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Income Tax Appellate Tribunal, ‘A’ BENCH: CHENNAI
Before: SHRI GEORGE MATHAN, & SHRI A. MOHAN ALANKAMONY
आदेश / O R D E R
PER GEORGE MATHAN, JUDICIAL MEMBER:
ITA No.3142/Mds/2016 is an appeal filed by the assessee against
the Order of Commissioner of Income Tax (Appeals)-2, Chennai, in ITA
No.150/CIT(A)-2/2016-17 dated 15.09.2016 for the AY 2008-09.
Mrs.Ruby George, CIT represented on behalf of the Revenue and
Mr.Ajay Vohra, Adv., represented on behalf of the assessee.
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The assessee has filed concise grounds as follows:
Jurisdiction
The CIT (Appeals) is wrong in confirming the order of the Assessing Officer in respect to the re-opening of the Assessment under section 147 of the Income Tax Act, 1961.
The CIT (Appeals) ought to have appreciated that the Appellant had furnished all relevant materials along with the return and there is no non-disclosure or omission or failure on the part of the Appellant and ought to have appreciated that all along the Assessee claimed exemption under section 10(38) on sale of shares which was accepted by the Department earlier as well as subsequent assessment years. Hence, there is a mere change of opinion on the part of the Assessment year.
Merits
The CIT (Appeals) is wrong in holding that the transaction with respect to shares held by the Appellant, will have to be treated as business income and hence Appellant is not entitled exemption under for section 10(38) of the Income Tax Act 1961. Further, the Assessee has shown the purchase of shares as investment in his balance sheet, which reflects the intention of the Assessee.
The CIT (Appeals) ought to have seen that a share purchased on a particular day which came to be sold on the very same day is shown as short term capital gains by the Assessee himself and in respect of the shares held beyond 12 months was shown as long term capital gains.
The CIT (Appeals) ignored the scope and purport of the CBDT circular bearing no.6 of 2016 dated 29th February 2016, wherein the Assessee’ desire to treat the transactions as capital gains would not be open to question by the Assessing Officer.
The CIT (Appeals) ought to have appreciated that the Assessee has treated the income derived from the transfer of share as capital gain which the revenue had so accepted and hence there is consistency on the part of the Assessee in line with the spirit of the circular.
The CIT (Appeals) ought to have appreciated that most of the shares sold during the accounting year were held for more than 2 years.
The CIT (Appeals) is wrong in placing strong reliance on greater volume of purchase/holding of shares and higher frequency in trading when the fact remains that are several other principles including the ascertainment of intention of the Assessee which in the current case is to derive dividend income which signifies intent to make ‘investment’.
Disallowance under Section 14A
The CIT (Appeals) erred in disallowing interest of Rs.31,42,235/-invoking section 14 of the Act. 10. The CIT (Appeals) ought to have appreciated that the interest payment of Rs.16,24,380/- pertained to income from derivatives.
11.The CIT (Appeals) ought to have seen that only the surplus funds of the Appellant have been used for the purpose of the investment.
It was submitted by the Ld.AR that Ground Nos.1 & 2 were against
the re-opening of the assessment, Ground Nos.3 to 8 were against the
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action of the Ld.CIT(A) in confirming the action of the AO in treating the
transaction of the purchase and sale of shares by the assessee as business
income as against long term capital gains as disclosed by the assessee.
Ground Nos.9 to 11 were against the disallowance u/s.14A.
At the time of the hearing, the Ld.Counsel on behalf of the assessee
submitted that he does not wish to press the grounds in respect of the
disallowance u/s.14A. Consequently, Ground Nos.9 to 11 of the
assessee’s concise grounds stands dismissed as not pressed.
In regard to Ground Nos.1 & 2 in respect of the re-opening. It was
submitted by the Ld.AR that the original assessment came to be
completed u/s.143(3) on 30.11.2010. It was a submission that the re-
opening was done by issuance of notice u/s.148 on 08.08.2014 which is
beyond 4 years period and consequently, the provisions of Sec.147 would
apply. It was a submission that the re-opening was bad in law on account
of three reasons. The first was that there was no failure by the assessee
to disclose fully and truly all material facts. The second was that the re-
opening was purely based on change of opinion and thirdly the re-opening
was done on the dictate of the audit party & the Ld.CIT and there was no
independent application of mind by AO. The Ld.AR drew our attention to
Page No.6 of the Paper Book, which is a copy of the return to submit that
the assessee was doing a business of Futures and Options. It was a
submission that during the year the assessee had liquidated substantial
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portions of investments which were held for period of varying more than
one year to nearly five years. The Ld.AR also drew our attention to Page
No.15 of the Paper Book which was a copy of the Form No.3CD report,
wherein the Auditors have reported the nature of the business of the
assessee as Derivative, Future & Options in shares. It was a submission
that at Page No.21 in respect of clause No.28(a) of the Form No.3CD
report, Auditors have also mentioned that the assessee is carrying on the
business of Derivative, Future & Options in shares. The consolidated
balance sheet of the assessee was shown at Page No.26 of the Paper Book
to show the investments as separately disclosed and the current assets in
respect of Derivative business. He further drew our attention to Page
No.62 of the Paper Book which is a copy of the 143(2) notice dated
16.09.2009 and the replies at Page No.63, 66 & 68 wherein the details of
the investment and the details of the assessee’s business of dealing in
Derivative, Future & Options in shares was also clearly explained. It was a
submission that further verifying the said details, the assessment had
been completed u/s.143(3) on 30.11.2010. The Ld.AR further drew our
attention to Page No.75 of the Paper Book which was the copy of the
approval obtained from the Commissioner of Income Tax, Chennai-I, in
respect of reasons recorded for re-opening. At Page No.77 was the
approval granted by the Ld.CIT(A) in respect of the re-opening, Page
No.78 was the notices u/s.148. The Ld.AR further drew our attention to
Page No.79 of the Paper Book which was an hand written audit objection
and Page No.73 which was a copy of the letter addressed by the AO to the
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Commissioner of Income Tax, Chennai dated 20.12.2013 seeking
directions to initiate remedial actions. Page No.74 was a letter of the
Ld.CIT(A), Chennai-I to the AO granting approval for issuance of notice
u/s.148. It was a submission that the reasons recorded for the purpose of
re-opening were in fact the verbatim copy of the audit objections. It was
a submission that consequent to the re-opening, the re-assessment came
to be completed on 29.03.2016. The Ld.AR further drew our attention to
Page No.92 of the Paper Book which was a reply given by the AO to the
Dy. Accountant General(ITRA) in respect of the Revenue audit objection
wherein the AO has intimated that the assessment was re-opened and the
re-assessment completed raising the demand and the copy of the re-
assessment order was enclosed. It was a submission that a perusal of the
reasons recorded does not state the failure on the part of the assessee to
disclose fully and truly all material facts. It was a submission that thus,
the re-opening was done only on the dictate of the audit party and the
Ld.CIT and in view of the decision of the Hon’ble Supreme Court in the
case of Indian and Eastern Newspaper Society v. CIT: 119 ITR 997 (SC)
and also CIT v. Lucas T.V.S. Ltd. 249 ITR 306 (SC) re-assessment was
based on the opinion of audit party was not permissible and was liable to
be quashed.
At this point, it was informed to the Ld.AR that as the re-opening
had two issues. One in regard to the treatment of the long term capital
gains disclosed by the assessee as business income and the second one
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being the disallowance u/s.14A, and as the assessee having withdrawn his
ground in regard to the disallowance u/s.14A, though, the assessee did
have a very good case in regard to the re-opening, the same cannot be
quashed on account of the withdrawal of the ground in regard to the
disallowance u/s.14A.
In reply, the Ld.DR vehemently supported the order of the AO and
CIT(A) in respect of re-opening.
We have considered the rival submissions. A perusal of the reasons
recorded at Page No.84 of the Paper Book shows that the re-opening is on
two grounds. The first one is in regard to the withdrawal of the
exemptions granted u/s.10(38) of the Act and the second one is in regard
to the disallowance u/s.14A r/w Rule 8D. Admittedly, the re-opening has
been done beyond the period of four years from the end of the relevant
assessment year and consequently, the reasons recorded must disclose
the failure on the part of the assessee to disclose fully and truly all
material facts required for assessment. In the present case, the reasons
recorded do not specify the failure on the part of the assessee to disclose
truly and fully all the material facts in respect of the assessment. Further,
a perusal of the reasons recorded clearly shows that the same is a
verbatim extract of the audit objection. On both these grounds, the re-
opening is bad in law. However, as the assessee has withdrawn the
ground in respect of the challenge to the disallowance u/s.14A, we are
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unable to quash the re-opening, as if the re-opening assessment is validly
initiated in respect of one of the issues, then the AO would be entitled to
examine other issues also in the course of the re-opened assessment. In
these circumstances, as the assessee has withdrawn the ground in respect
of the challenge to the disallowance made u/s.14A, we are of the view
that the re-opening is valid. In these circumstances, Ground Nos.1 & 2 of
the assesse’s concise grounds stands dismissed.
In respect of the merits, in regard to the withdrawal of the
exemption u/s.10(38) of the Act, in respect of the long term capital gains
disclosed by the assessee raised in Ground Nos.3 to 8 of the concise
grounds, it was a submission that the assessee was not in the business of
purchase and sales of shares. The Ld.AR drew our attention to Page
No.26 of the Paper Book, which is a copy of the consolidated balance
sheet of the assessee to show that the investments in the shares are
separately shown and the Derivatives business is separately shown under
the head Current Assets, Loans and Advances. He, further, drew our
attention to Page No.131 of the Paper Book which was the chart showing
the long term capital gains disclosed by the assessee in respect of the sale
of the investment in equity shares right from the AY 2001-02 to 2016-17.
It was a submission that the business of the assessee in respect of the
Derivatives, Future & Options was separately shown and the short term
and long term capital gains/loss on the sale of investments in equity
shares was always separately shown and accepted by the Revenue. The
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Ld.AR also drew our attention to Page Nos.132 & 133 which was a copy of
the Assessment Order u/s.143(3) r/w 147 wherein returned income has
been accepted for the AY 2005-06. He further drew our attention to Page
No.137 of the Paper Book which was a copy of the Assessment Order
u/s.143(3) for the AY 2006-07 wherein his returned income has been
accepted, wherein the business income from Futures and Options are
separately shown and his long term capital gains claimed as exempt
u/s.10(38) has been accepted. Same also at Page No.149 for the AY
2010-11 and Page No.163 for the AY 2012-13. The Ld.AR further drew
our attention to Page No.95 of the Paper Book which was a copy of the
break-up of the investment in the shares which has lead to long term
capital gains claimed exempt u/s.10(38) to submit that out of the shares
sold 77.12% of the shares was held for more than five years, 11.57% was
held for a period of 3 to 5 years, 6.75% for a period of 2 to 3 years and
4.5% for a period of 1 to 2 years. It was a further submission that one
single holding of M/s.Parry Agro Industries Ltd. which constituted nearly
63.38% of the entire capital given offer by the assessee during the
relevant previous year was held as investment for substantial more than
five years. The breakup of the shares holding as investment was shown at
Page No.97 of the Paper Book. It was a submission that the shares
having been held as investment continuously and the same have also
been accepted by the Revenue for the earlier years it was not open to the
Revenue to turn around and treat the long term capital gains disclosed by
the assessee as the business income of the assessee. It was a submission
ITA No.3142/Mds/2016 :- 9 -:
that the assessee may be granted benefit of deduction u/s.10(38) as
claimed.
In reply, the Ld.DR vehemently supported the orders of the AO &
the CIT(A). It was a submission that the Ld.CIT(A) has also examined the
claim u/s.10(38). It was a submission that the volume of transaction
itself clearly showed that the transaction which has been claimed as given
rise to long term capital gains was in effect the business of the assessee.
It was a submission that the order of the AO & the CIT(A) was liable to be
upheld.
In reply, the Ld.AR submitted that the Circular issued by the CBDT
in No.6 of 2016 in F.No.225/12/2016-ITA-II dated 29.02.2016 in regard to
the issue of taxability of the surplus on the sale of shares and securities
applied to the assessee’s case and the assessee was entitled to the benefit
of deduction u/s.10(38) of the Act. He drew our attention to Page No.194
of the Paper Book, it is a copy of the said circular.
We have considered the rival submissions. Admittedly, the long
term capital gains disclosed by the assessee for the relevant assessment
year amount to Rs.46,14,11,403/-, a substantial portion relates to
M/s.Parry Agro Industries Ltd. Nearly 63.38% of the capital gains. A
perusal of the breakup of the holding of the shares of M/s.Parry Agro
Industries Ltd. shows nearly 77.12% of the said shares were held for
ITA No.3142/Mds/2016 :- 10 -:
more than 5 years and minimum holding of the shares of M/s.Parry Agro
Industries Ltd. is 2 to 3 years. The next largest transaction is in respect
of the Steel Authority of India, which has been substantially held for a
period of 2 to 3 years and the third is in respect of the Indian Hotels which
has been held for a period of 2 to 3 years. A perusal of the Page No.137
of the Paper Book, which shows that the Assessment Order u/s.143(3) for
the AY 2006-07 and the connected return copy shows that the
investments claimed by the assessee had not been tinkered with by the
AO. If the transaction claimed as long term capital gains by the assessee
for the current year is to be tinkered with, then, in the first place the said
investment would have to be treated as stock in trade in the earlier years
or during the current year. The fact that the shares were held for more
than 1 to 2 years would automatically require the shares to be held stock
in trade in the earlier years. If that is so, the market value of the shares
would to be determined at the end of the each year and the profits/loss
would have been determined and assessed. This has not been done in the
assessee’s case. A perusal of the Assessment Orders for the earlier years
clearly shows that the Revenue has recognized that the assessee is in the
business of Derivative, Future & Options in shares and the assessee is
having investments in shares which has given rise to long term capital
gains and short term capital gains which are being assessed as offered. It
is only during this year that the Revenue has shifted its stand and has
attempted to tax the long term capital gains disclosed by the assessee and
claimed as exempt u/s.10(38) as a business income of the assessee. A
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perusal of the Circular issued by the CBDT in Circular No.6/2016 in
F.No.225/12/2016-ITA-II which is extracted below:-
Circular No.6/2016 Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes
North Block, New Delhi, the 29th of February, 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 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-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.
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 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
ITA No.3142/Mds/2016 :- 12 -:
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. Sd/- (Rohit Garg) Deputy Secretary Government of India F.No.225/12/2016-ITA-lI Copy to: 1) Chairman. CBD1 and all Members, CI3L) I 2) OSD to Revenue Secretary 3) All Pr. CCsIT/Pr. DsGIT 4) All JS/CsIT, CBDT 5) ADG(PR,PP & OL) with request for placing on official handle of the department 6) Addl. CIT, Data base Cell for uploading on Departmental Website 7) Web manager for uploading on incometaxindia.gov.in & placing in public domain 8) ITCC, Central Board of Direct Taxes (3 copies) 9) Guard file Sd/- (Rohit Garg) Deputy Secretary Government of India
It is clearly shows 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 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;“
This applies to the Revenue also. In the present case, the assessee
has been consistently holding his claim of long term capital gains in
respect of his investments in shares. This being so, we are of the view
that the AO is not justified in denying the assessee’s claim of deduction
ITA No.3142/Mds/2016 :- 13 -:
u/s.10(38). In these circumstances, the AO is directed to grant the assessee, the claim u/s.10(38) in respect of the long term capital gains disclosed by the assessee.
In the result, Ground Nos.3 to 8 of the assessee’s concise grounds partly allowed.
In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the Open Court on August 08, 2017, at Chennai. Sd/- Sd/- (ए. मोहन अलंकामणी) (जॉज� माथन) (A. MOHAN ALANKAMONY) (GEORGE MATHAN) �या�यक सद!य/JUDICIAL MEMBER लेखा सद!य/ACCOUNTANT MEMBER
चे�नई/Chennai, 1दनांक/Dated: August 08, 2017. TLN
आदेश क) '�त2ल3प अ4े3षत/Copy to: 1. अपीलाथ&/Appellant 4. आयकर आयु5त/CIT 2. '(यथ&/Respondent 5. 3वभागीय '�त�न�ध/DR 3. आयकर आयु5त (अपील)/CIT(A) 6. गाड� फाईल/GF