Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI BENCH: ‘A’ NEW DELHI
Before: SHRI PRAMOD KUMAR & SHRI SUDHANSHU SRIVASTAVA
against the order dated 16.3.2015 passed by the Ld. Assessment year 2010-11 Commissioner of Income Tax (Appeals)-18, New Delhi for assessment year 2010-11. ITA 4106/Del/2015 is the department’s cross appeal for the same year.
Brief facts of the case are that the assessee is engaged in the business of trading in shares, mutual funds and derivatives through the Portfolio Management Services of M/s Globe Capital Ltd. The return of income was filed showing an income of Rs. 1,69,80,958/-.
Initially, the return was processed u/s 143(1) of the Income Tax Act, 1961 (hereinafter called 'the Act') and, subsequently, the case was selected for scrutiny assessment. A perusal of the profit and loss account of the assessee showed that the assessee had declared sales of equity amounting to Rs. 17,20,09,797/- and of mutual funds amounting to Rs. 12,06,18,410/-. Profit of Rs. 1,13,332/- was shown on derivates and a gain of Rs. 53,495/- was disclosed on options. Further, the assessee had shown total profit of Rs. 98,16,506/- and after reducing the exempt income of Rs. 3,72,151/- and after making a suo moto disallowance of Rs. 1,89,897/-, being expenses attributable towards earning of exempt Assessment year 2010-11 income, the net taxable income of Rs. 96,34,253/- was offered to tax under the head “income from business”.
Apart from this, the Assessing Officer also observed that the assessee, in her individual capacity, had also purchased and sold equity, mutual funds and bonds and had declared short term as well as capital gains totalling to Rs. 65,38,895/-. The Assessing Officer was of the view that since the assessee was fully involved in the business of trading of securities and had offered income from business and profession to tax, she had shown some income under the head “capital gains” to take benefit of nil or lower rate of tax. The assessee was issued a show cause notice to explain as to why income shown under the head “short term and long term capital gains” may not be assessed under the head “income from business”. Thereafter, the Assessing Officer proceeded to treat the income from short term and long term capital gains amounting to Rs. 65,38,895/- as income from business. Apart from this, the Assessing Officer also made an addition of Rs. 32,00,463/- for the disallowance of benefit of indexation by treating it as income from Assessment year 2010-11 business. The Assessing Officer also made a disallowance of Rs. 10,04,210/- u/s 14A of the Act by applying provisions of Rule 8D(2)(iii) of the Income Tax Rules. The assessment was completed at an income of Rs. 2,11,85,630/-.
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 Assessment year 2010-11 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.”
Assessment year 2010-11 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. Assessment year 2010-11 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 ITA No. 2248/Del/2015 Assessment year 2010-11 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.
In response, the Ld. Senior Departmental Representative (Sr. DR) placed reliance on the concurrent findings of the Assessing Officer and the Ld. CIT (A) with respect to disallowance made u/s 14A of the Act. The Ld. Sr. DR also submitted that although the assessee is claiming that she is maintaining two portfolios with respect to the investments, provisions of section 14A do not differentiate between two portfolios and, therefore, the disallowance made and as sustained by the Ld. CIT (A) was in order.
Arguing for the department’s appeal, the Ld. Sr. DR supported the assessment order with respect to the capital gains having been treated as business income by the Assessing Officer. The Ld. Sr. DR submitted that it 8 Assessment year 2010-11 is undisputed that the business of the assessee is purchase and sale of equity, securities and future options. It was submitted that the same assessee is carrying out the same business with her own funds and the only difference is that the income from sale and purchase of few securities has been shown under the head ‘capital gain’. It was submitted that the conduct of the assessee proves that she was engaged in the business of sale and purchase of securities in an organized and regular manner and was duly showing business income and showing some part of the income under a different head of income was just a ploy for avoidance of tax. The Ld. Sr. DR, while placing reliance on the detailed findings of the Assessing Officer in this regard, vehemently argued that the Ld. CIT (A) had erred in treating the business income as long term capital gains/short term capital gains. The Ld. Sr. DR also assailed the action of the Ld. CIT (A) in deleting the addition of Rs. 32,00,463/- by allowing benefit of indexation to the assessee. It was submitted that since the source of income was from business and not capital ITA No. 2248/Del/2015 Assessment year 2010-11 gains, the benefit of indexation could not be allowed to the assessee.
In response to the Ld. Sr. DR, the Ld. AR submitted that the Assessing Officer was wholly unjustified in treating the profit on sale of investments held by the assessee in her personal capacity as business income only by relying on the fact that the assessee was also carrying out business of trading in shares, mutual funds and derivatives through Portfolio Management Service account with M/s Globe Capital Market Limited. The Ld. AR submitted that there is no bar in having two portfolios viz. investment portfolio and trading/business portfolio. Reliance was placed on CBDT Circular No. 4/2007 dated 15.6.2007 wherein the CBDT provides that a taxpayer could have two portfolios, namely an investment portfolio and also a trading portfolio and, thus, the assessee could hold shares both for the purpose of investment as well for the purposes of trading. Reliance was also placed on CBDT Circular No. 6 of 2015 dated 29.2.2016 wherein the CBDT had clarified that in respect of listed shares and securities Assessment year 2010-11 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 and further if the assessee takes a particular stand, in a particular assessment year, the same shall be applicable in subsequent assessment years as well and the tax payer shall not be allowed to adopt a contrary stand. Reliance was further placed on CBDT Press release dated 5th May 2016 wherein it has been stated that CBDT, vide order dated 2nd May, 2016, has given direction to the Field Formation to maintain uniform approach that the income arising from transfer of unlisted shares, irrespective of period of holding, would be taxable under the head ‘Capital Gain’. The Ld. AR also submitted that the profits on sale of mutual funds etc. held by the assessee as investment have been assessed to tax as short term/long term capital gain in the immediately preceding year 2009-10 as well as in subsequent assessment years 2011-12 and 2012-13 and, therefore, in view of rule of consistency also, the short ITA No. 2248/Del/2015 Assessment year 2010-11 term and long term capital gain declared during the year under consideration deserved to be accepted. Ld. AR also placed reliance on numerous case laws in support of his contention.
We have heard the rival submissions and perused the material available on record. We take up the assessee’s appeal first. The sole issue being disputed by the assessee is the sustenance of disallowance of Rs. 8,14,313/- u/s 14A of the Act. It is undisputed that the assessee had suo moto made a disallowance of Rs. 1,89,897/- u/s 14A of the Act being expenses attributable for earning dividend income of Rs. 3,72,151/-. However, the Assessing Officer also clubbed the dividend income of Rs. 19,10,682/- for the purposes of making disallowance although the assessee had claimed that no expenditure had been earned towards earning this dividend income on personal account. A perusal of the assessment order shows that the Assessing Officer has not recorded a finding as to why he was not in agreement with the assessee’s claim that no expenditure for earning the dividend income of Rs. Assessment year 2010-11 19,10,682/- had been incurred. The issue of recording of satisfaction by the Assessing Officer has attained finality by the judgment of the Hon’ble Apex Court in the case of Godrej & Boyce Co. Ltd. vs. DCIT 394 ITR 449 (SC) wherein the Hon’ble Apex Court has observed as under:-
“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”.
Assessment year 2010-11 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.
In the result, the appeal of the assessee stands allowed.
Coming to the department’s appeal, the issue in dispute before us is whether the income from capital 14 Assessment year 2010-11 gains as claimed by the assessee is to be treated as income from capital gains or is it to be charged to tax as business income as claimed by the department. The answer to this question will necessarily decide the second question before us is as to whether the benefit of indexation is allowable to the assessee in respect of capital gains or not if the income has to be assessed as business income. We find that the issue is no longer res integra. We find that this issue is squarely covered in favour of the assessee by the judgment of the Jurisdictional High Court in the case of CIT vs. Avinash Jain reported in 362 ITR 441 (Del). The relevant observations of the Hon’ble Delhi High Court are reproduced as under:-
“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 Assessment year 2010-11 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 Assessment year 2010-11 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.
In the result, the appeal of the department is dismissed.
In the final result, the appeal of the assessee stands allowed and the appeal of the department stands dismissed.
Order is pronounced in the open court on 23.8. 2018.