ACIT, NEW DELHI vs. M/S. PURAN ASSOCIATES (P) LTD., NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES “F”: DELHI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA. No. 701/Del/2015 Assessment Year 2010-11 ACIT, Puran Associates (P) Ltd., Circle-20(1) 4th Floor, Punjabi Bhawan, New Delhi. vs. 10, Rouse Avenue New Delhi PAN AAACP0458J (Appellant) (Respondent)

For Revenue : Shri Surender Pal, Sr. DR For Assessee : Shri M.P. Rastogi, Advocate Date of Hearing : 04.10.2018 Date of Pronouncement : 02 .01.2019 ORDER PER AMIT SHUKLA, J.M.

The aforesaid appeal has been filed by the revenue against the impugned order dated 3.11.2014, passed by Ld. CIT (Appeals)-XVII Delhi for the quantum of assessment passed u/s 143(3) for the assessment year 2010-11. In the grounds of appeal revenue has raised following grounds: - 1. The Ld. CIT(A) erred on facts & under the circumstances of the case in treating the loss of Rs. 2300136/- as long-term capital loss and Rs. 17393856/- as short term capital gain by following the decision of CIT(A)’s on Principal of consistency.

2.1 The Ld. CIT(A) erred in law and on the facts in deleting the disallowance u/s 14A read with Rule 8D amounting to Rs. 38,19,939/- without appreciating the facts that the assessee failed to prove the nexus of interest free fund and investment made during the year before the AO. 2.2 The Ld. CIT(A) erred in law and on the facts in deleting the disallowance u/s 14A read with rule 8D(ii) following the decision of the Ld. CIT(A) in the A.Y. 2008-09.”

“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: -

Particulars Asset Type Amount

Income from a)Trading in units of 360,77,965 Mutual Funds; b) Business (A) Income from Interest; c) Incentive and Miscellaneous Income Income from Capital Income from Capital 13,51,06,960 Assets Investment in Gains (B) Equities LTCG- 11,48,78,740 (85%) STCG-2,02,28,220 (15%) Income from other Dividend earned from 8,19,14,172 investment in equities Sources (C)

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’. 16. 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 categorised 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 Holding More than 81 to 364 91 to 180 60 to 90 30 to 59 Less than 365 days days days days days 30 days Quantity of 1,33,65,009* 53,003 1,01,571 43,971 78,813 67,802 Shares Percentage to 97.48% 03.8% 0.74% 0.32% 0.57% 0.49% Total quantity

Gain or loss 1,19,85,50,369 86,05,051 20,57,841 21,45,605 22,70,962 19,21,580

Percentage of Capital gain to Total capital gain 98.34% 0.70% 0.16% 0.17% 0.18% 0.15% *inclusive of shares of Dabur India Ltd., Punjab Tractors Ltd. and ABN Amro Securities Pvt. Ltd.

Total Capital Gain 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 ltd. 10,13,29,232 Long Term Capital Gain on sale of shares of ABN Amro Securities Pvt. Ltd. 2,93,99,990

Short Term Capital Gain 2,02,28,140

Total 1,21,87,78,509

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 I.T.A. No.3078/Del/2011, 820/Del/2013 & 5054/Del/2015 23 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. 5. 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 characterisation 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 I.T.A. No.3078/Del/2011, 820/Del/2013 & 5054/Del/2015 24 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. 2. 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. 3. 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. 4. 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 I.T.A. No.3078/Del/2011, 820/Del/2013 & 5054/Del/2015 25 shares then same cannot be brought to tax under the head capital gain. Some of the judgments are as under: - 1. CIT vs. Gopal Purohit, 336 ITR 287 (Bom.) [Also confirmed by Hon’ble Supreme Court]

upon by the Assessing Officer or by the ld. CIT(A), therefore, we deem it proper that in so far as transaction of shares shown under the head ‘Short Term Capital Gain’, matter should be restored back to the file of the Assessing Officer to examine, whether there is any repetitive transaction; or whether similar scrips have been shown by the assessee in its trading portfolio; or there is frequent switching of same shares. The Assessing Officer will examine these aspects and will also examine it in the light of the clarification issued by the CBDT vide circular dated 2nd May, 2016. Thus, with this direction this issue is remanded back for limited purpose; and in so far as transaction of Long Term Capital Gain is concern, we hold that same is assessable as Long-Term Capital Gain and not business income. 20. Lastly, coming to the objection raised by the ld. CIT-DR that the new plea has been raised with regard to the transaction of Punjab Tractor Ltd., we do not find any merits in such objection, because the acquisition of sale of Punjab Tractor Ltd. has been discussed by the Assessing Officer also and moreover if I.T.A. No.3078/Del/2011, 820/Del/2013 & 5054/Del/2015 27 the entire issue of Long-Term Capital Gain, whether assessable under the head ‘capital gain or business income’ is in dispute and if certain facts are being pointed out from the material already on record, then the same can always be examined to see, whether it was acquired for the purpose of investment or for the purpose of trading. Thus, objection raised by the ld. CIT-DR is rejected.” 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 capital gain cannot be treated as

business income. Accordingly, ground No. 1 raised by the revenue stands dismissed. 6. In so far as second issue relating to disallowance u/s 14A read with rule 8D is concerned, Ld. Counsel submitted that this issue too is covered in favour of the assessee, because there is a categorical finding that assessee has made investment in the shares and mutual funds out of surplus funds which is evident from the fact that the balance sheet of the assessee disclosed that assessee has surplus funds of Rs. 369.44 crores and the total investment as on 31st March, 2010 was only Rs. 66.02 crores and the loan funds were reduced to Rs. 1.02 crores as on 31st March, 2010. Thus, no disallowance of interest under rule 8D can be worked out. In so far as indirect expenditure under rule 8D (2)(iii) is concerned, the same has been disallowed by the assessee itself for sum amounting to Rs. 27,90,774/-. Ld. CIT(A) following the order of the earlier year has deleted the said disallowance of interest this issue has come up for consideration before the Tribunal in the earlier years and in so far as disallowance of interest is concerned, Tribunal has held that once assessee has huge surplus funds which exceeds the investment then no interest can be disallowed. Accordingly order of the Ld. CIT(A) deleting the disallowance of interest is upheld. 7. In the result appeal of the revenue is dismissed. Order pronounced in the open Court on 2nd January, 2019.

sd/- sd/- (PRASHANT MAHARISHI) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Delhi, Dated 2nd January, 2019

Veena Copy to 1. The appellant 2. The respondent 3. CIT(A) concerned 4. CIT concerned 5. D.R. ITAT ‘G’ Bench, Delhi 6. Guard File.