under:- “12. We have carefully considered the rival submissions and, perused the material on record along with the order of the tax authorities below. We have also gone through the case law as has been cited before us. We find that in the case of CIT (Central), Calcutta vs Associated Industrial Development Company (P) Ltd. (82- ITR-586), the Hon‟ble Supreme Court has held as under: “Whether a particular ho/ding of shares is by way of in vestment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee who holds the shares and he should, in normal circumstances, be in a position to produce evidence from his records as to whether he has. maintained any distinct/on between those shares which are his stock-in-trade and those which are held by way of in vestment.
12.1 In the case of CIT, Bombay vs H Holck Larsen (160-ITR-67), the order to determine whether one was a dealer in shares or an investor, the question was not whether the transaction of buying and selling the shares lacks the element of trading, but whether the later stages of the whole operation show that the first step — the purchase of the shares — was no ken as, or in the course of a trading transaction. The totality of all the facts will have to be borne in mind and the correct legal principles applied to these. If all the relevant factors have been taken into consideration and there has been no misapplication of the principles of law, then the conclusion arrived at by the Tribunal cannot be interfered with because the inference question of law, if such an inference was a possible one, subject, however, that all the relevant factors have been duly weighed and the considered by the Tribunal, the inference reached by the Tribunal should not be interfered with.” Assessment Years: 2012-13 and 2014-15 13. In view of the aforesaid decisions, we are of the view that whether the profit from the shares is a capital gain or business income - Whether the shares are held by the assessee as investments or – Whether the shares are purchased with an intention to keep them - Whether the shares purchased with an intention to sell; -Whether the shares were purchased with an intention to earn the profit in the Short Term; - Whether the shares are held to maximize the return; - Whether the shares have been purchased from the primary market; - Whether the shares have been purchased from the secondary market; - Whether the shares have been purchased by subscription to Public -Whether the shares have been held for fairly long period, and - Whether the shares once sold have never been re-purchased 14. We noted that in the case of CIT Vs V A Trivedi 172 ITR 95 (Born) Hon‟ble jurisdiction High Court has clearly laid down under para 12 of the order that the onus of establishing that a purchase is made with the intention to trade is on the Revenue.
We noted that the main contention of the revenue in treating the gain to be the income from business is the number of transactions and the period of the holding by the assessee. The period of the holding and number of transactions cannot be the only basis to determine whether the assessee has carried out the business in shares transactions. It may be one of the relevant consideration but cannot be the main consideration for deciding whether the assessee in this case is engaged in a business or not. We have to look into all the surrounding circumstances. This is a fact on record that the assessee in this case is engaged in the employment and has derived the salary income. Out of the surplus fund, he invested into the shares and the units and those shares and units has duly been shown by the assessee as investment in his balance sheet in the earlier year as well as during the year. In the earlier year also, the assessee derived the income on the sale of the shares, which has been returned by the assessee as capital gain and revenue has duly accepted the same. The assessee was not holding the shares of the units as a stock in trade. This fact is also not denied by the revenue. The period of holding itself has been treated by the legislature to be a relevant consideration for determining whether the capital gain derived is a long term capital gain or a short term capital gain. There is no provision under the Income-tax Act which has provided that in case the assessee is holding the shares for a lesser period than the one prescribed, it will be regarded to be the business income. Dividing the capital gain into two parts i.e. the short term gain or the Assessment Years: 2012-13 and 2014-15 long term gain itself prove that the period of the holding cannot be the criteria for determining whether the profit derived by the assessee is a long term capital gain or short term capital gain.
The CIT(A), we noted in this case while allowing the appeal of the assessee has relied on the decision of the ITAT Nagpur bench in the case of Dineshbhai C. Patel (HUF) in 1TA No.616/2008, which confirmed the decision of the C1T(A), the copy of the decision was filed before us. The appeal against the decision of the Nagpur Bench in the case of Dineshbhai C. Patil (supra) has been dismissed by the High Court vide order dated 28 10 2010 holding that no substantial position arise and the Tribunal, on the basis of the material on record, hold that the shares were purchased by the assessee as investment and the gain arising on sale of those shares were allowable to be taxed as capital gain. It is not denied that in this case also, the assessee was holding the shares as investment. Holding of the shares as investment itself prove the intention of the assessee as regards to the nature of the transaction. Had the shares been the business assets, it would have shown by the assessee as a stock in trade. Apparent is real, if the revenue feels that the intention of the assessee was not to hold the shares as investment. The onus in our opinion is on the revenue to prove that apparent is not real. No evidence was being placed or brought to our knowledge by the Ld. D.R. which may prove that the intention of the assessee was not to hold the shares as investment. It is also a fact that the assessee derived the dividend income and has also made the investment in the shares not out of the borrowed funds, but out of its own surplus funds. The CIT(A) while allowing the appeal of the assessee has extensively dealt with the various factors as well as various case laws to arrive at a finding that the shares were held by the assessee as a capital investment and not as stock in trade. He has also relied on the decision of this Tribunal in the case of CIT Vs. Dineshbhai C. Patel (supra). It is not denied that the facts involved in this case in the case of Dineshbhai C. Patel (supra) are similar to the facts in the case of the assessee. Similarly, the facts involved in the case of Gopal Purohit Vs. JC1T 20 DTR 99 (Mumbai) were also the same as in the case of the assessee. In all those cases, the Tribunal took the view that period of holding cannot be the basis to determine whether the share transaction entered into by the assessee is a business income or capital gain. In this case also, we noted that the assessing officer has built up his case mainly on the basis o period of holding and on that basis, he took the view that the shares held for a short period or for a number of days would not be capital gain. In our opinion, no interference is called for in the order of the CIT(A). The CIT(A) has Assessment Years: 2012-13 and 2014-15 rightly taken the view that the decision of this Tribunal in ITA No.616/2008 in the case of ACIT Vs. Dineshbhai C. Patel (HUF) is clearly applicable in the case of the assessee. The decision of the coordinate bench which has been approved by the Hon‟ble jurisdictional High Court is binding on us. We cannot take a different view. We noted that the Nagpur Bench of this Tribunal in the case of Dineshbhai C. Patel „I (supra) has followed the decision of Gopal Purohit Vs. „JCIT (supra), that decision has ,also been approved by the Hon‟ble jurisdictional High Court and SLP against that decision has been dismissed by the Supreme Court We accordingly, confirm the order of the CIT(A) and dismiss both the appeals.”
Similar facts are involved for the assessment year 2007-08, the year under consideration. Therefore, we see no reason to interfere in the finding of the learned CIT(A), who allowed the issue in favour of the assessees following the decision of its predecessor for assessment year 2006-07 and the same has been confirmed by the Tribunal as stated above. Accordingly, we confirm the order of the CIT(A) in both the cases.”
Since facts are similar in the present case, therefore, in view of the facts and circumstances of the case and in view of the decision of the Tribunal in the case of Shri Sanjay Ishwarlal Ranka (supra), we allow the issue in favour of the assessee and direct the AO to treat the gain on account of sale of shares as short term capital gain”.
As pointed out by the Ld. counsel, the coordinate Bench has decided the identical issue in favour of the assessee. Since the department has not pointed out any material change in the facts of the present case, we have no reason to take a different view. Hence, respectfully following the decision of the coordinate Bench rendered in assessee’s own case for the assessment year 2006-07, discussed above, set aside the findings of the Ld. CIT(A) and allow this ground of appeal
of the assessee. Accordingly, we direct the AO to treat the income of the assessee amounting to Rs. 74,05,599/- under the head income from short term capital gains.
7. Ground No. 2 pertains to disallowance of Rs. 9,74,735/-u/s 14A read with rule 8D of the Income Tax Rules (Rules). During the previous year the assessee earned exempt income of Rs.4,21,042/- and not made any suo moto disallowance stating that it had not incurred any expenditure in relation to the Assessment Years: 2012-13 and 2014-15 earning of the said exempt income. The AO rejecting the contention of the assessee computed the disallowance u/a 14A read with Rule 8D(2)(ii) and (iii) of the Rules and determined the disallowance at Rs. 9,74,375/-, which was confirmed by the Ld. CIT(A) in appeal.
8. The Ld. counsel submitted before us that the Ld. CIT(A) has wrongly confirmed the disallowance made by the AO in contravention of the ratio laid down by the Hon’ble Delhi High Court in the case of Joint Investments vs. CIT. The Ld. counsel further submitted that since the findings of the Ld. CIT(A) are not in accordance with the judgment of the Hon’ble Delhi High Court, the same is liable to be set aside and the disallowance may be restricted to the exempt income earned by the assessee.
9. On the other hand, the Ld. DR relying on the decision of the Ld CIT(A) submitted the since the AO had determined the disallowance as per the provisions of the Act and the Rules framed there under, the impugned order does not suffer from any infirmity to interfere with.
10. We have perused the material on record including the cases relied upon by the authorities below and the case relied upon by the Ld. counsel for the assessee. We notice that the Ld. CIT (A) has confirmed the disallowance amounting to Rs. 9,74,375/- computed by the AO against the exempt income of Rs. 4,21,042/-, which is contrary to the ratio laid down by the Hon’ble Delhi High Court in the case of Joint Investments, as the disallowance confirmed by the Ld. CIT (A) is more than the exempt income earned by the assessee. The Hon’ble Delhi High Court in the case of Joint Investments vs. CIT, (2015) 59 taxmann.com 295, has held that section 14A and Rule 8D cannot be interpreted to mean that the entire tax exempt income can be disallowed. The observations of the Hon’ble Court read as under:-
9. In the present case, the AO has not firstly disclosed why the appellant/assessee's claim for attributing Rs. 2,97,440 as a disallowance under s. 14A had to be rejected. Taikisha Engg. India Ltd. (supra) says that the jurisdiction to proceed further and Assessment Years: 2012-13 and 2014-15 determine amounts is derived after examination of the accounts and rejection if any of the assessee's claim or explanation. The second aspect is there appears to have been no scrutiny of the accounts by the AO-an aspect which is completely unnoticed by the CIT(A) and the Tribunal. The third, and in the opinion of this Court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is Rs. 48,90,000, the disallowance ultimately directed works out to nearly 110 per cent of that sum, i.e., Rs. 52,56,197. By no stretch of imagination can s. 14A or r. 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in s. 14A, and is only to the extent of disallowing expenditure incurred by the assessee in relation to the tax exempt income". This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case.”
11. In the present case, the assessee has earned exempt income of Rs. 4,21,042/- on which the AO made disallowance of Rs. 9,74,375/-. In view of the ratio laid down by the Hon’ble Delhi High Court in the aforesaid case, the disallowance u/s 14A cannot exceed exempt income of the relevant year. Therefore, in our considered view, the findings of the Ld.CIT (A) are contrary to the law laid down by the Hon’ble Delhi High Court. Hence, following the ratio laid down by the Hon’ble Delhi High Court in the aforesaid case, we set aside the findings of the Ld. CIT (A) and direct the AO to restrict the disallowance to the exempt income earned by the assessee during the relevant year.
12. Ground No. 3 pertains to charging of interest u/s 234A, 234B, 234C and 234D and Ground No. 4 pertains to the initiation of proceedings u/s 271 (1) (c) of the Act. Since, both these grounds are pre mature, the same do not need adjudication at this stage. The assessee has challenged the impugned order passed by the Ld. CIT (A) on the following effective grounds:- 1. “The learned Commissioner of Income (Appeal) erred in treating an amount income of Rs. 37,493/- under the head ‘income from Assessment Years: 2012-13 and 2014-15 Business or Profession’ instead of income from Short Term Capital Gains’ disclosed by the appellant and while doing so he amongst others failed to appreciate that:- (a) The income arising on transfer of the capital assets held by the appellant by way of shares was on account of the investments held by the appellant. (b) The income disclosed by the appellant under the head ‘Short Term Capital Gains Loss’ was on account of the shares purchased with an intention of making an investment. (c) The appellant had maintained separate books for the investments made and the business activities carried on of trading in shares. (d) As in the earlier years, the appellant continued to be an investor in shares. (e) The appellant was not a trader vis-à-vis the shares, which have yielded income/Loss under the head ‘Short Term Capital Gains/Loss’, as disclosed in the return of income filed.
2. The learned Commissioner of Income (Appeal) Tax erred in making an addition of Rs. 71,00,000/- under section 2(22)(e) without appreciating the fact that the Appellant had paid back Rs. 34,59,559/- & only received Rs. 36,40,442/- from the Jogani Construction Limited.
The learned Commissioner of Income (Appeal) erred in treating Rs. 3,24,673/- as interest income on Fixed Deposit and Saving Bank Interest as income from other sources as against business income.”