DCIT, NEW DELHI vs. M/S. CECIL WEBBER ENGINEERING LTD., NEW DELHI

ITA 3757/Del/2010 A.Y. 2006-07 :- Ground no.1 and 3 of revenue are general in nature which do not require any adjudication. The sole effective ground reads as under. “2. The Ld.CIT(A) has erred in law and on facts in directing the A.O. to treat short term capital gains on account of sale of shares of Rs.75,34,023/- as business income ignoring the detailed findings recorded by the A.O. in the assessment order that the assessee was engaged in trading activity rather

We have heard arguments on both sides and perused relevant material placed on record. The Ld.D.R. submitted that the Ld.CIT(A) has erred in law and on the facts in directing the A.O. to treat the short term capital gain on account of sale of shares as business income ignoring the detailed findings recorded by the A.O. in the assessment order that the assessee was engaged in trading activity rather than in any investment activity even though shares had been shown as investment in the balance sheet. The Ld.DR also drew our attention towards relevant part of the assessment order and submitted that the more of the assets or shares had been treated as investment by the assessee as the changes had been brought about in the tax statute under the head capital gain. The Ld.DR submitted that the stand of assessee for sale of shares shown as investment does not hold ground as the assessee was engaged in the business of purchase of shares and securities of the assessee. The Ld.DR submitted that the Ld.CIT(A) has granted relief to the assessee without any basis, therefore, the impugned order may kindly be set aside by restoring that of the A.O.

The Ld. Sr. Counsel of the assessee strongly supported the first appellate order and submitted that as per recent circulars of CBDT viz., Circular no.6/2016 dated 29.2.2016 and copy of the letter issued by CBDT clarifying Circular no.6/2016 clearly states that the income arising from transfer of unlisted shares to be considered under the head ‘capital gain’ irrespective of period of holding with a view to avoid disputes/litigation and to maintain uniform approach. The Ld.Sr.Counsel supporting the first appellate order also drew our attention towards sub para (b) of para 3 of the CBDT Circular (supra) and submitted that in respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer if assessee desires to treat the income arising from ITA 3757/Del/2010 Assessment Year: 2006-07 ITA 3659/Del/2011 Assessment Year 2007-08 Cecil Webber Engineering Ltd., New Delhi transfer thereof as capital gain the same shall not be put to dispute by the A.O.

On a careful consideration of rival submissions from the first appellate order, we observe that the Ld.CIT(A) has granted relief to the assessee with the following finding. “I have gone through the facts and circumstances of the case, observations of the Assessing Officer and the submissions of the AR of the appellant. This ground of the appellant is being decided after making the following observations: (a) From the facts of the case it is clear that the shares which had been sold during the year was shown as an asset in the balance sheet and the AR of the appellant has also contented that a dividend of Rs. 1.63 crores has also been shown on the basis of the investments made by the appellant. The AR has contended that various details were filed before the Ld. Assessing Officer vide letter dated 25/11/2008 in which the audit accounts and details had been furnished by the AR of the appellant during the assessment proceedings. The Assessing Officer has not controverted the contention of the AR of the appellant that these shares had been treated as investment and should therefore be taxed under the head of short term capital gains. (b) The AR has further highlighted that the appellant company had declared the short term capital gain and long term capital gain under one basket of investment and while the long term capital gain had been accepted, no reasons had been provided as to why the short term capital gain should not be accepted. The decision of CIT Vs Gopal Purohit (ITA No. 1121 of 2009) of Mumbai High Court has also been relied upon to argue that if the assessee had been following a consistent policy, the Assessing Officer has no justification for adopting a divulging approach. From the facts it is also observed that the Assessing Officer has accepted that the assessee has separate portfolio for investment and trading as also stated on Page 6 of the assessment order. In view of the CBDT's Circular dated June, 2007,as well as CBDT's Instruction No. 1827 dated 31/8/1987, these facts indicate that the appellant was holding these shares as investment, even though other shares were being held for trading purposes. (c) On going through the facts it is seen that in totality the number of transactions are also not frequent and there are 9 transactions of sale of shares and 3 transactions of sale of mutual funds. It has also been observed that the dividend received on shares has also been declared by the appellant company. The total networth of the appellant company was Rs. 973.21 lacs as on 31.3.2006 out of which investments in shares/mutual fund amounted to Rs. 921.51 lacs. The investments were made out of own funds of the ITA 3757/Del/2010 Assessment Year: 2006-07 ITA 3659/Del/2011 Assessment Year 2007-08 Cecil Webber Engineering Ltd., New Delhi company and not through borrowed funds. This fact had also been specifically highlighted by the AR of the appellant. On the other hand the Assessing Officer has generally relied upon the CBDT's circular of June, 2007 but has not highlighted as to how he came to the conclusion that the intention of the appellant for holding these shares was for the purpose of trading and not investment. Keeping in view the low frequency of transaction, the reflection of the shares in the balance sheet as investment as well as the other facts highlighted by the AR of the appellant, I am of the considered opinion that in view of the specific facts and arguments as made out by the AR of the appellant and also keeping in view the CBDT circular on this issue, in the present set of facts the sale of shares made by the appellant should be treated as short term capital gains and not business income as held by the Assessing Office.”

In view of the above, there were 9 transactions on sale of shares and three transactions on sale of mutual funds and the dividend received on shares has also been declared by the appellant. Undisputedly the investments were made out of own funds of the assessee and not by borrowing the funds. The Assessing Officer has relied on the CBDT Circular of June, 2007, but the A.O. miserably failed to establish that the intention of the assessee for holding shares and securities was for the purpose of trading and not investment. Undisputedly there was very low frequency of transactions and the assessee shown the shares as investment in the balance sheet. Further from the CBDT Circular 6/2016 and Clarifications No. II dated 2.5.2016, it is clear that the CBDT has advised the A.O. 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 litigation and to maintain uniformity in approach by revenue authorities.

In view of the above, conclusion drawn by the Ld.CIT(A) treating the income of assessee as capital gain, is correct and we are unable to see any valid reason to interfere with the same. Accordingly the sole ground of revenue being devoid of merit is dismissed.

The effective grounds raised

The Bombay High Court, which is probably the only Court which had dealt with the issue of Rule 8D in great detail, has in its decision in Godrej & Boyce (supra), has sent the file to the AO to make a reasonable estimate. Thus, it would be reasonable to add back the amount of Rs.6,58,674/- as offered by the assessee in the submissions made before me. The assessee succeeds partly in ground of appeal