CHOWDRY ASSOCIATES,NEW DELHI vs. ACIT, CIRCLE-6(1), NEW DELHI

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:

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 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:

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.

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.

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 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 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).

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 is allowed.