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Income Tax Appellate Tribunal, DELHI BENCH “F’’ New Delhi
Before: SHRI AMIT SHUKLA & SHRI O.P. KANT
2 I.T.A. No.3078/Del/2011, 820/Del/2013 & 5054/Del/2015
PER AMIT SHUKLA, J.M.: The aforesaid Appeals have been filed by the Revenue for the Assessment Years 2008-09, 2009-10 & 2011-12, passed by ld. CIT (Appeals)-XVII vide separate order dated 11.03.2011, 30.11.2012 and 26.05.2015 respectively, for the quantum of assessment passed u/s.143(3). Since the issues involved in all the appeals are common, therefore, same were heard together and are being disposed of by way of this consolidated order.
We will first take up the appeal for the Assessment Year 2008-09, wherein the Revenue has raised the following grounds of appeal: - 1. That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 15,41,96,869/- by treating long term capital gain and short-term capital gain as business income. 2. That on the facts and circumstances of the case and in law, the Ld. CIT (A) erred in restricting the addition made u/s. 14A from Rs. 57.64 lacs to Rs. 32.14 lacs. Ld. CIT (A) erred in giving relief to the assessee on the fact that the assessee has earned interest income and therefore he is entitled for set off. 3. That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating the fact that section 14A read with Rule 8D, takes into account only the interest component which can be attributed towards the income and not forming part of total income. It has nothing to do with the earning of interest income. 4. The Appellant craves to the allowed to amend, delete or add any other grounds of appeal during the course of hearing of this appeal”
The facts in brief qua the issue are that, assessee-
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company has been stated to be in the business of sale and purchase of shares and mutual funds. During the year, the assessee had shown income from business and also income from Long Term and Short-Term Capital Gains in the following manner: -
Heads of Income Rs. Capital gains i) Long term capital gains exempt u/s 10(38) 106,78,21,147
ii) Long-term capital gain without indexation 10,13,29,232 iii) Long-term capital gain with indexation 1,35,49,508 iv) Short-term capital gain u/s 111A 1,85,41,338 v) Short-term capital gain Others 29,95,242 Profit and gains of Business or profession Trading in mutual funds 3,60,77,965 Income from other sources Dividend income 8,19,14,172
The Assessing Officer to understand the different nature of transaction undertaken by the assessee, first of all noted that assessee had done huge trading in mutual fund having turnover of Rs. 907.91 crores for which assessee has offered the income under the head ‘business and profession’. Then he tried to examine the transaction which has been reflected under the head ‘capital gain’ and noted that assessee has huge turnover in these transactions also, which was around Rs.132.63 crores. In the category of ‘Long Term Capital Gain’, it has transacted into 20 scrips and in ‘Short Term Capital Gain, 64 scrips. From this he inferred that the frequency of the transactions carried out by the
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assessee is very high with large volume of shares. He further noted that under the category of Long Term Capital Gain, assessee has sold shares of ‘Punjab Tractors Ltd.’ wherein assessee has earned profit of Rs.10.11 crores. The said transaction was carried out over the counter without paying STT. He also noted that assessee had paid interest of Rs.1.56 crore on borrowed funds and in absence of any segregation in the account, he presumed that net borrowed funds must have been utilized in investment activities and this indicates motive of the assessee was to earn profit from such transaction and not to enjoy dividend income. The assessee has also taken help from the experts in its portfolio management and business for which it has paid consultancy charges of Rs.13.08 lacs. Another important fact noted by him was that the assessee was holding shares as ‘stock-in-trade’ till 31st March, 2004 and the same were converted into investment portfolio as on 01.04.2004 and thus, till Assessment Years 2004-05, the assessee was showing all the income from share transactions and mutual fund transactions under the head ‘income from business’; and it is only from Assessment Year 2005-06 the assessee has segregated the income under the head ‘Capital Gain and Business Income’. Out of the total transaction undertaken by the assessee under the head ‘capital gain’, the Assessing Officer held that in so far as shares invested in Dabur India Ltd. is concerned which was invested in the share capital of the group company, was has held as investment since beginning, therefore, tax on sale transaction on such shares i.e., Dabur India Ltd. can be held to be taxable
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under the head ‘Long term Capital Gain. After excluding the share of Dabur India Ltd, he has combined the entire transaction of shares and mutual funds, both under the head ‘business’ and ‘capital gain’ in the following manner: - Opening Stock a. Mutual Fund (shown as stock in trade) = Rs.30.24 crore b. Shares (shown as investment) = Rs.39.92 crore (Excluding Dabur India Ltd. Stock of Rs.60,054/- Total = Rs.70.16 crore Closing Stock c. Mutual Fund (shown as stock in trade) = Rs.53.35 crore d. Shares (shown as investment) = Rs.88.62 crore (Excluding Dabur India Ltd. Stock of Rs.41,774/-) Total = Rs.141.97 crore Turnover e. Mutual Fund (shown as stock in trade) = Rs.907.91 crore f. Shares (shown as investment) = Rs.37.78 crore (Excluding Dabur India Ltd. Sale of Rs.106.46 crores) Total = Rs.945.69 crore
Thereafter, the learned Assessing Officer after referring the various judgments held that mere entries in the books of account showing shares as investment is not a determinative factor to decide the real nature of transaction. In support, he strongly relied upon the judgment of Hon'ble Supreme Court in the case of Tuticorin Alkali chemicals and Fertilizers Ltd. vs. CIT, reported in 271 ITR 172 and catena of other judgments as
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incorporated by him in the assessment order. Thereafter, he has discussed the various tests laid down by the courts from time to time distinguishing between shares held as stock-in-trade and shares held in investment which has been highlighted by him in the following manner:
(i) Whether the purchase and sale of securities was allied to his usual trade or business was incidental to it or was an occasional independent activity. The assessee is having sole activity of buying and selling of shares/mutual funds where the transactions were entered into continuously and regularly during the assessment year under consideration. ii) Time devoted to the activity and the extent to which it is the means of livelihood. In the given case the share/mutual fund trading activity is the only activity being undertaken by the assessee and is a whole-time occupation for the assessee. iii) Whether scale of activity is substantial. The scale of activity is definitely substantial in the case of the assessee. The number of transactions and the quantum of sale and purchase of shares/mutual fund have been elaborated in the earlier paragraphs of this assessment order from where it is clear that both the number and quantum of transactions are substantial. v. Ratio of Dividend earned and profit from investment activity. The dividend earned by the company is as under: From Mutual Fund category(stock in trade) Rs. 98,99,593 From Investment category Dabur India Limited.(Treated as investment) Rs.7,09,54,500 Others (Disputed to be investment) Rs. 10,60,079
Thus it can be seen that the dividend earned on so called investment is Rs. 10,60,079/- only, while the profit earned from above transactions is Rs. Rs. 15,41,96,869/-(para No. 14). Thus the ratio of dividend to profit is 1 : 145. This clearly and strongly indicate that the motive is to earn profit in regular and systematic manner.
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v) Holding period of securities bought and sold and frequency of transactions. Analysis of statement of capital gains filed by the assessee shows that the period of holding varies from few days to few months. Transactions have been carried out throughout the year almost on daily basis. It will not be out of place to mention even at the cost of repetition that taxability of transactions will not depend on presentation of accounts or by showing the shares as investment. It will depend on the facts of the case. The volume, frequency and regularity of share transactions done in organized manner indicate business activity [CIT vs. Motilal Hirabhai Spg. & Svg. Co. Ltd. (1978) 113 ITR 173 (guj)].”
Thereafter, he again referred to various decisions as discussed from pages 15 to 22 of his order including CBDT Circular No.4 of 2007 dated 15th June, 2007 and concluded that assessee was dealing in sale and purchase of shares for earning profit and tax them under the head ‘business income’ in the following manner: 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/-
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However, before coming to his decision, AO has highlighted following facts to reach to the following conclusions: -
(i) Assessee is in the business of sale and purchase of shares and mutual funds, which is the only business of the assessee. (ii) The assessee is even doing the trading in items of growth oriented or dividend oriented Mutual Funds which are normally considered as investment items. This shows the motive of the assessee in such activities. (iii) The assessee failed to give any logic for different classification of securities/mutual funds under different heads of income. (iv) The object in the MoA i.e., “To carry on the business of dealers in shares, stocks, debenture stocks, bonds, obligations, units, securities..........” clearly indicates that the company is authorized to carry out the business of dealers in shares, stocks, debentures stocks, bonds, obligations, units, securities, etc, (v) Till A.Y. 2004-05 the assessee was showing all the income from share transactions and mutual fund transaction under the head income from business. (vi) The assessee carried out huge turnover in such transactions precisely Rs. 132.63 crores in long term category and Rs. 11.88 crores in short-term category. (vii) The above transactions were carried out throughout the year on almost daily basis. (viii) The opening and closing stock of such scrip is huge. The opening stock is Rs.39.93 crores and closing stock is Rs. 88.62 crores. (ix) The assessee has sold the shares of Punjab Tractors Ltd. over- the- counter (OTC) without paying STT, which clearly indicates the strong intention of the assessee to earn profit. (x) The assessee has paid interest of Rs.1.56 crore on borrowed funds for such activities.
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(xi) The assessee has paid consultancy charges for investment planning amounting to Rs. 13.08 lakhs. The hiring of service of experts clearly indicates that the motive of the assessee is to earn profit on such transaction and not merely to make investment and earn silent income. (xii) On combined examining the mutual fund and equity share transaction, there is huge turnover of Rs. 945.69 crore and average holding of Rs 106.06 crore which is clearly the case of high transaction and low holding, which in turn indicates trading activity. (xiii) The ratio of dividend to profit is 1: 145. This clearly and strongly indicate that the motive is to earn profit in regular and systematic manner. (xiv) From the volume, frequency, continuity and regularity of transactions of purchase and sales in shares it can be inferred that these transactions must have been entered into by the assessee with a profit motive. (xv) Tests laid down under various judicial pronouncements confirms that the assessee has entered into share transaction with profit motive.”
Before the ld. CIT (A), the assessee submitted that it has maintained two portfolios for the shares in the balance-sheet; one as an ‘investment’ and other as ‘stock’ for trading activities. Such an investment in shares have been classified since Assessment Year 2005-06 and in all the years separate schedule of investment have been shown right from 31st March, 2005 to 31st March, 2008. The intention of the assessee for making investment in shares is also borne out from the resolution of Board of Directors. It was further pointed out that 85% of the gain were from Long Term Capital Gain, i.e., the shares which were held for more than 365 days and only 15% of the shares were held for less than a year, hence, the intention was always to
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keep the shares as investment. In support, the reliance was placed upon the decision of Hon'ble Jurisdictional High Court in the case of Essjay Enterprises Pvt. Ltd., reported in (2007) 165 taxmann.com (Del.) and Madras High Court judgment in the case of CIT vs. NSS Investments Pvt. Ltd., reported in (2005) 277 ITR 149 (Mad.). Thereafter, point-wise rebuttal of Assessing Officer’s allegation was given which has been incorporated in the appellate order in detail. Again, in support of the contention that if the assessee has maintained two separate portfolios, one for the investment and other for trading, then it cannot be held that shares held under the head ‘Investment Portfolio’ would be taxed as business income, reliance was placed upon the judgment of Hon'ble Bombay High Court in the case of CIT vs. Gopal Purohit, reported in (2011) 336 ITR 287.
Ld. CIT (A) noted that in the Assessment Year 2005-06 in assessee’s own case, this issue has been decided in favour of the assessee and again in the Assessment Years 2006-07 & 2007-08, this issue has been decided in favour of the assessee; and held that assessee has invested in shares and shares held as investment is to be taxed under the head ‘Long Term Capital Gain or Short Term Capital Gain’ and not as business income.
Before us, ld. CIT-DR after referring to the various observations made by the Assessing Officer, submitted that the ld. CIT (A) has followed the appellate order for the Assessment Years 2005-06 to 2007-08; and now this issue stands decided by
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the Tribunal against the assessee wherein vide order dated 31.01.2012 passed in ITA Nos.1118, 942 and 943/Del/2010 wherein the Revenue’s appeal has been allowed. Whence, on similar facts and issue, the matter has been decided by the Tribunal, then no different view can be taken.
On the other hand, learned counsel for the assessee, Mr. M.P. Rastogi after narrating the entire facts, submitted that one thing which heavily weighed the Tribunal was that assessee had earlier held the shares as ‘stock-in-trade’ which was later converted into investment and thus, it was held that the intention of the assessee was to do business. But conversion of stock into investment was done way back in the financial year 2004-05 and if one looks to the schedule of investment, appearing at pages 63 to 67 of the paper book which is scrip-wise detail, then it could be seen that none of the scrips which has been sold during the year were part of such conversion of stock. He had also filed a detail of transaction of shares undertaken under the head ‘Long Term Capital Gain’ and ‘Short Term Capital Gain’ and pointed out that all the shares which were held as investment have been acquired in the financial years 2005-06, 2006-07 and 2007-08. Only the shares of Dabur India Ltd. were purchased in the year 1987 which Assessing Officer himself has held that it was always held as investment and he has excluded it from the computation of business income. From these details, he again pointed out that there was one scrip of ‘Punjab Tractors Ltd.’ which was purchased in the Assessment Years 2005-06 and
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2006-07, was always held as investment and was never part of stock-in-trade. Out of total gain of Long Term Capital Gain of Rs. 15,41,96,869/- gain on the shares of Punjab Tractors Ltd. alone were Rs.10,13,29,232/-. This gain at any cost cannot be held to be in the nature of business income, because right from day one it was acquired as an investment and was sold as such. He further pointed out that the shares of Punjab Tractors Ltd. were sold to Mahindra & Mahindra in a takeover deal for which he has also filed copy of share purchase agreement dated 08.03.2007 executed between assessee and Mahindra & Mahindra and the offer letter made by Mahindra & Mahindra to purchase equity shares from the public at large after the acquisition of the shares of the Punjab Tractors Ltd from the assessee in accordance with provision of SEBI. Apart from that, he submitted that another major amount relates to ABN Amro Securities Pvt. Ltd. amounting to Rs.2,08,03,217/- which was never part of trade-in- stock but were treated as investment since inception and this scrip was not tradeable. Thus, these two stocks cannot be held to be for business purpose and should be removed from the business income as computed by the assessee.
Coming to the decision of the Tribunal for the Assessment Years 2005-06 to 2007-08, Mr. Rastogi submitted that the Tribunal has given a finding on the ground that assessee had held shares as stock-in-trade which was converted into investment from 1st April, 2004; and thus, when the shares were purchased it was for the intention of trading. The Tribunal has referred to various decisions which were more with regard to
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whether the treatment in the books could be decisive factor or not. Now the decision of the Tribunal does not hold ground in wake of CBDT Circular no. 6/2016, dated 29.02.2016, whereby it has been clarified that if the assessee is treating the income arising from the transfer thereof as capital gain then same should not be disputed by the Department. Again, by way of clarificatory note issued on 2nd May, 2016 by CBDT, such a benefit has been given to the unlisted shares also. He also referred to a judgment of Hon'ble Gujarat High Court in the case of Pr.CIT vs. Bhanuprasad D. Trivedi (HUF) (2017) 87 taxmann.com 137 which was precisely on this issue that if the intention of the assessee at the time of purchase is of investor and held as investment then any action arising out of transfer of shares should be treated as capital gains. This judgment of Hon'ble Gujarat High Court has now been affirmed by the Hon'ble Supreme Court vide order dated 4th May, 2018, reported in (2018) 256 taxmann.com 66. Regarding balance sale of shares other than Punjab Tractor Ltd. and ABN Amro Securities Ltd., he submitted that looking to the transaction in the shares which was held for more than 365 days which constituted 98.34%, then it is clear that assessee’s intention was always to treat the share as investment. He further pointed out that in the Assessment Year 2012-13, the Tribunal in the case of the assessee has held that transaction of shares held under the head ‘investment’ is to be taxed as capital gain and in support, he filed a copy of ITAT order dated 26.03.2018 passed in ITA No.4711/Del/2016. Thus, he submitted that now in the wake of various decisions of Hon'ble
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High Court and Hon'ble Supreme Court which has been rendered after the earlier Tribunal order and looking to the fact that the major transaction is into Punjab Tractor Ltd. and ABN Amro Securities Ltd. which has held as investment from day one, the ratio laid down by the earlier order would not be applicable.
By way of rejoinder, ld. CIT-DR vehemently opposed the contention of the Ld. Counsel with regard to the nature of holding of shares of Punjab Tractors Ltd. on the ground that, this plea was never taken before the Assessing Officer and ld. CIT(A). Even though the assessee has filed an application under Rule 27, however, such an application is not tenable under the scope of Rule 27, because here the ld. CIT (A) has reversed the entire finding of the Assessing Officer that the sale and purchase of the share of the assessee is not in the nature of trade and business but assessable under the head ‘Long-Term Capital Gain and Short-Term Capital Gain’. There is no such finding which has been decided against the assessee. Thus, such a plea cannot be taken under Rule 27. Moreover, the assessee has also not filed any Cross Objection before the Tribunal on this ground that investment in Punjab Tractors was made to have controlling stake/interest in the said company and not to trade in shares and these facts was neither presented before the Assessing Officer nor before the ld. CIT (A). Hence, this plea cannot be taken by the learned counsel at this stage in Revenue’s appeal.
We have heard the rival submission and also perused the relevant findings given in the impugned orders as well as mater
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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: -
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Amount Particulars Asset Type Income from Business (A) a)Trading in units of Mutual 360,77,965 Funds; b) Income from Interest; c) Incentive and Miscellaneous Income Income from Capital Income from Capital Assets - 13,51,06,960 Gains (B) Investment in Equities LTCG- 11,48,78,740 (85%) STCG- 2,02,28,220 (15%) Income from other Dividend earned from investment 8,19,14,172 Sources (C) in equities
One of the main contentions of the Revenue which has been strongly harped by the Tribunal in the earlier years is that, assessee prior to 31st March, 2004 was holding shares as ‘stock in trade’, hence intention was to do business only and mere classification in books as investment by making entries is not decisive factor. It was on 01.04.2004 the shares were converted into investment portfolio and since A.Y. 2005-06; assessee has segregated the income under the head ‘Capital Gains’ and ‘Business Income’. Apart from that, Assessing Officer has noted that magnitude of the transaction and the volume shows that assessee was into sale and purchase of share for the intention of business only and has also referred to the huge turnover and also highlighted various facts it has been discussed and incorporated in detail in the earlier part of the order. Now from the perusal of the schedule of investments especially investment made in the shares under the head ‘Long-Term Capital Gain’, we find that the major amount on amount of Long-Term Capital Gain is arising on account of sale of shares of Punjab Tractors Ltd. which is at
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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’.
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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: -
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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.
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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
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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
Now, it has been well settled that if the shares which has been acquired and treated as investment from day one and held for more than a year, then sale of such shares has to be taxed under the head ‘Long Term Capital Gain’. This has been clarified by the CBDT in its following two circulars: -
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.
Over the years, the courts have laid down different parameters to distinguish the shares held as investments from the shares held as stock-
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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
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keeping in view the aforesaid Circulars issued by the CBDT.
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
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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
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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] 2. CIT vs. Vinay Mittal, 208 taxman 106 (Del. HC) 3. ITO vs. Rohit Anand, (2009) 34 SOT 42 (Del.) 4. CIT vs. Amit Jain, 374 ITR 550 (Del.) 5. CIT vs. Sahara India Housing Corporation Ltd., ITA No.740/2009 (Del.)
In the light of the catena of decision Hon'ble Jurisdictional High Court and also some of the judgment affirmed by the Hon'ble Supreme Court and the facts as discussed above, the earlier years Tribunal order cannot be held to have any binding precedence and accordingly, we hold that in so far as transaction in sale of shares shown under the head ‘Long Term Capital Gain’ same cannot be taxed under the head business income especially in the light of the categorical clarification by the CBDT.
In so far as the allegation of the Assessing Officer that looking to the magnitude of the transaction and the volume so far as ‘Short Term Capital Gain’ is concerned, before us, the assessee has filed scrip wise details to show that in most of the cases period of holding was more than six months and there is no repetitive transaction. The volume and frequency may be one of the factors to gauge, whether the shares acquired were for trading purpose or for were for investment, but that alone is not a final test, because the shares may be acquired for a short period
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and whenever the assessee feels that either the scrip is giving immediate gain or there going to be a loss, then such shares are sold/transferred either to maximize the gain or to mitigate the loss. Simply because the assessee has held the shares for less than period of 12 months it does not straight away put in the bracket of trading activity, especially when there is no repetitive transaction of the shares. However in so far as detail of Short Term Capital Gain is concerned, the assessee has filed voluminous detail which has been neither examined or looked 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.
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
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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.
The next issue relates to restricting the addition made u/s.14A from Rs. 57.64 lacs to Rs. 32.12 lacs. The Assessing Officer noted that assessee has earned dividend income of Rs.8,19,14,172/- and hence he observed that provisions of Section 14A are applicable. In response to the show cause notice, the assessee submitted that it had already added back the sum of Rs.37,74,438/- for the purpose of disallowance u/s.14A and as per the calculation under Rule 8D the disallowance only comes to Rs32,13,921/-, which is lesser than the figure added by the assessee. The learned Assessing Officer held that assessee is having common infrastructure and common personnel for earning income under various heads and also using the administrative, managerial and infrastructure set up for earning the income. Accordingly, he held that no doubt assessee has computed the disallowance under Rule 8D but it is only with regard to the indirect expenditure by taking 0.5% of the average investment. The assessee has not included the disallowance of interest expenses debited in the P&L account. Accordingly, he computed the disallowance at Rs.95,39,000/- which constituted Rs.63,25,000/- under Rule 8D(2)(ii) and Rule 8D(2)(iii) of
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Rs.32,14,000/- since the assessee had suo-moto disallowed Rs.37,74,438/-, he made further disallowance of Rs.57,64,562/-.
Before the ld. CIT (A), assessee submitted that it had earned interest income of Rs.395.23 lacs and made interest payment of Rs.156.86 lacs which resulted into net income of interest of Rs.328.37, which has been offered for tax for the year under consideration. Thus, the disallowance of interest by taking the total interest payment of Rs.156.86 lacs as per Rule 8D is not justified as assessee has already offered huge interest income of Rs.238.37 lacs for tax. The ld. CIT (A) has deleted the said disallowance of interest after observing and holding as under: “3.1. I have carefully considered the submissions of the Ld. AR and perused the assessment order passed by the AO. I agree with the submission of Id. A.R. that the appellant is a Non-Banking Financial Company and also engaged in financing activities. The appellant is registered with Reserve Bank of India as Non-banking Financial Company and earning interest income. To earn the interest income of Rs. 395.23 lakhs it has paid interest of Rs. 156.86 lakhs and offered the balance interest income of Rs. 238.37 lakhs for tax under the head Business Income. Since the appellant is a Non-Banking Financial company and it is also maintaining a separate financing business activity to earn interest and other business receipts, total interest payment made to earn the interest income is eligible to be set off against the interest income. In the instant case payment of interest is adjusted with interest income and balance interest income of Rs. 238.37 lakhs is offered for tax proved the financing activity as a separate business activity which should not be clubbed with other business activities. “Any expense which is related to earning a specific income, should be allowed and such income should be reduced to the extent of such expense”. The same principle is adopted by the appellant and it has correctly sett of the interest payment with its
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interest income. It is also observed from the balance sheet of the appellant company that the appellant is holding Reserves of Rs. 19199.85 lakhs. So considering the interest payment of Rs. 156.86 lakhs for sub point D of point no. ii of the table of Rule 8D is not correct and the disallowance of expenses should be restricted to Rs. 32.14 lakhs only as mentioned by the AO in point no. iii of the table of rule 8D. Hence the ground no. 8 of the appeal is allowed.”
Learned Department Representative has strongly relied upon the judgment of Hon'ble Supreme Court in the case of Maxopp Investment Ltd. vs. CIT (2018) 91 taxmann.com 154; and submitted that if the expenditure has been incurred in earning of dividend income then that much of expenditure which is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure. Even the shares held as stock in trade from which assessee has earned profit therefrom and also the dividend then also Section 14A is triggered.
On the other hand, learned counsel submitted that has a huge reserve and surplus of Rs.19,199.85 lacs and also assessee has shown huge net interest income, therefore, disallowance under Rule 8D on account of interest cannot be made.
After considering the aforesaid submission and on perusal of the relevant findings given in the impugned orders, we find that in so far as disallowance under Rule 8D2(iii) is concerned, it is not in dispute, because already assessee has offered more than what is disallowable under the formula given under Rule 8D2(iii).
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The Assessing Officer has imputed the disallowance of interest without even analyzing the nature of accounts and the fact that assessee has a huge net surplus of interest income which has been offered for tax. The assessee is a NHBC and has earned interest income of Rs.395.23 lacs on loan advances to the parties. It has made total interest payment of Rs.156.86 lac on loans taken and net income interest of Rs.238.37 lac has been offered to tax. Since the interest payment has been adjusted with the interest received, this itself goes to show that assessee is maintaining a separate finance activity and the interest payment is directly relating to such financial activities. Nowhere the Assessing Officer has brought out that such an interest payment has any co-relation with the loan funds for the purpose of making the investment. On the other hand, we find that the assessee has huge surplus funds in its reserve which is around Rs. 19,200 lacs. Under these circumstances, it could be easily presumed that, investments have been made from interest free surplus funds and no portion of interest expenditure can be disallowed. Accordingly, we do not find any infirmity in the order of the ld. CIT (A) and same is confirmed.
In the result, the appeal for the Assessment Year 2008-09 is treated as partly allowed for statistical purposes.
In the Assessment Year 2009-10, the Revenue has taken only one ground, i.e., ld. CIT(A) has earned in treating profit from sale of shares as Long-Term and Short-Term Capital Gains or business income. Admittedly, the fact in this year are by and
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large the same as were in there in the Assessment Year 2008-09, that is, the shares which were held for more than 365 days were held as investment from the date of acquisition. We have already held that so far as the shares transacted under the head Long Term Capital Gain the same cannot be held to be for the purpose of trading activity and consequently it cannot be assessed under the head ‘Business Income’, following the CBDT Circular (supra). On this issue and various judgment of the Hon'ble High Court have been followed. In so far as Short-Term Capital Gain is concerned, we have given certain directions to the Assessing Officer for examination of certain aspects; therefore, for this year also same direction is given to the Assessing Officer. Accordingly, appeal for the Assessment Year 2009-10 is treated partly allowed for statistical purposes.
In the appeal for the Assessment Year 2011-12, the Revenue has raised the following grounds; - 1) The Ld. CIT(A) erred on the facts and under the circumstances of the case in treating the loss of Rs.34,78,378/- as long-term capital loss and Rs.57,05,498/- as short-term capital gain by following the earlier decision of CIT(A)'s principle of consistency. 2) On the facts and under circumstances of the case, the Ld. CIT(A) erred in deleting the addition of Rs.25,57,020/- by ignoring the mandatory procedure prescribed under Rule 8D of the IT Rules r.w.s 14A of the IT Act. 3) On the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the addition of Rs.66,998/- by giving effect to CBDT's Notification No.56/2012 which is operative from 01.01.2013 and not applicable to the year under consideration. The Ld. CIT(A) also erred in holding that the payment of DEMAT charges does not qualify for deduction u/s 194H of the IT Act, 1961.
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In so far as ground no.1 is concerned, again the issue is by and large the same as has been discussed in the earlier part of the order and even the ld. CIT (A) has followed the earlier years. Since we have already held that the transaction of the shares held by the assessee in the investment portfolio is assessable under the head ‘capital gain’ and therefore, the loss of Rs.34,78,378/- has to be treated as Long Term Capital Loss. In so far as amount of Rs.57,05,498/- treated as business income as against Short Term Capital Gain claimed by the assessee, we have already given the direction to the Assessing Officer in the earlier year, therefore, same finding will apply mutatis mutandis in this year also.
Now coming to the issue of disallowance u/s.14 of Rs.25,57,020/-, it is seen that the disallowance consists of interest component made under Rule 8D(2)(ii) by the Assessing Officer. The assessee has already disallowed sum of Rs.28,42,651/- for the purpose of disallowance u/s.14A which has been computed in accordance with formula given in Rule 8D2(iii). However, the Assessing Officer has imputed the interest disallowance without even examining the nature of accounts and also whether any interest-bearing funds have been invested in the purchase of the investment which has yielded dividend income. No ‘satisfaction’ has been recorded by the Assessing Officer as to why such interest disallowance should be made. The ld. CIT(A) noted that assessee has not made investment from the borrowed funds and interest expenditure has no link whatsoever for the earning of the exempt income and accordingly, he has
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deleted the addition under Rule 8D2(ii).
After considering the submission made by both the parties and on perusal of the impugned orders, we find that the assessee’s contention has been that it always had huge sufficient interest free funds available with it which is also evident from the balance-sheet in the form of huge ‘reserves and surplus’ and therefore, no disallowance of interest could have been made. This contention of the assessee has not been rebutted by the Assessing Officer. Apart from that, assessee has also categorically stated that none of its borrowed funds was applied for the purpose of the investment and it has earned interest income of Rs.19.84 crore from the loan advanced by it and has paid interest on loans of Rs.1.98 crores only. Thus, there is a net interest income. We have already given a finding while deciding the appeal for Assessment Years 2008-09 that if there is net interest income then no disallowance of interest can be made. Under these circumstances and facts, we hold that no disallowance of interest can be made. Accordingly, the disallowance made by the Assessing Officer under Rule 8D(2)(iii) is directed to be deleted and hence, the order of the ld. CIT(A) on this score is confirmed.
Lastly, coming to the issue of deleting the addition of Rs.66,998/- we find that Assessing Officer has held that assessee has not deducted TDS on Demat Charges of Rs.66,998/- paid Deutche Bank and HDFC Bank. The reliance placed by the assessee on the CBDT notification no.56/2012 that no TDS is required to be deducted on the DEMAT account; the AO held that
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the said circular has come into force from 1st Day of January, 2013 and hence cannot be applicable in the present case. Ld. CIT (A) held that notification only clarifies that no tax will be deducted at source with DEMAT charges w.e.f. 01.01.2013, but this does not imply that TDS was required to be deducted. He further held that TDS u/s.194H would not be applicable on DEMAT charges, because there is no principle agent relationship. Accordingly, he deleted the disallowance made u/s. 40(a)(ia) made by the Assessing Officer.
After hearing both the parties and on perusal of the relevant finding given in the impugned order, we find that the only reason for disallowing the payment of DEMAT charges of Rs.66,998/- by the Assessing Officer is that the CBDT Notification No.56/2012 has come into effect from 01.01.2013 and therefore, for the earlier period TDS is required to be deducted u/s.194H. Such a reasoning for disallowance cannot be sustained, because if CBDT has clarified that no TDS is required to be deducted on DEMAT charges, then such a clarification brought to remove the rigors and the hardship to the assessee, has to be given retrospective effect, because the reason given by the CBDT to bring the circular was to reduce the hardship and the compliance cost and it is causing great hardship to the deductee. Such a clarification brought by CBDT to remove the hardship, cannot be held that prior to 01.01.2013 such a hardship should be imposed. Accordingly, the order of the ld. CIT(A) for deleting the said disallowance is affirmed.
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In the result, the appeal of the Revenue is partly allowed for statistical purposes.
Order pronounced in the open Court on 20th August, 2018.
Sd/- Sd/- [O.P. KANT] [AMIT SHUKLA] ACCOUNTANT MEMBER JUDICIAL MEMBER
DATED: 20th August, 2018 PKK: