CHOWDRY ASSOCIATES,NEW DELHI vs. ACIT, CIRCLE-6(1), NEW DELHI
Facts
The assessee, a Non-Banking Finance Company, had declared income from Long Term Capital Gains (LTCG) with STT as exempt and claimed Long Term Capital Loss (LTCL) on mutual funds. The Assessing Officer (AO) reclassified LTCG as business income, made an enhanced disallowance under section 14A for exempt dividend income, and disallowed diminution in value of current investments. The CIT(A) confirmed the AO's actions, leading to the current appeal before the Tribunal.
Held
The Tribunal ruled that the assessee's income from Non-Current Investments should be treated as LTCG and loss as LTCL, citing previous consistent decisions in the assessee's own case. It also deleted the enhanced disallowance under section 14A, finding the AO failed to record satisfaction for disagreeing with the assessee's suo-moto disallowance. Furthermore, the disallowance of diminution in value of current investments was deleted as it was already considered in the financial statements. All grounds of appeal were allowed.
Key Issues
Whether income from the sale of long-term investments should be treated as business income or capital gain; whether the enhanced disallowance under section 14A is sustainable without proper satisfaction by the AO; and whether the disallowance of diminution in value of current investments already accounted for in financial statements is justified.
Sections Cited
10(38), 28, 14A, Rule 8D
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI ‘B’ BENCH,
Before: SHRI SAKTIJIT DEY, & SHRI NAVEEN CHANDRA
PER NAVEEN CHANDRA, ACCOUNTANT MEMBER:-
This appeal by the assessee is preferred against the order of the ld. CIT(A)- 31, New Delhi dated 19.06.2019 pertaining to A.Y. 2013-14.
The grounds raised by the assessee are as under:
“1. On facts and circumstances of the case and in law, both Ld CIT(A) and AO has erred in treating income of Rs 12,04,775 from Long term Capital gains on which STT as business income
On facts and circumstances of the case and in law, both Ld CIT(A) and AO has erred in treating non STT paid Long term Capital Loss of Rs 84,04,552 as business income. Consequently, both Ld CIT(A) and AO erred in not allowing indexation benefit and taxed Rs 4,26,78,924 as business income.
On facts and circumstances of the case and in law, no satisfaction was recorded by the Ld AO before invoking notional rule of disallowance u/s 14A read with rule 80. Thus, enhanced addition of Rs 57,51,594 is unsustainable under law and deserves to the quashed.
On the facts and circumstances of the case and in law, both the learned CIT-A and Ld AO has erred in determining the enhanced disallowances u/s 14A of Rs 57,51,594 without ascertaining why disallowance of Rs 9,36,306 u/s 14A made by the assessee is incorrect.
That both CIT(A) and Ld AO has erred in working out enhanced disallowances u/s 14A read with rule 8D of Rs 57,51,594 on incorrect assumption of facts and applying Rule 8D in mechanical manner.
That on facts and circumstances of the case and in law, both CIT(A) and Ld AO erred in bringing to tax Rs 13,86,103 which represents diminution in value of assets as difference between opening and closing stock which was already considered at time of financial statements and there was no requirement to further add it to the income.”
The appeal is late by 28 days. The assessee has filed an
application for condonation of delay. A perusal of the same
shows that the assessee was prevented by reasonable cause
in not filing the appeal on time. Considering the same, delay
in filing the appeal is condoned.
Ground Nos. 1 and 2 taken together as they relate to the Long
Term capital gains treated as business income.
Briefly stated, the facts of the case are that the assessee is a
corporate resident Non Banking Finance Company and has declared an
income of Rs. 15,98,11,512/- for A.Y 2013-14. The assessee has shown
income from LTCG on shares with STT paid of Rs. 12,04,775/- as
exempt from tax u/s 10(38) of the Act. It has also claimed Long Term
Capital loss of Rs. 84,04,552/-on sale of Mutual Funds [non STT] after
indexation. Further, the assessee has reduced the profit on sale of
Long term Investment (Mutual Funds) of Rs 4,38,83,700/- from its
business profit. It however, has shown profit on sale of long term
Investment (Mutual Funds) of Rs. 4,38,83,700/- as income in the book
profit for MAT purposes on which MAT tax was calculated.
The Assessing Officer considered the income from sale of mutual
funds assets as business income and not from capital gains. The
Assessing Officer was of the opinion that income from such long term
asset is shown in the books as income from operations and section 28
of the Act will apply on income shown as from operations. The AO
treated the investment in the mutual funds as business activity and
consequently disallowed exemption of Rs 12,04,775/- u/s 10(38) as
well as consequential long term loss of Rs. 84,04,552/-
When the aggrieved assessee went in appeal before the ld.
CIT(A), the ld. CIT(A) sustained the same.
Now the assessee is in appeal before the Tribunal.
Before us, the ld. counsel for the assessee vehemently argued
that the CIT(A) has ignored that the Balance Sheet itself which shows that the assessee has maintained two portfolios: one as Non-Current
Investment (Note-9) and other as Current Investment (Note-11). It is
the say of the assessee that:
(a) the assessee was engaged in trading of debt oriented units
of various mutual funds which are held as stock-in-trade
duly shown in Current Investments (Note-11 of balance
sheet) whose income was shown as income from business
and
(b) assessee was also engaged in making investments in units of
Fixed Maturity Plan(FMP) of some of mutual funds for
specific period of time (lock in period) without trading
therein and such investments were shown as Non-Current
investments (Note-9 of balance sheet) whose income was
shown as Capital Gain.
The ld AR also submitted that the AO was of the view that even
the non-current investments were in the nature of business assets
since holding period was just few days more than one year although
Lock-in period was 2 to 3 years and about 70 to 80% of the investment
of the total holdings were either sold or redeemed. It was further
submitted that the AO noted that income from both the activities was
shown as Income from Operations in the P & L A/c without any
separate demarcation or supported with records portfolio-wise and
hence, bifurcation only for income tax purposes is not justified. It was
also stated that the AO held that as the STT was not paid on the
transactions pertaining to non-current investments and hence,
provisions of sec 10(38) would not apply.
The ld AR further submitted that the AO fell in error in his
conclusion because a perusal of the balance sheet would reveal that
income from such long term capital gain are not shown in the
inventories (stock-in-trade) but are reflected in the non-current
investments. Once the asset is outside the inventories (stock-in-trade),
there is no question of taxing it u/s 28 of the Act. The ld. counsel for
the assessee forcefully relied upon the CBDT Circular No. F. No.
225/12/2016 dated 02.05.2016.
The ld counsel of the assessee thereafter stated that the issue is
covered in its favour by the decision of Coordinate ITAT benches in its
own case for AY 2006-07; 2007-08; 2010-11 and 2014-15. It was also
submitted that the ITAT decision in its own case for the AY 2005-06 to
2008-2009 was confirmed by the Hon’ble Delhi High Court.
Per contra, the ld. DR relied upon the orders of the authorities
below.
We have heard the rival submissions and have perused the
relevant material on record. The issue we are called upon to decide is
whether the profit from sale of longterm investments of Rs.
4,38,83,700/- is to be treated as income from Business or long term
capital gain.
We find that during the year under consideration, the assessee
has maintained separate accounts for Current Investment which
comprises of Investment in Equity and Debt Instruments in Mutual
Fund. The assessee considers the profit accruing/arising from the
sale/purchase of equities/Mutal funds of this portfolio as its business
income.
We also find that the assessee has maintained separate accounts
for Non-Current Investment which comprises of Investment in quoted
and unquoted Equities; Fixed Maturity Plan Mutual Fund; PMS and
Bonds etc. The assessee considers the profit accruing/arising from the
sale/purchase of such equities/Mutal funds as its Long Term Capital
Gain/Loss.
We also note, from the perusal of the computation of Income,
that the assessee has declared long term capital gain of Rs.
12,04,775/- on which STT was claimed to have been paid. Since such
shares were held for more than 12 months, the assessee claimed the
same as exempt under section 10(38) of the Act. The assessee has also
claimed long term capital loss of Rs. 84,04,552/- from sale of 8 mutual
funds namely JM fixed maturity plan, Reliance fixed horizon, DSP block
rock FM series 32, L&T FMP V, DSP block rock FM series 32, Reliance
FMP XXI series 9, Reliance PMS, India Adv Fund. This loss of 84,04,552/-
is arrived at by reducing the indexed cost of Rs 45,10,84,415/- of the
above 8 Mutual Funds from its sale proceed of Rs 44,26,79,863/-. For
the purposes of calculating the overall Profits from the business, the
assessee has reduced the Profit on sale of Investment of Rs
4,38,83,700/- from its business profit. The bone of contention is
whether this profit on sale of Investment of Rs 4,38,83,700/- is
business income or Long term capital Gain. The assessee treats the
same as Long Term Capital Gain while the Revenue considers the same
as Profit from the Business.
The debate of whether the income arising out of sale/purchase
of share by the assessee has been settled in favour of the assessee. In
the assessee’s own case, the Hon'ble Delhi High Court held in ITA No
544/2013 dated 30.01.2015 held that income from purchase and sale of
shares was not business income but income from capital gain. The
ITAT, in assessee’s own case for A.Y 2006-07 and 2007-08 held that
such income is from capital gains and not business income. The ITAT in
A.Y 2010-11 in ITA 3301/Del/2014 vide order dated 28.12.2017 in
assessee’s own case [supra] has held as under:
“6. We have carefully considered the rival contentions and also peruse~ the orders of the lower authorities. The claim of the assessee is that profit earned by the assessee on sale of shares is chargeable to tax under the head "capital gain" and not "business income", whereas the argument of the revenue is otherwise. This issue has been decided in favour or the assessee by Hon'ble Delhi High Court in assessee's own case in ITA No. 544/2013 dated 30.01.2015, as well as by the coordinate benches from Assessment Year 2005-06 to 2008-09. The ld Departmental Representative could not bring any material on record to show that facts and circumstances of the case are different in this year compared to those years. Therefore, we do not find any infirmity in the order of the ld CIT(A) in holding that "short term capital gain" earned by the assessee is not chargeable as "business income". In view of this,
respectfully following the decision of the High Court and coordinate benches in assessee's Own case for earlier years we dismiss the solitary ground of appeal of revenue.”
We also find force in the ld AR submission that the department
has accepted the practice of assessee’s segregation of business income
and long term capital gains on mutual fund in subsequent A.Y 2017-18.
The Ld DR has not controverted this fact of acceptance in subsequent
years.
We also find that the CIT(A) in the instant year has distinguished
the decision of ITAT’s earlier orders in assessee own case on the
ground that in the instant year the assessee dealt in Mutual Funds
while in the earlier years where the ITAT had decided in assessee’s
favour, the assessee dealt in Shares. We are of the considered opinion
the distinction made by CIT(A) is a superficial one and does not assist
the Revenue. The distinction between shares and Mutual Funds is not
material as long as the treatment given by the assessee remains same
i.e., the assessee maintains a distinct separation in its accounts for
shares/mutual fund held as current investment and shares/mutual fund
held as non-current investment. The CIT(A) has let go out of sight the
fact of maintenance of separate accounts of sale/purchase of the
Current Investment and the Non-Current Investment. The perusal of
the Audited Report establishes that the assessee has maintained the
Current Investment and Non-Current Investment as separate accounts.
The assessee treats the income from trading made under the Current
Investment portfolio as its business income while the income from
sale/purchase in the Non-Current Investment portfolio is declared as
Long Term Gain/Loss. The ld Departmental Representative has failed
to controvert otherwise as he could not bring any material on record to
show that facts and circumstances of the case are different in this year
compared to earlier years. It would follow therefore that the decisions
of Coordinate Bench and the Hon’ble Delhi Court referred to above,
have equal force in the facts and circumstances of the case in the
instant year.
Accordingly, we delete the addition of Rs. 4,38,83,700/- and we
direct the AO to treat the income of Rs 12,04,775/- as Long Term
Capital Gain and treat the loss of Rs 84,04,552/- as Long term Capital
Loss. Ground No. 1 and 2 are allowed.
Ground Nos. 3, 4 and 5 pertain to the addition/s 14A r.w.r 8D of
the Act.
Brief facts are that the assessee earned tax free dividend of Rs.
33,16,64,142/- during the year under consideration and has disallowed
a sum of Rs. 9,36,306/- u/s 14A r.w.r. 8D on account of administrative
cost being 0.5% of the average value of investment. The Assessing
Officer held that the facts of the case prompts invocation of provisions
of section 14A of the Act r.w.r 8D of the Rules for making disallowance
of expenditure incurred for earning exempt income and he computed
the disallowance at Rs. 57,51,594/-. The assessee agitated the matter
before the ld. CIT(A) who confirmed the addition.
Before us the Ld AR submitted that the assessee has already
disallowed Rs 9,63,306/- under 14A. For the purposes of calculating
the disallowance u/s 14A, the assessee had reduced 82% of dividend
received from Dabur India Ltd on the ground that the dividend
received from Dabur India Ltd involved no investment activity requiring
any expenditure. Therefore, no disallowance should be made u/s 14A
of the Act r.w.r 8D of the Rules. The ld AR also vehemently argued
that the Assessing Officer has also not recorded his satisfaction or
justification as to why the disallowance u/s 14A of the Act made by the
assessee is incorrect. Therefore, the act of the AO making
disallowance u/s 14A is legally unsustainable. The Ld AR also placed on
record the decision of the Coordinate Bench of Delhi ITAT in AY 2014-
15 in ITA no 6525/Del/2019 dated 14.09.2023 which on identical facts
and circumstances deleted the addition u/s 14A.
We have given thoughtful consideration to the orders of the
authorities below. The issue of disallowance under section 14A has
been elaborately dealt with by the Coordinate Bench of Delhi ITAT in
AY 2014-15 in ITA no 6525/Del/2019 dated 14.09.2023 in assessee’s
own case. Drawing support from the decision of the Hon'ble Supreme
Court in the case of Maxopp Investment Vs. CIT 402 ITR 640 (SC), the
ITAT deleted the addition u/s 14A. in AY 2014-15.
The ITAT Delhi Bench order (supra) dated 14.09.2023 in
assessee’s own case for A.Y 2014-15 has categorically given a finding
that “not a single word is discussed on the basis of financials or the
P&L Account of the assessee company to show how this suo moto
disallowance is not justified. No reason for disagreeing with the suo
moto disallowance is mentioned by the Assessing Officer. The exempt
income is from investments in subsidiary and there is no justification to
attribute any direct or indirect expenses by the assessee for
maintaining the shares of subsidiary Dabur India Ltd on a very general
presumption”.
In the instant year, we find that the AO has not recorded any
reason for disagreeing with the suo-motto disallowance made by the
assessee. We find that in the instant year also, the AO has not
examined the balance Sheet and P&L account of the assessee company
to arrive at any conclusion that there is no justification for such suo-
motto disallowance. The ld DR has not brought on record any material
to controvert the facts emerging from the records and materials before
us. The facts and circumstances remaining the same in the instant
year, we respectfully follow the decision of coordinate Bench(supra).
Consequently, we direct the Assessing Officer to delete the
disallowance of Rs. 57,51,594/- u/s 14A. Accordingly, Ground Nos. 3
to 5 are allowed.
Last Ground No. 6 relates to the diminution in value of
Investment.
During the course of assessment proceedings, the Assessing
Officer noticed that in the Note-15 of financial statements, it has been
mentioned that the profit from current investment at Rs.
2,61,98,015/- was net off diminution in the value of current
investments amounting to Rs. 13,86,103/-. Since this was not an
actual loss, the Assessing Officer made disallowance.
Aggrieved, the assessee went in appeal before the ld. CIT(A) who
confirmed the action of the Assessing Officer.
Now the aggrieved assessee is in appeal before us.
The ld. counsel for the assessee stated that the AO has added the
difference between the cost and market value of the closing stock. He
submitted that the assessee had already considered the same at the
time of making financial statement and hence question of disallowance
does not arise.
The ld. DR relied upon the orders of the Assessing Officer.
Having heard the rival submissions, we find that the Assessing
Officer has added the difference between the cost and market value of
the closing stock but the assessee has already considered the same at
the time of making the financial statement. Hence, there is no
question of disallowance. We therefore, hold that the ld. CIT(A) was
not justified in sustaining the disallowance. Ground No. 6 is allowed.
In the result, the appeal of the assessee in ITA No.
7718/DEL/2019 is allowed.
The order is pronounced in the open court on 24.07.2024.
Sd/- Sd/-
[SAKTIJIT DEY] [NAVEEN CHANDRA] VICE PRESIDENT ACCOUNTANT MEMBER
Dated: 24th JULY, 2024 VL/
