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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
Before: SHRI D. KARUNAKARA RAO & SHRI PAWAN SINGHShri Dipak Kanayalal Shah, Shri Dipak Kanayalal Shah, Shri Rajan Vora / Mr. Hemen
सुनवाई की तायीख / Date of Hearing : 06.03.2017 घोषणा की तायीख /Date of Pronouncement : 12.04.2017 आदेश / O R D E R
PER D. KARUNAKARA RAO, AM:
The captioned appeal is filed by the Revenue and the Cross Objection is filed by the assessee against the order of the CIT (A) 39, Mumbai dated 31.3.2015 for the assessment year 2010-11. Since, the issues raised in these appeals are inter- connected, therefore, for the sake of convenience, they are clubbed heard combinedly and disposed of in this consolidated order. Appeal wise adjudication is given in the succeeding paras of this order. (Revenue’s appeal) 2. This appeal filed by the Revenue against the said order of the CIT (A)-39, Mumbai. The solitary ground raised
by the Revenue in its appeal reads as under:- “On the facts and in the circumstances of the case and in law, the Ld CIT (A) has erred in allowing business income of Rs. 4,19,33,272/- as Short Term Capital Gains of Rs. 1,53,54,744/- and Long Term Capital Gains of Rs. 2,65,78, 528/- and ignoring the decision of Gujarat High Court in the case of CIT vs. Motilal Hirabhai Spg & Wvg. Co. Ltd [1978] 113 ITR 173 (Guj) and Raja Bahadur Visheshwar Singh vs. CIT [1961] 41 ITR 685 (SC) wherein it is stated that when the assessee has huge quantum periodic, repetitive and voluminous with substantial regularity of transactions then it indicate systematic and organized activity with profit motive.”
3. Further, bringing our attention to assessee‟s CO, Ld Counsel for the assessee submitted that the same is filed in connection with the disallowance of Rs. 19,07,147/- u/s 14A read with Rule 8D of the Act. Basic facts in connection with the said issues are that the assessee is an individual carrying business activity as inter corporate finance broker, arranging of corporate deposits, bill discounting etc. Assessee is also an investor in shares, debentures and Central Government Bonds. Assessee is in this line of business for the last three decades. During the year under consideration, assessee furnished return of income declaring the total income of Rs. 1.90 Crs (rounded of). In the return, assessee offered business income on account of trading of shares, brokerage and bill discounting. Assessee also offered capital gains income consisting of STCG as well as LTCG. Assessee claimed exemption u/s 10(38) of the Act in respect of LTCG. In the assessment, assessed income was determined at Rs. 4.66 Crs (rounded of). Relating to the claim of capital gains of income, AO treated the entire capital gains as „business income‟ of the assessee. In the process, AO denied the claim of exemption u/s 10(38) of the Act in respect of hte said LTCG as well as concessional rate of tax available u/s 111A of the Act available in respect of STCG. AO also made another addition of Rs. 19,07,147/- invoking the provisions of section 14A read with Rule 8D(2)(iii) of the IT Rules, 1962. The above said issues are the subject matter of litigation before the CIT (A).
4. During the first appellate proceedings, CIT (A) granted relief and allowed the claim of the assessee so far as the capital gains related issues are concerned. However, CIT (A) confirmed the disallowance on account of the provisions of section 14A. Aggrieved with the said relief relating to the capital gains issues, the Revenue is in appeal before us. Further, aggrieved with the confirming of the addition of Rs. 19,07,147/- u/s 14A read with Rule 8D(2)(iii) of the Rules, assessee is in appeal before the Tribunal vide its CO (supra). Long Term Capital Gains 5. During the year under consideration, assessee earned STCG and LTCG amounting to Rs. 1,53,54,744/- and Rs. 2,65,78,528/- respectively. Assessee claimed benefit u/s 10(38) of the Act in respect of LTCG. So far as the STCG are concerned, assessee applied concessional rates specified u/s 111 of the Act. We should deal with each of this category of gains separately.
Regarding the LTCG, Ld Counsel for the assessee submitted that the LTCG is defined u/s 2(29)(b) r.w.s 2(29)(a) and 2(42)(a) and (b) of the Act. Further, Ld Counsel for the assessee mentioned that all the scrips which were under this category of gains undisputedly relate to the long term capital assets. Therefore, considering the binding nature of the CBDT Circulars No. 4 and 6, the claim of the assessee should be allowed. Therefore, the order of the CIT (A) is fair and reasonable on this issue and it does not call for any interference. In this regard, Ld AR furnished the written submissions. On the contrary, ld DR for the Revenue submitted that the assessee is professionally a businessman in dealing with the shares and the intention of dealing with these transactions of share purchase and sale constitutes „business activity‟ for a profit motto. Therefore, Ld DR heavily relied on the order of the AO.
On hearing both the parties on this issue, we are of the opinion, there is no dispute on the fact that the shares in question are undisputedly long term capital assets within the meaning of section 2(29)(b) r.w.s 2(29)(a) and 2(42)(a) (b) of the Act. The period of holding constitutes the determining factor conclusively so far as the said definitions relating to the short term and long term capital loss and the short term and long term capital gains. We have perused the said written submissions of the assessee and relevant paras are extracted as under:- “11. At outset, Assessee would like to place reliance on two Circulars of the CBDT; Circular No. 4/2007 dated 15 June 2007 (Refer Pg 86-87) and Circular No. 6/2016 dated 29 February 2016 (Refer Pg 88-89) which are issued for determining whether, in a given case the shares are held by the Assessee to be treated as an investment (therefore giving rise to capital gains) or as stock in trade (therefore giving rise to business profits).
CBDT vide circular No. 4/2007 dated 15 June 2007 has stated that it is possible for taxpayer to have two portfolios that is an 'investment portfolio' comprising of securities which are to be treated as capital assets and a 'trading portfolio' comprising of stock in trade which are to be treated as trading assets. Where an Assessee has two portfolios, the Assesse may have income under both heads that is capital gains as well as business income.
Further, the CBDT vide circular No. 6/2016 dated 29 February 2016, has stated that in respect of listed shares and securities held for a period of more than 12 months, immediately preceding the date of its transfer, and 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.
In Assessee's case, as evident from page 44 of the paperbook, long term capital gain has aroused from sale of shares held for more than 2, 3 & 4 years and hence, the gain on sale of shares held for more than 1 year has to be treated as long term capital gain.
15. Hence, it is respectfully submitted that relying on the above circular and various other decisions referred in legal paperbook, the order of the CIT(A) in respect of capital gain of Rs. 2,65,78,528/- arising on sale of Long term shares may kindly be upheld.”
Further, we have perused the contents of Circular 6/2016 dated 29.2.2016 and find the following paras are relevant and the same reads as under:-
3(b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of it transfer, if the assessee desires to treat the income arising from the transfer thereof 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.
Considering the above CBDT Circular as well as the precedents in the matter, we are of the opinion, the order of the CIT (A) on this issue of LTCG is fair and reasonable and it does not call for any interference. Accordingly, we affirm the view of the CIT (A).
SHORT TERM CAPITAL GAINS
During the year under consideration, assessee reported STCG amounting to Rs.1.54 Crs (rounded of). The details are given in para 16 of the written submissions and the same is extracted as under:-
From the above table, it is evident that the holding period of the assets vary from 7 days to 365 days. Out of the above said profits, 47% of the same relates to the scrips held by the assessee 90 to 180 days. 16% of the gains has the holding period varying from 180 to 270 days. Merely 20% is relatable to the shares held for a period above 275 days and below 365 days. Relying on the CBDT Circular No.4 (supra), Hon‟ble Supreme Court judgment in the case of CIT vs. Associated Industrial Development Co. Ltd [ITR 586] SC, Gujarat High Court judgment in the case of CIT vs. Rewashanker A Kothari [283 ITR 338], assessee claimed the above gains as STCG and not as business income. The profits earned from the intra trade transactions were separately shown and offered to tax as „business income‟. In the remand proceedings, AO rejected the above claim of the assessee. In the process, the Assessing Officer disregarded the sanctity of the book entries, the Board Circular Nos. 4 and 6 and other material available on the records.
12. During the proceedings before the first appellate authority, AO furnished various documents including the relevant contract notes. Relying on the said contract notes, the assessee demonstrated that the relevant transactions were categorised as business transactions or investment transactions, as the case may be, at the very time of issue of the contract note by the broker. Referring to the expressions TRD and DEL, appearing on the contract notes against each of the transactions, assessee demonstrated that „TRD‟ refers to „trading activity‟ ie non- delivery based and „DEL‟ refers to „delivery based transactions‟. Further, after examining the manner in which the Assessing Officer accepted the claim of the assessee in the past and disturbed the claim of the assessee for the first time in the year under consideration, CIT (A) granted relief to the assessee and approved the claims of the assessee in the return of income. Aggrieved with the above relief granted by the CIT (A), Revenue is in appeal before the Tribunal.
13. To start with, Ld Counsel for the assessee brought our attention to page 44A and 44a and 44 of the paper book and Ld AR demonstrated that the capital assets in question constitutes „short term capital assets‟. Further, bringing our attention to copies of the relevant contract notes, Ld AR brought our attention to the expressions DEL and TRD against the transactions appearing in the contract notes and mentioned that the assessee applies his mind at the time of purchase of shares where they should constitute investment or stock-in-trade. The books of accounts are accordingly maintained and there is no transfer of shares from one category to the other. Considering the principle of consistency in this matter, the Assessing Officer is not justified in treating the entire short term capital assets as business assets for taxing the same as business income. In this regard, Ld AR also brought our attention to the fact that the assessee disclosed sum of Rs. 3,85,274/- as business income attributable to the intraday transactions of the shares. Further, Ld Counsel for the assessee relied heavily on the contents of Circular No.6 of the CBDT and demonstrated that the AO is not justified in disturbing the above claim of the assessee without any sustainable reasons. Ld AR also mentioned that no mistake is found in the entries in the books of accounts regarding relevant shares. Ld AR also relied on the judgment of the Hon‟ble Supreme Court in the case of Gopal Purohit in support of AO‟s failure to follow the principle of consistency. Further, Ld AR mentioned that assessee has not used borrowed funds for the purchase of these shares. Using borrowed funds is a business feature and not an investment one. The fact of earning dividend income of more than Rs. 30 lakhs out of the said short term shares was demonstrated. It again is an investment feature. Ld AR also submitted that assessee earned dividend income of Rs. 1.2 Crs and the said Rs. 30 lakhs constitutes approximately more than 25%. Earning of dividend income supports the investment activity of the assessee. All these shares are delivery based. Ld AR also gave various other reasons to demonstrate the assessee‟s intention to hold the shares as investment. The details are given in para 38 to 47 of the written submissions. Replying to the arguments of the Revenue, Ld AR submitted the following:- (para 53 of the written submissions are relevant).
53.the Department has raised the following objections / arguments which has been dealt by CIT (A) in its order:- Assessee has undertaken 9680 saudas of purchase and sale of 578 companies: CIT (A) has dealt with the same (at page no. 37 – 38 of the CIT (A) order) and has stated that single transaction has been split into multiple transactions by computer and same should be considered as one transaction only. Not maintaining two portfolios ie assessee should have two different Demat account: CIT (A) has dealt with the same (at pae no.40 of the CIT (A) order) and has stated how the assessee is demarcating the share transactions which depends on various factors. Rule of consistency not applicable: CIT (A) has dealt with the same (at page no. 41-42 of the CIT (A) order) and has held that as there is no change in facts of the case, rule of consistency must be followed. Intention of the assessee to make profit out of price Fluctuation: Department has relied on the transactions reported by the AO in its assessment order in scrips of Binani, Revathi & Wipro. CIT (A) has dealt with the same (PageNo. 43 & 44 of the CIT (A) order) and held that assessee has himself offered the income wherein no delivery has been taken. No borrowed funds used does not mean that assessee is not a trader:- Department has argued that even if no borrowed funds are used assessee may still carry on business of purchase and sale of shares. The same has been dealt by CIT (A) ( page no.43-44 of the CIT (A) order) wherein the CIT (A) ha stated that assesse has earned income of Rs. 37.44 lacs out of consulting services activities which no trader will have such free time to earn such income and the assessee has sufficient capital of his own to make investments.
14. Eventually, it is the submission of the assessee that the decision of the CIT (A) should be sustained and the appeal of the Revenue should be dismissed on this part of the issue.
We have heard both the parties on this issue relating to the treating of the STCG as business income of the assessee. From the records, it is clear that the assessee earned three types of gains / profits from the transactions involving sale / purchase of shares. In the return of income, Rs. 2.66 Crs and Rs. 1.54 Crs (rounded of) were shown as Long Term and Short Term capital gains respectively. In addition, assessee also has share trading income amounting to Rs. 3,85,274/-. Ignoring the claim of the assessee, AO treated all these three groups of income as „business income‟ of the assessee. There is no incriminating evidence otherwise mentioned in the orders of the lower Authorities to support the above conclusions of the Assessing Officer. We have decided the issue against the Revenue so far as the LTCG are concerned restoring the claim of the assessee. Now, we have to decide if the STCG of Rs. 1.54 Crs (rounded of) constitutes business income as held by the AO. It is a settled issue that the issue has to be decided on case to case basis based on the facts of the each case. In the present case, there is no incriminating material gathered by the AO to conclude that the said short term capital assets constitutes stock-in-trade. It is an undisputed fact that the contract notes clearly demonstrate the original intention of the assessee so far as treating the asset as delivery based or for trading activities. The contract notes furnished before us (1-15) supports the above contention. Further, it is also relevant to mention that the assessee is consistently reflecting three schemes of profits / gains in dealing with / investing the shares viz., business income, STCG and LTCG. This is for the first time Assessing Officer disturbed the claim of the assessee for the AY 2010-2011. Of course, assessment for the AY 2007-2008 was reopened wherein the STCG of Rs. 1.2 Crs is treated as business income and the matter is still pending before the CIT (A) and the same is yet to reach the Tribunal. Otherwise, the claim of the assessee stood undisturbed for the AY 2008-09 to 2011-12 and 2014-15. We find that the AO treated the STCG and LTCG as business income for the AYs 2010-11, 2012-13 and 2013-14. It is finding of fact that no borrowed funds were utilised for purchasing the said short term capital assets. Further, we have also considered the written submissions and the following prayer of the assessee. (para 54 of the written submissions are relevant).
“54.In view of above factual and legal position, it is prayed that: No single formula or principle can be the determinative factor for deciding the nature of the transaction i.e. as 'trading transaction' or 'investment'. Thus, looking into the overall conduct and the intention of the Appellant, it clearly emerges out that the Appellant is an investor. The investment in shares were made with a clear intention to gain from appreciation and to earn income by way of dividend from shares. Treatment in books of accounts - The Appellant has made a clear demarcation of the share trading activity and normal share investment activity. The Appellant has shown shares and securities as "investments" in the Balance Sheet. Further, the profit on share trading activity of Rs 3,85,274/- has already been offered to tax as business income in ROI. A capital asset is always a capital asset and cannot be treated differently at the time of sale. No use of borrowed funds for purchase of shares - The shares were purchased out of the own funds and no borrowed funds were utilized for purchase. Volume and frequency of shares - a. Mere number of transactions, does not decide that whether a person is an investor or trader in shares. The conduct of the Appellant has to be looked into totality and no single aspect can determine whether the Appellant is an investor or a trader in shares. b. A single sale/purchase order, split into number of transactions by brokers, does not infer that Appellant has carried out that many transactions. Where bulk orders are placed for purchase or sale of a share of a particular company, the brokers/electronic trading system execute the transactions in a number of trenches. This cannot be taken that frequent sale and frequent purchase has taken place of the same share. Investment in Small cap and Mid cap companies, where the volume, liquidity of the shares are too low and the companies capital issue is also very low. Holding of shares under B, T and Z Group would mean that such type of shares once purchased on a particular day, selling of those shares on the same day is not permissible. This is particularly a trait of investor and not a trader. Holding of shares in physical form - suggest that these shares are not marketable. No trader would hold the shares of a company which is not marketable or saleable and that too for such a long period of time Holding of shares of more than 1 % to 5% of share capital of the Company and investment in illiquid or delisted shares, clearly indicates that investment in such companies is made with objective of long term investment Rule of consistency - The Appellant has in past several assessment years has offered to tax the income arising from sale of shares as capital gains in RCI and this position has been accepted by the tax authority without any dispute (except in AY 2007-08 where assessment is reopened to treat Assessee as Trader in shares in respect of sale of short term shares). Without prejudice to the above, had the motive of the Appellant been of making quick profits by trading in shares, then on computing the income of Appellant as business income, as per the provisions of section 28 to 44 of the Income Tax Act, Appellant would be incurring a loss of Rs 4,34,45,585/-. “ 16. Further, we have also examined the reasoning given by the CIT (A) in his order vide paras 6.21 to 6.29 which relate to STCG and find the same are relevant. Considering the significance, the finding of the CIT (A), given in para 6.29 of his order is extracted and the reads as under:-
“6.29. In view of the above discussion and considering the whole gamut of fact, the exhaustive submissions of the appellant, the various case laws cited by the AO as well as the appellant, I am of the view that the AO was not justified in treating the income shown by the appellant under the head capital gains both LTCG and STCT amounting to Rs. 4,19,33,271/- as business income. In my view, there is no reason and ground for the AO to deviate from the past stand of the Department of treating the appellant as an investor in share. Therefore, the AO is directed to treat the capital gains of the appellant both long term and short term amounting to Rs. 4,19,33,272/- as such treating the appellant as an investor in shares and not as business income. The findings of the AO in this regard are reversed. The grounds of appeal are allowed.”
17. After examining the said paras 6.21 to 6.29 of the CIT (A)‟s order, we find the CIT (A) has applied the judgment of the Hon‟ble Supreme Court in the case of CIT vs. Gopal Purohit [336 ITR 287] (Mum) before coming to the conclusion that the STCG should be treated as business income of the assessee.
18. To sum up, we find the view of the AO in treating the LTCG and STCG as business income of the assessee, is not proper. Considering statutory provisions regarding the definition of LTCG, we are convinced that the views of CIT (A) are sustainable. Similarly, regarding the claim of STCG also, we find that (i) the consistency principles; (ii) use of own funds of Rs. 54 Crs; (iii) earning of gross dividend income of Rs. 1.20 Crs or Rs. 30 lakhs on account of short term capital assets; (iv) details given in the contract notes regarding intention of certain shares in physical form etc., suggest that the STCG in question cannot be held as business income.
19. Therefore, in our opinion, the decision of the CIT (A) on this issue is fair and reasonable and does not call for any interference. Accordingly, grounds raised
by the Revenue with regard to both the STCG and LTCG are dismissed.
20. In the result, appeal of the Revenue is dismissed. C.O. No.12/M/2017 (By assessee)
21. This CO filed by the assessee on 20.1.2017 for the AY 2010-2011. This CO relates to the applicability of the provisions of section 14A read with Rule 8D of the Act. In the assessment, AO made addition on this account amounting to Rs. 19,07,147/-. The said disallowance was computed @ 0.5% of the average investment of Rs. 38.14 Crs (rounded of) under clause (iii) of Rule 8D(2) of the IT Rules, 1962.
22. Before us, in connection with the above CO, Ld AR mentioned that the CIT (A) erred in confirming the above addition entirely ignoring the fact that the assessing Officer failed to record the satisfaction to the correctness of the claim of the assessee. Otherwise, on facts, Ld AR submitted that the assessee earned dividend income of Rs. 1,20,33,713/- and the same was claimed as exempt u/s 10(34) of the Act. Assessee did not suo motto disallow any expenditure giving the reasons that no expenditure was incurred for earning the said exempt income. He also justified the claim stating that no part of the expenditure is allocable to the said exempt income. Apart from the legal arguments, Ld Counsel for the assessee brought our attention to the entire expenditure claimed by the assessee in the return of income. According to the books of accounts, the total expenditure claimed by the assessee for the year constitutes Rs. 16,92,342/- only. Against the said expenditure debited to the P & L Account, disallowance of Rs. 19,07,147/- constitutes anomaly and the same is against the spirit of various decisions on the issue. It is a settled legal proposition that the disallowance u/s 14A should not exceed the total debits in the P & L Account. Further, analysing the breakup of the said gross expenditure of Rs. 16,92,342/-, Ld Counsel for the assessee mentioned that Rs. 13,32,012/- is attributable to the subscription fees and the same has nothing to do with the share trading activity and the earning of the exempt income. Considering the above, it is the prayer of the Ld Counsel for the assessee that the disallowance should not exceed the balance amount of Rs. 3,60,330/- (ie Rs. 19,07147 – Rs. 13,32,012/-). At the end of the argument, Ld Counsel for the assessee submitted that it is on the fairer side of the adjudication of the issue that the disallowance of expenses u/s 14A should not exceed the said amount of Rs. 3,60,330/-. Ld AR also submitted that the Bench may even proceed to quantify the disallowance applying the flat rate of some percentage in the spirit of the judgment in the case of Godrej Agrovet.
On the other hand, Ld DR for the Revenue relied on the order of the AO and on the provisions of Rule 8D of the IT Rules, 1962.
We have heard both the parties and perused the orders of the Revenue Authorities as well as the relevant material placed before us. On hearing both the parties, we find, the relevant facts of this issue include earning of exempt income for Rs. 1.20 Crs (rounded of) and the total debits worked out to Rs. 16,92,342/-. AO disallowed Rs. 19,07,147/-, which is far exceeded the said total debits. In our view, by no means, the club subscription amount of Rs. 13,32,012/- cannot be attributable to the earning of the exempt income. Therefore, what remains to be considered for disallowance is only 3,60,330/-, which is the common expenditure for all the activities of the assessee that generated the income. Therefore, part of the said amount can only considered for disallowance. Therefore, applying the provisions of Rule 8D(2) of the Rules creates a absurdity to the facts of the present case. Considering the same, in our view, as fairly mentioned by the Ld Counsel for the assessee, disallowing 2%, taking spirit from the said judgment of the Bombay High Court in the case of Godrej Agrovet should meet the ends of justice. Accordingly we order and direct the Assessing Officer to restrict the disallowance to 2% of the exempt income. This conclusions is specific to the facts of the present case and should not act as a precedent for any other cases. We order accordingly. Thus, the grounds raised
by the assessee in its CO are partly allowed.
25. In the result, CO filed by the assessee is partly allowed.
26. Conclusively, appeal of the Revenue is dismissed and the CO filed by the assessee is partly allowed. Order pronounced in the open court on 12th April, 2017.