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Income Tax Appellate Tribunal, DELHI BENCH “C” NEW DELHI
Before: SHRI S.V. MEHROTRA : & SMT. BEENA A. PILLAI:
These are revenue’s appeals against separate orders of the ld. CIT(A)-XV, New Delhi relating to AY 2005-06 to 2007-08. All these appeals were heard together and are being disposed of by this composite order for the sake of convenience. AY 2005-06 (ITA no. 1563/Del/2010): 2. Grounds of appeal raised by the revenue for AY 2005-06 read as under:
2 ITA 1563/D/2010; 1279 & 1747/Del/2011 1. On the facts and circumstances of the case and in law, the order of the CIT(A) is wrong, perverse, illegal and against the provisions of law which is liable to be set aside.
2. On the facts and circumstances, whether Ld. CIT(A) was justified on facts of the case and in law in deleting the disallowance of Rs.98,49,931/- made by the AO, who treated the profit derived from share trading as business income whereby the assessee has treated the same as the long term capital gain exempt u/s 10(38).
3. The appellant craves to leave, to add, alter or amend any ground of appeal
raised above at the time of the hearing.
3. Brief facts of the case, as obtaining from the assessment order, are that in the relevant assessment year, the assessee company was engaged in the business of purchase and sale of shares, debentures, stock bonds and securities. The assessee filed its return of income declaring total income of Rs. 17,38,820/-. The AO noticed that assessee had claimed exemption u/s 10(38) in respect of long term capital gain amounting to Rs. 97,96,248/- and short term capital gain was declared at Rs. 1,007/-. Further, long term capital gain [as per proviso to section 112(1)] amounting to Rs. 52,676/- was also declared. The AO observed that assessee was doing share trading, which was both delivery based and non-delivery based. The AO has observed that since the business of the assessee was trading in shares, therefore, he required the assessee to explain why capital gain declared on shares/ securities should not be treated as business income as the business of the assessee was trading in shares. The assessee vide its reply dated b14.9.2007 submitted that its business was to make investment as well as to hold these investments. It was further submitted that investment had been made by the assessee on long term basis and classified as ‘investment’ in its accounts. The investments 3 ITA 1563/D/2010; 1279 & 1747/Del/2011 were made from own funds and, therefore, the sale of investment should be treated as long term capital gain.
4. The AO did not accept the assessee’s contention, inter alia, observing that assessee had itself declared short term capital gains from share trading, which shows that shares had been purchased for short term also. He further referred to the audit report filed by the assessee u/s 44AB, wherein also the business of the assessee was stated to be ‘purchase, acquire, hold and dispose off or otherwise investment in shares, debentures, stocks, bonds, obligations and securities’. The AO further pointed out that perusal of the P&L a/c shows that the assessee had primarily derived its income from speculative trading of shares and delivery based trading of shares. He noted that the long term capital gain was shown in respect of sale of scrip in Rasandik Engineering Industries India Ltd. amounting to Rs. 98,41,195/-. AO further observed that it is scrip in which the assessee had also done non- delivery based speculative trading and declared speculation profits on the same. He, therefore, concluded that since the assessee itself had declared business income from the trading in the shares of Rasandik Engineering Industries India Ltd., the claim of the assessee that it derived long term capital gain from the same scrip could not be accepted. He, accordingly, treated the entire capital gains as business income of the assessee.
5. Ld. CIT(A), keeping in view the facts of the case, read with CBDT Circular no. 4/2007 dated 15.6.2007 and also in view of the decision of Hon’ble Bombay High Court in the case of CIT Vs. Gopal Purohit of 2009 dated 6.1.2010 and ITAT Mumbai Decision in the case of J.M. Share & Stock Brokers Ltd. Vs. JCIT in ITA nos. 2801/Del/2000 & ors., vide order dated 30.11.2007), held that profit on sale of such shares had to be assessed as capital gain.
4 ITA 1563/D/2010; 1279 & 1747/Del/2011
6. Ld. DR relied on the order of AO and submitted that since the assessee company was in the business of share trading, therefore, AO had rightly treated the profit from sale of shares as business income.
Ld. counsel for the assessee submitted that assessee was not trading in shares. The consistent practice of assessee was to hold shares as investment. In this regard ld. counsel referred to the balance-sheet of assessee wherein in Schedule 4, relating to investment, contained at page 48 of the PB, 838882 equity shares of Rasandik Engineering Industries India Ltd. were held as investment as on 31.3.2004 a well as on 31.3.2005. Ld. counsel further referred to the written submissions filed before ld. CIT(A), contained at page 23 of the PB, wherein details of share holding as on 31.3.2004 and 31.3.2005 was as under: Name 2003-04 2004-05 No. of Amount No. of Amount Shares shares Rasandik Engineering 814396 7618277.00 838882 16232324.00 Industries India Ltd. Jay Bharat Maruti Ltd. 100 2010.00 100 2010 Automotive Stampings 60 370.00 60 252 and Assemblies Ltd. Tata Motors Ltd. 1500 746015.00 1500 746015 Tata Steel Ltd. 300 117585.00 450 117585 JBM Auto Components 40 148 Ltd. Total 616356 8484257.00 841032 17098334.00
8. Further, it was pointed out that the investment in shares had been made out of own funds and not from any borrowings. The details of income, investment, loan given and taken over the year was also given, which is reproduced hereunder:
5 ITA 1563/D/2010; 1279 & 1747/Del/2011 Year Income Profit Investment Loan Loan taken Before tax Given 2001-02 3828538.00 1564718.00 00.00 3225000.00 350000.00 2002-03 4149062.00 3961157.00 7529757.00 00.00 750000.00 2003-04 5297581.00 5143350.00 8484287.00 150000.00 750000.00 2004-05 12852886.00 12430877.00 17098334.00 00.00 00.00
Ld. counsel further relied on the CBDT Circular no. 6 dated 29.2.2016, wherein it has been, inter alia, observed as under: “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; …….. . 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”' 10. Ld. counsel further relied on the decision of ITAT Delhi Bench ‘C’ in assessee’s own case for AY 2008-08 rendered in vide order dated 9.5.2014, wherein it has been held that principle of consistency requires that the view taken in one year should be followed in subsequent year unless the facts or the legal position justifies departure therefrom. The observations of Tribunal are reproduced hereunder:
6 ITA 1563/D/2010; 1279 & 1747/Del/2011 “4. We have heard the ld. Departmental Representative and perused the relevant material on record. There is no appearance from the side of the assessee despite notice. As such, we are proceeding to dispose of this appeal ex-parte qua the assessee. The entire dispute centres around the characterization of profit of Rs. 24.79 lac earned by the assessee from sale of shares held for a period of more than one year. In this connection, it is relevant to note that for the immediately preceding three assessment years, namely, 2005- 06, 2006-07 and 2007-08, the AO adopted similar approach as in the year under consideration but the CIT(A) overturned the assessment order on such point by holding similar income to be capital gain instead of business income assessed by the assessee.
5. Principle of consistency requires that the view taken in one year should be followed in subsequent years, unless the facts or the legal position justifies departure therefrom. The Hon'ble Bombay High Court in CIT Vs. Darius Pandole [(2011) 330 ITR 485 (Born.)} has held that income from sale of shares treated as business income in earlier years by way of assessment u/s 143(3) cannot be taken as capital gain in subsequent year. The essence of the judgment is that the principle of consistency should be followed and the parties should not be allowed to register departure from the existing position time and again. In the like manner, the Hon'ble Bombay High Court in CIT VS. Gopal Purohit (2011) 336 ITR 287 (Born) has held income from shares as Business income on the basis of the rule of consistency. Since, the view taken by the Assessing Officer on similar issue has been reversed by the ld. CIT(A) and no material has been brought on record by the Id. DR to demonstrate that the Tribunal tinkered with such view canvassed by the ld. first appellate authority for the earlier years, respectfully following the above precedents of the Hon'ble Bombay High Court, we uphold the impugned order on this score.”
7 ITA 1563/D/2010; 1279 & 1747/Del/2011 11. He, therefore, submitted that profit on sale of shares returned by assessee should be assessed as long term/ short term capital gain as returned.
We have considered the rival submissions and have perused the record of the case. As far as ld. counsel’s contention that assessee company was not trading in shares, we are unable to accept the same contention in view of the main object of the company of assessee for which it was formed. The first main object of assessee as per memorandum of association contained at page 74 was as under:
To carry on investment business and to purchase, acquire, hold and dispose of or otherwise invest in shares, debentures, stocks, bonds, obligations and securities, issued or guaranteed by any company constituted or carrying on business in India or elsewhere and debenture, stocks, bonds, obligations, and securities issued or guaranteed by any government, state dominion sovereign ruler, commissioner, public body or authority, supreme municipal, local or otherwise whether in India or elsewhere and to deal in and/ or invest in real estate or properties, either out of its own funds or out of funds that the company might borrow and to vary or otherwise dispose of exchange, transfer or alienate any of the investments, real estates and properties of the company.
A bare perusal of this object clearly shows that main object of the assessee was trading in shares including investment in shares etc. also. However, in order to find out whether the income arising from sale of shares is to be assessed as capital gain or business income, we have to find out the true intention of assessee keeping in view the facts and circumstances of each case.
In the present case the CIT(A) has analyzed the factual aspects as under:
8 ITA 1563/D/2010; 1279 & 1747/Del/2011 “1. The assessee Company is a Promotor group company of Rasandik Engineering Industries India Ltd. and therefore it holds shares on long-term basis.
Rasandik Engineering Industries India Ltd. is in Auto ancillary and therefore the assessee company has made investment on long- term basis in similar auto sector companies such as Jay Bharat Maruti Ltd. (100 shares) Automotive Stampings & Assemblies Ltd. (60 shares) and Tata Motors Ltd. (1500 shares). Besides these it has made investment in Tata Steel Ltd. (450 shares). The details are contained in Schedule 4 to the accounts.
The investment have been made from own fund over a period of time and are classified as long term investment in the books and accounts of the assessee company.
The investment is held in dematerialized form. The sales from the demat accounts are recognized on First in First out (FIFO) basis.
The copies of demat accounts are enclosed to show the long-term holding of the shares.
The opening balance of holding in Rasandik Engineering Industries India Ltd. shares was 814396 equity shares on 01- 04- 2004. The same were dematerialized as under:- Opening as on 01.04.04 in demat account 39,696 20.09.04 - dematerialized 1,600 23.09.04 - dematerialized 2,50,000 24.09.04- dematerialized 5,23,100 8.14.396
During the year 2004-05 the company had purchased 1,84,523 shares on long-term basis which were credited to demat account.
9 ITA 1563/D/2010; 1279 & 1747/Del/2011 7. The company sold 1,61,137 shares from the opening balance through stock exchange and has claimed exemption u/s 10(38).
The company was allotted 3200 shares on forfeiture.
9. It also sold 2000 shares on off market basis under Proviso to section 112(1).
Other sales were 325 shares.
The closing holding therefore worked out as under:- Opening balance 8,14,396 Purchases 1,84,523 Allotment 3,200 Sales & transfer (1,63,462) Closing balance 8,38,657 Thus, the investment in shares has been made for long term basis.”
The aforementioned facts have remained uncontroverted by the department. Once the assessee was consistently showing the shares as its investment, the same cannot be converted into stock-in-trade, unless the intention is proved otherwise.
Ld. CIT(A) has pointed out that from the record it is evident that assessee company had distinct port-folio of shares and mutual funds under two categories i.e. investments and stock-in-trade. He has observed that during the last few years too the assessee company had followed the same practice of holding certain shares under the head “Investment” and some shares as “Stock in trade”. Therefore, as the assessee was holding the shares as investment consistently and the same were acquired out of own funds, there was no reason to treat the same as business income. We, accordingly
10 ITA 1563/D/2010; 1279 & 1747/Del/2011 confirm the order of ld. CIT(A) on this issue in view of various decisions relied by ld. CIT(A) as noticed earlier.
In the result, department appeal for AY 2005-06 is dismissed. AY 2006-07 (
Grounds of appeal
raised in AY 2006-07 are as under:
1. On the facts and circumstances of the case and in law, the order of the CIT(A) is erroneous, perverse, illegal and against the provisions of law which is liable to be set aside.
2. On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in deleting Addition of RS.1,01,510/- on account of expenses u/s 14A made by AO.
3. On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in deleting addition of Rs.3,61,49,379/- as business income instead of L TCG & STCG.
4. The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of the hearing.
19. Ground nos. 1 & 4 are general and require no adjudication.
20. Apropos ground no.3, brief facts are that assessee had filed return declaring loss of Rs. 20,06,475/-. The AO noticed that the assessee had declared long term capital gain (claiming exemption u/s 10(38) amounting to Rs. 3,23,56,173/- and short term capital gain amounting to Rs. 37,93,206/-. The AO has further noticed as under:
“The perusal of the details filed by the assessee In respect of its claim of long term capital gains shows that the gain of Rs. 9841195/- has basically been derived from the sale of the scrip - Rasandik Engineering Industries India Ltd. It is the same scrip in which the assessee has also done non-delivery based 11 ITA 1563/D/2010; 1279 & 1747/Del/2011 speculative trading and declared speculation profits on the same. Therefore, when the assessee has itself declared business income from the trading in the shares of Rasandik Engineering Industries India Ltd., the claim of the assessee that it has derived long term capital gains from the same scrip cannot be accepted. Thus, the entire gains derived by the assessee from the purchase and sale of shares is held to be business income of the assessee”.
Thus, the facts in the present assessment year as regards ground no. 3 are similar to the facts as obtaining in AY 2005-06. Therefore, for the reasons Therefore, for the very same reasons as in AY 2005-06, s above, we uphold the action of ld. CIT(A) on the issue in question. Ground is dismissed.
Apropos ground no. 2, facts in brief are that the AO noticed that assessee had declared dividend income of Rs. 10,48,381/-. He show caused the assessee regarding applicability of section 14A. After considering the assessee’s reply, applying the provisions of Rule 8D(2)(iii), he determined the disallowance u/s 14A at Rs. 1,01,510/-.
Ld. CIT(A), keeping in view the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT 2010-TIOL- 564-HC-Mum-IT, held that though Rule 8D was not applicable but since administrative and personal expenses must have been incurred to earn exempt income, determined the disallowance at Rs. 63,352/-.
Having heard both the parties, we do not find any reason to interfere with the order of ld. CIT(A) on this count, as he has made a reasonable disallowance of 5% of the expenditure incurred under the head administrative and personal expenses. Ground is dismissed.
12 ITA 1563/D/2010; 1279 & 1747/Del/2011 26. In the result revenue’s appeal for AY 206-07 is dismissed. Assessment year 2007-08 (ITA no. 1747/Del/2011): 27. Grounds of appeal raised in AY 2007-08 are as under: “1. On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in deleting the addition of 15,97,563/- out of Rs. 16,35,393/-on account of expenses u/s 14A made by AO.
2. On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in deleting addition of RS.52,64,895/- as business income instead of LTCG & STCG.
3. On the facts and circumstances of the case and in law, the Ld. CIT" (A) has erred in deleting addition u/s 2(22)(e) of RS.15,34,349/- on account of loan received.
4. The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of the hearing”.
28. Ground no. 4 is general and requires no adjudication.
29. Apropos ground no.2, brief facts are that assessee had filed return declaring income of Rs. 38,86,420/-. The AO noticed that the assessee had declared long term capital gain (claiming exemption u/s 10(38) amounting to Rs. 62,04,497/- and short term capital gain amounting to Rs. 9,39,602/-. The AO has further noticed as under:
‘The perusal of the details filed by the assessee in respect of its claim of long term capital gains shows that the gain of Rs. 9841195/- has basically been derived from the sale of the scrip - Rasandik Engineering Industries India Ltd. It is the same scrip in which the assessee has also done non-delivery based speculative trading and declared speculation profits on the same. Therefore, when the assessee has itself declared business income from the trading in the shares of Rasandik Engineering
13 ITA 1563/D/2010; 1279 & 1747/Del/2011 Industries India Ltd., the claim of the assessee that it has derived long term capital gains from the same scrip cannot be accepted. Thus, the entire gains derived by the assessee from the purchase and sale of shares is held to be business income of the assessee.”
He, accordingly, treated the profit on sale of shares as business income. Ld. CIT(A) following the order for AY 2005-06, allowed the assessee’s claim. Thus, the facts in the present assessment year, as regards ground no. 2, are similar to the facts as obtaining in AY 2005-06. Therefore, for the very same reasons as in AY 2005-06, above, we uphold the action of ld. CIT(A) on the issue in question. Ground is dismissed.
Apropos ground no. 1, facts in brief are that the AO noticed that assessee had declared dividend income of Rs. 8,87,929/-. He show caused the assessee regarding applicability of section 14A. After considering the assessee’s reply, applying the provisions of Rule 8D(2)(iii), he determined the disallowance u/s 14A at Rs. 16,35,393/-.
Ld. CIT(A), keeping in view the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT 2010-TIOL- 564-HC-Mum-IT, held that though Rule 8D was not applicable but since administrative and personal expenses must have been incurred to earn exempt income, determined the disallowance at Rs. 37,830/-.
Having heard both the parties, we do not find any reason to interfere with the order of ld. CIT(A) on this count, as he has made a 14 ITA 1563/D/2010; 1279 & 1747/Del/2011 reasonable disallowance of 5% of the expenditure incurred under the head administrative and personal expenses. Ground is dismissed.
Apropos ground no. 3, brief facts are that from the balance-sheet of the assessee company, the AO noticed that assessee had received loan from one of its group company i.e. Radhika Securities Pvt. Ltd. He required the assessee to file copy of account, shareholding pattern of Rasandik Engineering Industries India Ltd.. He also show caused the assessee as to why addition u/s 2(22)(e) be not made. After considering the assessee’s reply, the AO observed as under:
The share holding pattern of the Radhika securities Pvt. Ltd. is as under Mrs.Anjula Khanna-25% Mrs.Radhika kapoor-75%. The shareholding pattern of assessee company is as under- Mrs.Anjula Khanna-25% Mrs.Radhika kapoor-75%. Applying above parameters of section 2(22)(e) it is seen that assessee company has received loan from the company in which it seen that both of the shareholders are common in assessee company and company from which assessee company has received loan and both shareholder has substantial interest in both companies. So the applicability of the deeming provision is established.
He, therefore, made addition of Rs. 15,34,349/- as per the calculation given in para 5 of his order.
15 ITA 1563/D/2010; 1279 & 1747/Del/2011 36. Ld. CIT(A) deleted the addition, inter alia, keeping in view the decision of Special Bench of the ITAT Mumbai in the case of Bhaumik Color Pvt. Ltd. Vs. ACIT (2008) TIOL 641, wherein it was held as under:
On the first question : Deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder. On the second question: The expression shareholder referred to in Sec.2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial shareholder than the provisions of Sec.2(22)(e) will not apply. Similarly if a person is a beneficial shareholder but not a registered shareholder then also the provisions of Sec.2(22)(e) will not apply.
Ld. CIT(A), thus, concluded as under:-
“Perusal of the provisions of section 2(22)(e) and the judicial decisions cited above show that deemed dividend will be taxed in the hands of the share holder. In the instant case since the appellant was not a share holder of the company, therefore, the assessment of the deemed dividend in the hands of the appellant was not correct. In view of the findings above and judicial precedents on the subject, this ground of appeal is allowed in favour of the appellant.
Ld. counsel pointed out that now this issue is also concluded by the decision of Hon’ble Delhi High Court in the case of CIT Vs. Ankitech P. Ltd. (2012) 340 ITR 14 (Delhi), holding that loan received by assessee company from another company – persons having substantial interest in assessee company and company which gave loan – assessee company not shareholder of company which gave loan, loan not assessable as deemed
16 ITA 1563/D/2010; 1279 & 1747/Del/2011 dividend u/s 2(22)(e) of the Income-tax Act, 1961. Hon’ble Delhi High Court has, inter alia, observed as under:
“Further, it is an admitted case that under the normal circumstances, such a loan or advance given to the shareholders or to a concern, would not qualify as dividend. It has been made so by a legal fiction created under section 2(22)(e) of the Act. We have to keep in mind that this legal provision relates to "dividend". Thus, by a deeming provision, it is the definition of dividend which is enlarged. Legal fiction does not extend to “shareholder". When we keep in mind this aspect, the conclusion would be obvious, viz., loan or advance given under the conditions specified under section 2(22)(e) of the Act would also be treated as dividend. The fiction has to stop here and is not to be extended further for broadening the concept of shareholders by way of legal fiction. It is a common case that any company is supposed to distribute the profits in the form of dividend to its shareholders/members and such dividend cannot be given to non- members. The second category specified under section 2(22)(e) of the Act, viz. a concern (like the assessee herein), which is given the loan or advance is admittedly not a shareholder/member of the payer company. Therefore, under no circumstance, it could be treated as shareholder/member receiving dividend. If the intention of the Legislature was to tax such loan or advance as deemed dividend at the hands of "deeming share-holder”, then the Legislature would have inserted a deeming provision in respect of shareholder as well, that has not happened. Most of the arguments of the learned counsel for the Revenue would stand answered, once we look into the matter from this perspective.”
Admittedly, the assessee was not a shareholder of Radhika Securities Pvt. Ltd. and, therefore, no deemed dividend could be added in the hands of 17 ITA 1563/D/2010; 1279 & 1747/Del/2011 the assessee company. Accordingly, we see no reason to interfere with the order of ld. CIT(A) on the issue in question. Grounds is dismissed.
In the result, all the three appeals preferred by the revenue stand dismissed.
Order pronouncement in open court on 30/06/2016.