MS. VIVITA RELAN,NEW DELHI vs. ACIT, NEW DELHI

2.1 Aggrieved, the assessee approached the Ld. First appellate authority who partly allowed the assessee’s appeal by directing the Assessing Officer to assess the income of Rs. 65,38,895/- under the head ‘capital gains’ and not under “business income”. The Ld. Commissioner of Income Tax (A) also deleted the addition of Rs. 32,00,463/- by allowing the benefit of indexation to the assessee. The Ld. Commissioner of Income Tax (A), however, sustained the disallowance made u/s 14A of the Act to the tune of Rs. 8,41,313/- by giving the assessee relief of Rs. 1,89,897/- being the amount which had suo moto been disallowed by the assessee as expenditure attributable to earning of exempt income.

2.2 Now, both the parties are before the ITAT against the order of the Ld. Commissioner of Income Tax (A) and the following grounds have been raised by the respective parties:-

ITA 2248/Del/2015 (Assessee’s Appeal):

“That the disallowance of Rs.8,14,313/- (Rs.10,04,210 minus Rs.1,89,897) u/s 14A of the I.T. Act as sustained by the Ld. CIT(A) is arbitrary, unjust, illegal and at any rate, without prejudice, very excessive. Various observations made by the authorities below in their respective orders are either incorrect or legally untenable. The submissions as made supported by documentary evidence and the case laws have either been ignored or have not been properly appreciated.” (Department’s Appeal):

“The CIT(A) has erred in directing to assess the income of Rs. 65,38,895/- under the head ‘capital gains’ which was rightly treated as business income by the AO. The CIT(A) has erred in deleting the addition of Rs. 32,00,463/- by allowing indexation whereas the same was treated rightly as business income by the AO. The CIT(A) has erred in not appreciating the fact that the quantum and dates of transactions in shares and mutual funds clearly indicates that the transactions are entered into continuously and regularly during the year under consideration and hence it is nothing other than business activity of the assessee.”

3.0 The Ld. Authorised Representative (AR) submitted that as far as the assessee’s appeal was concerned, the issue being agitated was the sustenance of disallowance of Rs. 8,14,313/- u/s 14A of the Act by the Ld. CIT (A).

It was submitted that during the year under consideration, the assessee had carried out the business of trading in shares, mutual funds and derivatives and from such a business, the assessee had earned dividend income of Rs. 3,72,151/- out of which the assessee had disallowed Rs. 1,89,897/- u/s 14A of the Act voluntarily on account of expenses attributable to earning of such dividend income. He drew our attention to the working of the disallowance placed on page 68 of the paper book.

It was further submitted that the assessee had also carried business in bonds and mutual funds with Citibank and YES Bank in her individual capacity and from which the assessee had earned dividend income of Rs. 19,10,682/- and further that it had been submitted during the course of assessment proceedings that the assessee had neither incurred nor claimed any expenditure for earning such dividend income of Rs. 19,10,680/- but the Assessing Officer had made disallowance of Rs. 10,04,210/- by considering the dividend income of Rs. 3,72,151/- and Rs. 19,10,682/- collectively. It was submitted that, although, the Ld. CIT (A) had allowed relief of Rs. 1,89,897/- in respect of this disallowance, being the suo moto disallowance made by the assessee herself, but the sustenance of the balance disallowance of Rs. 8,14,313/- was not legally sustainable as the disallowance was made without recording of reasons by the Assessing Officer as to why he was not satisfied with the claim of the assessee that no expenditure had been incurred for earning the dividend income of Rs. 19,10,682/- from personal investments. It was submitted that in absence of ‘satisfaction’, no disallowance could be made u/s 14A of the Act. The Ld. AR placed reliance on the judgment of the Hon’ble Apex Court in the case of Godrej & Boyce Manufacturing Co. Ltd. vs. DCIT reported in 394 ITR 449 (SC) and submitted that in case no satisfaction is recorded by the Assessing Officer, no disallowance could be made u/s 14A. The Ld. AR also submitted that a similar disallowance of Rs.5,73,072/- had been made by the Assessing Officer in the preceding assessment year i.e. 2009-10 which was deleted by the Ld.CIT (A) vide order dated 12.2.2015 and was now placed at pages 54- 63 of the Paper Book. It was further submitted that the revenue had not filed any appeal against this order of the Ld. CIT (A) deleting the disallowance.

“The requirement for attracting the provisions of section 14A(1) of the Act is proof of the fact that the expenditure sought to be disallowed had actually been incurred in earning the dividend income. Prior to the introduction of sub-section (2) and (3) of section 14A of the Act by Finance Act, 2006 with effect from April 1, 2007, such a determination was requirement to be made by the Assessing Officer to the best of his judgment. Sub-section (2) and (3) of section 14A of the Act read with rule 8D of the Income-tax Rules 1962 merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under rule 8D or to the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction of the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of section 14A(2) and (3) read with rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable”.

7.1 A perusal of the assessment order shows that the Assessing Officer has made a disallowance without recording satisfaction as envisaged by the Hon’ble Apex Court in the case of Godrej & Boyce vs. DCIT (supra) and, therefore, in view of the ratio of the judgment of the Hon’ble Apex Court as aforesaid, we are of the considered opinion that the disallowance could not have been made in absence of proper recording of satisfaction by the Assessing Officer. We have no other option but to direct the deletion of this disallowance. We also note that the Ld. CIT (A) in hos first appellate order for assessment year 2009-10 had deleted a similar disallowance made u/s 14A which has not been challenged by the department. Therefore, in view of the factual as well as the settled legal position, we set aside the order of the Ld. CIT (A) on this issue and direct the deletion of this disallowance.

“Before us the Ld. Counsel for the revenue submitted that while the CBDT circular only mentioned that it was “possible” for a tax payer to have two portfolios, namely, an investment portfolio and a trading portfolio, the Tribunal has misunderstood the said circular by holding that the circular had “allowed” the assessee to maintain two types of portfolios. Although technically the Ld. Counsel for the revenue may be right but that really does not make any difference when the entire circular is considered. The intent and purport of the circular is to demonstrate that a tax payer could have two Assessment year 2010-11 portfolios, namely, an investment portfolio and a trading portfolio. In other words, the assessee could own shares for the purposes of investment and/or for the purposes of trading. In the former case whenever the shares are sold and gains are made the gains would be capital gains and not profits of any business venture. In the latter case any gains would amount to profits in business. This has been made clear by the CBDT circular in the remaining portion of the circular itself. On facts, the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal have held that the short term capital gains and the long term capital gains in the present case were out of the investment account and were not related to the trading account of the assessee. That being the position, no interference with the decision of the Tribunal is called for. No question of law arises for our consideration. The appeal is dismissed”.

9.1 A similar view was taken by the Hon’ble Delhi High Court in the case of CIT vs. CNB Finwiz Ltd. reported in 369 ITR 228 (Del) and the relevant observations of the Hon’ble Delhi High Court are reproduced as under:-

“Held, dismissing the appeal, that it was clear from the finding of the Tribunal that the assessee, though a member of the Bombay Stock Exchange and the National Stock Exchange, maintained two portfolios, one relating to investments and the other relating to stock-in- trade. Profits and losses from investments were shown as “capital gains” either long-term or short-term and profits and losses from “stock-in- trade” were shown as “business income”. This position was also accepted in earlier assessment 16 years, i.e., 2002-03 onwards. The assessee had turnover of more than Rs.4697.23 crores, whereas investment in shares in comparison was a small amount of Rs.2.95 crores. The assessee declared “business income” of Rs.63.77 crores in respect of transactions as a member of the stock exchange and as a result of carrying on trade in shares. The shares held as investment were kept in a separate portfolio. The shares related to only three companies and were not treated as stock- in-trade. These shares were sold after a gap of four months or more. Hence, the profits were assessable as short-term capital gains”.

9.2 Therefore, in view of the settled legal position and in view of the ratio of judgments as aforementioned, we find no reason to interfere with the findings of the Ld. CIT (A) wherein he has directed to treat the impugned income as income from capital gains and not as business income.

Since the impugned income is to be treated as income from capital gains, the benefit of indexation will also be allowable to the assessee. Accordingly, there is no reason to interfere with the adjudication of the Ld. CIT (A) in directing the Assessing Officer to allow the benefit of indexation to the assessee.

9.3 We also note that the profit on sale of mutual funds held by the assessee as investment is being regularly assessed to tax under capital gains viz. in assessment years 2009-10, 2011-12 and 2012-13 and there being no change in the circumstances and factual matrix of the matter, there was no reason for the Assessing Officer to disturb the settled practice without bringing any adverse material on record. Accordingly, grounds raised by the department stand dismissed.

Order is pronounced in the open court on 23.8. 2018.