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सुनवाई क� तारीख / Date of Hearing: 14.03.2017 घोषणा क� तारीख / Date of Pronouncement: 05.04.2017 आयकर आयकर अिधिनयम अिधिनयम,1961 क� क� धारा धारा 254(1)केकेकेके अ�तग�त अ�तग�त आदेश आदेश आयकर आयकर अिधिनयम अिधिनयम क� क� धारा धारा अ�तग�त अ�तग�त आदेश आदेश Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य सद�य राजे�� राजे�� केकेकेके अनुसार अनुसार PER RAJENDRA, AM- लेखा लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the order, dated 25/03/2014 of CIT (A )– 26, Mumbai the assessee and the Assessing Officer (AO) have filed cross appeals for the year under consideration. Assessee, an individual, engaged in dealing and investment in shares, filed his return of income on 30/09/2009, declaring total Loss of Rs. 18.38 lakhs. The AO completed the assessment, under section 143 (three) of the Act, on 23/12/2011, determining his income at Rs. 1,05,970/-. ITA/3961/Mum/2014: 2.Effective ground of appeal
,filed by the AO,is about directing him to assess the income from sale of shares as capital gains instead of business.During the assessment proceedings, the AO found that the assessee had declared income under various heads namely income from house property (Rs.6.72 lakhs) profit on sale of shares (speculative transaction) of Rs. 21.5 lakhs, Short-Term Capital Gains (STCG)taxable under section 111A (Rs. 2.39 crores) Long-Term Capital Gains(LTCG) (Rs. 13.16 lakhs), that he had claimed exemption of Rs. 4.46 lakhs under section 10. (36)/10 (38) of the Act, that he had claimed loss in F&O segment of Rs. 3.23 crores.
3150 & 3961/M/14(09-10) Sanjay Kumar Poddar After considering the chart showing LTCG, STCG and other transactions, the AO held that the number and frequency of transactions in share trading were to taken as business,that the assessee could not be treated a mere investor, that he himself had made out a profit and loss account showing all his share business activity under the same had,that no separate portfolio for long- term investment and short-term investment was maintained,that the purchase and sale of shares was the major activity of the assessee, that substantial time was devoted by the assessee to the activity of purchase and sale of shares, that he had earned meagre dividend income, that he had heavily borrowed for investing in the shares, that the entire sale purchases had been funded by unsecured interest-bearing loans, that he had paid interest of Rs.28.78 lakhs as against interests of Rs.32.12 lakhs received during the year,that he was carrying organised activities of share trading, that it was covered by the definition of business under section 2 (13) of the Act, that it would be in the fitness of the things to ignore the claim of LTCG of Rs.4.46 lakhs as well as the STCG chargeable of Rs. 2.39 crores,that the income from the share trading activities was to be assessed as income from business, that the loss of Rs. 3.23 crores on F&O segment was to be allowed as business loss, that the speculative business profit was to be taxed as business income. 2.1.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA).Before him, the assessee argued that identical issue had arisen in the AY. 2008 -09,that the then FAA had decided the issue in favour of the assessee, that the AO himself had, in the AY.s 2006-07 and 2007-08 had taxed the profit from the share transaction under the head capital gains. He referred to the case of Gopal Purohit (228 CTR 582) and submitted that no borrowed funds were utilised for investment, that shares were purchased from the sale proceeds of the shares held by him, that the capital owned by him far exceeded the investment in shares, that he had sold unlisted shares held by him to the tune of Rs.4.21 crores, that sufficient funds were available with him for making investments, that all along he had made investment in shares that he had never converted the same into stock in trade, that in the past the AO had assessed the same under the head capital gains, that he had assess the income from sale of unlisted shares is capital gains in the earlier years, that it had valued its investment at cost, that the normal practice regarding valuation of closing stock of inventory in business was cost or market price whichever is lower, that if his investment in shares as on 31/03/2009 was valued applying the above method it would be reduced by Rs. 2.60 crores for which a deduction should have been allowed by the AO.
3150 & 3961/M/14(09-10) Sanjay Kumar Poddar After considering the submission of the assessee and the assessment order, the FAA held that the assessee had furnished xerox copies of LTCG and STCG assessed in various AY.s, that his predecessor had decided the issue in favour of the assessee in a detailed order, that the funds owned by the assessee far exceeded the borrowed funds even at the start of the year, that the amount of borrowed funds had been reduced substantially to about 20% during the year. He also took judicial note of the cases relied upon by the assessee and held that the delivery of the shares was not in doubt, that the assessee was an investor in shares and had been so recorded by the AO for the last several years, that even in the preceding year his predecessor has decided the issue in favour of the assessee, that in the balance sheet he had shown share investment and no closing stock of shares were shown in the books of accounts, that the investment in shares had been shown that purchase price. Referring to the case of Manish Karwa & others(ITA/307/Ind/2009- dated 20/12/2013), the FAA held that the income from delivery be a share transaction could not be assessed as business income, that same was to be assessed under the head capital gains. 2.2.During the course of hearing before us, the Departmental Representative (DR) supported the order of the AO and stated that. The Authorised Representative (AR) stated that identical issue had been decided in favour of the assessee by the Tribunal in favour of the assessee,while deciding the appeal for the AY.2008-09 (ITA.s/7087 &7410/Mum/2011,dtd.26.11.2014). 2.3.We find that the Tribunal has deliberated upon the issue,before us,in detail while adjudicating the appeal for the earlier AY.(supra)and has held as under: 7. We have considered rival contentions, carefully gone through the orders of the authorities below and also statement of investment and own funds vis-à-vis statement of sources of funds for investment during the year under consideration. We have also deliberated upon various case laws cited by the ld. Authorized Representative and ld. CIT DR and in the context of factual matrix of the case. We had also deliberated on the case laws referred to by lower authorities in their respective orders. The question as to whether the assessee has earned capital gain or business profits on the shares sold by him depend on the facts and circumstances of each case. Such decision is to be arrived at by taking into account the intention of the assessee while purchasing the shares, as to whether the same was acquired for holding as investment or for doing business therein. The treatment given by the assessee in its books of account is also one of the decisive factors to find out whether the shares were held as investment or stock in trade. If the shares are bought with the intention of earning capital gains thereon and also dividend income by keeping the same as investment, the gain arising there from is required to be treated as capital gains. On the other hand, if the shares are purchased with the intention to earn profit thereon and the same is treated as stock in trade in the books of account, the profit arising out of sale of such shares are liable to be treated as business income. Volume and frequency of transaction is also one of the guiding factors to find out whether the assessee is engaged in the business of purchase and sale of shares or making investment to have capital gains thereon. In the instant cases before us, the fact of the assessee investing in shares for the last several years is not in dispute. There is also no dispute to the fact that the assessee has treated the equity shares of Indian Companies as 3 3150 & 3961/M/14(09-10) Sanjay Kumar Poddar investment i.e. capital asset all along. The assessee has also valued the shares at cost thus given a particular treatment to the shares held as investment, therefore, without brining on record contrary material, the AO cannot change the intention and manner of investment being made by the assessee. Had the assessee valued the shares at cost or market price whichever is lower, the gain arising out of sale of shares could easily be treated as business income. Assessee had not valued the shares as stock but valued the same as investment. Thus, what was a capital asset will remain a capital asset unless a person holding the asset himself changes the nature by a specific action like conversion of capital asset into stock in trade. In the instant cases before us, the assessee has not treated the investment in equity shares of Indian Companies as stock in trade. In view of the decision of Hon'ble Supreme Court in the case of Ram Kumar Agarwal & Brothers, 205 ITR 251, the AO was not justified in treating the capital gain earned from sale of these shares, as business profits, which were entered by the assessee as investment in books of account. There is also no dispute to the well settled legal proposition that res judicata do not strictly apply to the income tax proceedings, but at the very same time, it is well settled that principle of consistency under the same facts and circumstances is the fundamental of judicial principle, which cannot be brushed aside without proper reasoning.
Merely because the assessee liquidates its investment within a short span of time, which had given better overall earning to the assessee, would not lead to the conclusion that the assessee had no intention to keep on the funds as investor in equity shares, but was actually intended to trade in shares.
Here, it is pertinent to mention the intention of Government for introducing the security transaction tax and exempt the long term capital gain earned from sale of shares and levying 10 % tax on short term capital gain earned on sale of shares. It is noted that under the old provisions of the Income-tax Act, profits or gains arising to an investor from the transfer of securities were charged to tax either as long term capital gains or short term capital gains depending on the period of holding of the said securities; Short-term capital gains arising from transfer of securities were taxed at the applicable rates (normal rate) and Long-term capital gains were taxed @ 20%, after adjusting for inflation by indexing the cost of acquisition. For listed securities, the 8 ITA 7087/M/11 & ITA 7410/M/11 taxpayer had an option to pay tax on long-term capital gains @ 10% but without indexation. For Foreign Institutional Investors (FIIs), the longterm capital gains and short-term capital gains were taxed at the rate of 10% (without indexation) and 30% respectively. In case of a trader in securities, however, the gains were taxed as any other normal business income. Thus tax liability on the income from purchase & sale of shares as regards to the STCG & business income was at par. However, the issue of treatment of income from share transaction as capital gain or business income has in-fact arisen after the amendment brought with Finance Act - 2004 by insertion of provisions of section 111A and 10(38) as regards to levy of Transaction tax and exemption / concession on capital gain arising from securities entered in a recognized stock exchange. With a view to simplify the tax regime on securities transactions, a tax at the rate of 0.015 per cent. (see: change in rates on securities transactions, by Finance Acts, at appropriate head) is levied on the value of all the transactions of purchase of securities that take place in a recognized stock exchange in India. This tax is collected by the stock exchange from the purchaser of such securities and paid to the exchequer. The provisions relating to the securities transactions tax are contained in Chapter VII of the Finance (No.2) Bill, 2004, and came into effect from 01.10.2004. Further, clause (38) has been inserted in section 10 of the Income-tax Act, so as to provide exemption from longterm capital gains arising out of securities sold on the stock exchange. A new section 111A has also been inserted and section l15AD is amended, so as to provide that short-term capital gains arising from sale of such securities to an investor including FIIs shall be charged at the rate of ten per cent. These amendments apply to AY. 2005-2006 and subsequent years. Through Finance Act, 2008, sections 111A and 115AD have further been amended whereby the rate of tax on such short-term capital gain has been raised to fifteen percent. Thus, w.e.f. 01.10.2004; on the share 4 3150 & 3961/M/14(09-10) Sanjay Kumar Poddar transactions subjected to STT; concessional tax rate of 10% (which has been increased to 15% from AY 2009-10) are applicable in respect of STCG whereas no tax is chargeable in respect of LTCG. It is also noted that the CBDT vide its Circular no.4/2007, dated 15.06.2007 has also recognized possibility of two portfolios, i.e. one 'Investment portfolio' comprising of securities which are to be treated as capital assets and the other 'Trading portfolio' comprising of stock in trade which are to be treated as trading assets. In view of these facts, profit arose on shares in respect of delivery based transaction are liable to be taxed as capital gain and not as business income.
Even the Hon'ble Apex Court in the case of K.P. Verghese vs TO, 131 ITR 597 (SC) observed as under:- ‘’The task of interpretation of a statutory enactment is not mechanical task. It is more than a mere reading of mathematical formulae because few word possesses the precision of mathematical symbols. It is an attempt to discover the intent of the legislature from the language used by it and it must always be remembered that language is at best an imperfect instrument for the expression of human thought and, as pointed out by Lord Denning, it would be idle to expect every statutory provisions to be ‘drafted with divine prescience and perfect clarity.’ 11. The above observations of Hon'ble Judges of the Apex Court was reiterated by Hon'ble Apex Court in the case of Kerala State Industrial Corporation, 259 ITR 51 (SC) holding as under:- ‘That the Finance Minister’s Speech can be relied upon to throw light on the object and purpose of the particular provisions introduction by the Finance Bill has been recognized by this Court in K.P. Verghese – vs ITO 1981), 131 ITR 597 (SC), at 609. Again in the case of R & B Falcon (A) Pvt. Ltd vs CIT (2008) 301 ITR 309 (SC), it was held that (Page 323):- Rules of executive construction in a situation of this nature may also be applied. Where a representation is made by the makers of legislation at the time of introduction of Bill or construction thereupon is put by the executive upon its coming into force, the carries great weight.’’ 12. The Hon'ble Delhi High Court in ARJ Security Printers, 264 ITR 276 and Neo Pollypack Pvt Ltd. 245 ITR 492 (Del.) held that even when the doctrine of res judicata does not apply to income tax proceedings, where a issue has been decided consistently in earlier AY.s in particular manner, the same view should prevail in subsequent years unless there is a material change in facts, meaning thereby, there must be material change in the facts.
The Mumbai Bench of the Tribunal in the case of Shantilal M Jain vs ACIT vide order dated 27-04-2011 (ITA No. 269/Mum/2010) held that despite large volume of shares transactions, the Assessing Officer cannot ignore the rule of consistency to treat the gains on sale of shares as STCG. In that case, the assessee was engaged in the business of trading of investment in shares and securities offered Rs. 1.54 croress as short term capital gain and Rs. 2.91 croress from long term capital gain. The long term capital gain was accepted whereas short term capital gain was held to be business profit. Since in earlier AY.s the claim of the assessee was consistently accepted as short term capital gain, it was held that the rule of consistency as propounded by Hon'ble Bombay High Court in the case of Gopal Purohit (supra), it is fairly applicable and the income has to be treated as short term capital gain. Identically in the case of Nagindas P Seth (ITA No.961/Mum/2010) it was held that despite large number of transactions in shares, the profit can be assessed as capital gains under the facts of the case. The case of the assessee is further fortified by these decisions more specifically when the assessee was hold the shares in his books as investor, as well as tock-in-trade separately. The decision in the case of Janak S Ranawala, 11 SOT 627 (Mum.) further supports the case of the assessee. Likewise, the decision from Hon'ble Madras High Court in CIT vs N.S.S. Investment Pvt Ltd. 227 ITR 149 (Mad), CIT vs. Associated Industrial Development Company, 82 ITR 526 (SC) supports the case of the assessee. In the present appeal, we note that the assessee made investment in shares with 3150 & 3961/M/14(09-10) Sanjay Kumar Poddar intention to earn dividend income on appreciation of price of shares. Therefore, it cannot be said that the assessee was doing business.
From the record, we found that the assessee has made investment in shares and securities out of sale proceeds of shares held as long term investment on which assessee has declared long term capital gains of Rs.10.91 croress. Since the assessee has earned dividend income, the AO disallowed Rs.33,87,373/- by invoking provisions of Section 14A. The assessee has also earned long term capital gain of Rs.10.91 croress and suffered short term capital loss of Rs.1.34 croress. However, the AO did not accept assessee‟s claim of capital gain and treated the same as business income. The basic plea of the AO was that assessee has invested borrowed funds for the acquisition of shares and securities, therefore, the profit/loss earned thereon was treated as business income. From the record we found that assessee was following consistent practice of holding shares as „investment‟ in its books of accounts in all the years. Such investment was consistently valued at cost as against cost or market value whichever is lower. In earlier years, assessment has been completed by department treating such activities as activity of realization of investment rather than trading in shares. We found that in the immediately preceding AY. 2007- 08 long term capital gain of Rs.5.95 croress was realized on sale of shares costing Rs.1.55 croress, which were realized for Rs.7.50 croress. The AO has accepted long term and short term capital gain shown by assessee was under scrutiny assessment order framed u/s.143(3) vide order dated 24-11-2009. Similarly assessment for AY. 2006-07 was completed u/s.143(3) vide order dated 29-12-2009, wherein long term capital gain of Rs.4.90 croress and short term capital gain of Rs.1.78 croress was accepted by the department. During the year under consideration also the assessee has shown long term capital gains of Rs.10.91 croress and short term capital loss of Rs.1.47 croress, however, without indicating any change in the facts and circumstances, the AO changed his view and held the same as business income. We found that there is no change in the circumstances in the current year, therefore, having regard to the principle of consistency profit on realization of investment is required to be assessed as capital gains. In this regard, reliance may be placed on the decision of the Mumbai Bench of the Tribunal in the case of Gopal Purohit, reported in 122 TTJ 87, which was confirmed by the Hon‟ble High Court, reported in 228 CTR 582 and the SLP filed by the department before the hon‟ble Supreme Court was also dismissed vide order dated 15.11.2010. There is no dispute to the fact that in its books of accounts also the assessee has treated the same as investment by proper disclosure in its audited balance sheet. The investments held by the assessee consisted of investment in quoted shares of Rs.6.60 croress and investment in unquoted shares and shares warrants of Rs.11.14 croress which were valued at cost. Similarly in AY. 2007-08, assessee was holding quoted shares at cost of Rs.7.10 croress and unquoted shares of Rs.2.26 croress. The disclosure of the investment in the accounts is a material fact to ascertain the intention of the assessee to hold the shares as “investment” or “stock in trade‟. In the case of Gopal Purohit (supra), the Tribunal held that presentation in the books of accounts is most crucial source of gathering intention of the assessee with regard to the nature of transaction. It is also not the case of AO that the shares which were held as investment in earlier AY.s i.e. 2005-06, 2006-07 & 2007-08 and accepted by the department as investment were converted into stock in trade so as to attract the provisions of Section 43(5) of the Act. Since the shares held as investment in earlier years and also accepted by the department as such, the assessee having not converted its shares in “stock in trade”, there was no reason to assess the profit arising out of sale as business income in place of capital gains.
Now, coming to the AO’s observation with regard to the borrowed fund having been utilized for acquiring shares, we found that incremental investment made during the year was of Rs.3.79 croress which was completely financed out of sale proceeds of earlier investment on which long term capital of Rs.10.91 croress has been returned by the assessee. We found that shares costing for Rs.3.59 croress were realized for Rs.14.50 crores. The shares were sold during the period from April2007 to January, 2008 and fresh shares has been acquired during the period June, 2007 to March, 2008. In case of unquoted shares, the assessee has acquired the same during the 6 3150 & 3961/M/14(09-10) Sanjay Kumar Poddar period June, 2007 to March, 2008, which was acquired out of share application given in earlier years, which clearly indicates that assessee has not used borrowed funds for investment held either as on 31-3-2008 or 31-3-2007.The AO has failed to appreciate the factual position emerging out of the audited balance sheet to the effect that increased unsecured loans has been utilized for further advancing loans. Loans and Advances as on 31-3-2008 amounted to Rs.20.56 croress as against loans and loan of Rs.8.96 croress as on 31-3-2007. Thus, increase in loans and advances were much more than increase in unsecured loans. Accordingly, we do not find any infirmity in the order of CIT(A) for holding these shares as investment giving rise to the capital gain. The CIT(A) has properly appreciated the volume and frequency of the transaction, the assessee’s intention of investing in shares as well as department‟s conclusion of treating these shares as investment in the scrutiny assessment framed in earlier years.
If the conclusion drawn in the impugned order, observations made from the assessment order, assertions made by respective counsel and the material available on record are kept in juxtaposition and analyzed, we find that the assessee had been consistently investing in shares and income arising from sale and purchase of shares had been shown and accepted as capital gains.” Respectfully following the above order of the Tribunal,we decide the effective ground of appeal against the AO. ITA/3150/Mum/2014 3.In the appeal filed by the assessee,effective ground of appeal is about disallowance made u/s.14A of the Act. During the assessment proceedings, the AO found that the assessee had paid and interest of Rs. 28,78,444/-, that it had shown loan of Rs.3.28 crores and capital of Rs. 25.95 crores, that he had invested Rs.18.49 crores in shares, that he had shown interest income of Rs. 48 lakhs including excellent interest of Rs.16 lakhs. The AO made a disallowance of Rs.13.21 lakhs and Rs.8.52 lakhs respectively under Rule 8D (2) (ii) and Rule 8D (2) (iii)of the Rules. 3.1.During the appellate proceedings, before the FAA,the assessee argued that his own capital exceeded the total investment in shares hearing exempt income, no disallowance under the head interest expenditure could be made applying to section 14A read with rule 8D of the Rules. He referred to the cases of Reliance Utility and Power Ltd (313 ITR 340) and Yatish Trading Private Ltd. (129 ITD 237). After considering the available material, the FAA observed that assessee had not been able to substantiate, by producing the bank statement showing movement of funds, that no borrowed funds had been used for investment in shares, that during the year he had entered into several share transactions income from which had been offered for taxation under the head capital gains, that he had not been able to submit his certainty that the funds from the same bank accounts used for all business purposes did not include application of borrowed funds also for investment activities. Referring the order of his predecessor for the earlier AY. he held that the AO had rightly made the disallowance applying the provisions of Rule 8D (2) (ii) of the Rules.
3150 & 3961/M/14(09-10) Sanjay Kumar Poddar 3.2.During the course of hearing before us, the AR stated that the Tribunal had deleted the disallowance made by the AO under the head interest expenditure in the earlier year, that it was held that investments were made out of assessee own funds, that the assessee had received interest more than the interest paid, that investment on which exempt income funds were only subjected to provisions of section 14A. He relied upon the cases of HDFC Bank Ltd (383 ITR 529), Karnavati Petroleum Private Ltd. (ITA/2228/Ahd/2012) ACB India Ltd. (374 ITR 1081). 3.3.We find that while deciding the appeal for the earlier AY.(supra), the Tribunal has dealt with the issue as under: 17. With regard to disallowance made by the AO u/s.14A read with Rule 8D, we found that assessee has not invested interest bearing funds in the shares and securities in terms of detailed discussion made hereinabove. Since no interest expenditure was incurred during the year in respect of additional investment put in the shares which were fully financed out of the sale proceeds of shares held as long term capital investment and same also offered as long term capital gains, there is no reason for disallowance of interest expenditure by invoking provisions of Section 14A read with Rule 8D.
With regard to the other expenditure debited in the profit and loss account, we found that common expenditure have been debited which are in the nature of insurance expenses, bank charges, audit fees, repairs and maintenance, stamp duty, etc., which amounts to Rs.65,925/-. Since this expenditure was also attributable for the earning of exempt income, we direct the AO to confirm the disallowance of these expenditure of Rs.65,925/- u/s.14A.”