VAHANVATI CONSULTANTS P. LTD,MUMBAI vs. DCIT 2(3), MUMBAI

The Present Appeal has been preferred by the assessee against the order dated 26.09.2011 of the Commissioner of Income Tax (Appeals) - 6, [hereinafter referred to as the CIT(A)] relevant to assessment year 2008-09.

The assessee has taken the following grounds of appeal: I. “Inappropriateness of confirming additions that the AO made by treating Short Term Capital Gain as business income. The Learned CIT(A) erred in facts and circumstances of the case and in law in confirming addition that the AO had made by treating the Short Term Capital Gain as business income.

The assessee has raised two effective grounds of appeal. The issue raised in ground no.1 by the assessee is whether the income earned from the sale and purchase of shares is to be assessed as Short term capital gains or as business income.

The brief facts of the case are that the assessee company is engaged in the business of providing consultancy services to private and public sector undertakings in India and abroad in the fields of financial, commercial, computer, legal, general office and establishments, etc. Further the company also undertakes to advance or lend money to such persons or companies on such terms as it may deem appropriate in order to earn interest income, commission income etc. During the year under consideration, the assessee company made transactions of sale and purchase of shares and earned an income of Rs.4,06,72,768/-. Assessee claimed the said income in its return of income as Short Term Capital Gain. During the assessment proceedings before the AO, the assessee explained that the company had made investments in the shares and the same were reflected under the head ‘investments’ in balance sheet. The company had made transactions of sale and purchase of shares and earned capital gains of Rs.4,06,72,768/-. The AO, however, 3 M/s. Vahanvati Consultants P. Ltd. vs. DCIT observed that during the year, the assessee company had done the only activity of sale and purchase of shares and that no other business activity was carried out. The transactions of purchase and sale of shares carried out by the assessee were to the tune of more than Rs.4 crores, whereas the dividend income earned was only Rs.46,218/-; That the assessee had carried numerous share transactions and that the holding period of the investments was not substantial. He, therefore, held that the motive of the assessee for purchase of shares was not investment but trading in shares. He accordingly treated the income earned by the assessee from share transactions as ‘business income’ of the assessee.

Being aggrieved by the above action of the AO, the assessee filed appeal before the Ld. CIT(A). In appeal, the ld. CIT(A), vide impugned order, observed that the assessee during the year had done only activities of share transactions and hence share transaction was main business activities of the assessee. The assessee had used the borrowed funds for the purpose of purchasing the shares. The fund position of the assessee from the balance sheet showed that out of total fund of Rs.18.43 crores, Rs.14.71 crores were unsecured loans; That the number of shares purchased and the volume invested was very high. He, therefore, upheld the finding of the AO, treating the income from the share transactions as ‘business income’ of the assessee.

Being aggrieved by the order of CIT(A), the assessee has come in appeal before us. We have heard the rival contentions. The ld. AR of the assessee has invited our attention to pg. 10 of the paper book to show that the assessee had invested only in 13 scripts during the year. He has further submitted that majority of funds of the assessee were invested in mutual funds that the average holding period of the assessee for the shares was more than 4 months. He has further 4 M/s. Vahanvati Consultants P. Ltd. vs. DCIT submitted that the income earned by the assessee from the share transaction was further invested in property and not in shares and that there was no churning of the portfolios. He has further stated that in the earlier assessment year 06-07, during the scrutiny assessment proceeding u/s 143(3) of the Act, the assessee has been treated as investor and the income of the assessee from the share transaction has been accepted as capital gains. Ld. AR has further stated that even in the subsequent assessment year A.Y. 2010-11, the assessee again has been treated as investor. He, therefore, has stated that the department has changed its stand during the year under consideration. So far as the use of borrowed funds was concerned, the ld. AR has stated that the assessee is in the business activity of lending and borrowing and surplus borrowed funds were invested in share transaction. That the assessee, otherwise, has its own sufficient capital that the investment was not only made in shares but also in mutual funds and in fixed assets such as landed property where the notice of which earning of profits was not involved but the activities of the assessee suggest that he was an investor. Ld. DR on the other hand has strongly relied upon the findings of the lower authorities and has contended that out of total funds of Rs.18.43crores, the assessee has Rs.14.71 as unsecured loans. Thus, the fact reveals that the assessee used the borrowed fund for the purpose of making share transaction. He, therefore, submitted that the lower authorities have rightly treated the income of assessee from the share transaction as ‘business income’ of the assessee.

We have considered the rival contentions and have also gone through the records. We find that though the value of investment in shares is high, however, the number of scripts invested in is only 13. The assessee has shown in the balance sheet the above shares as investments. The assessee in the past as well as in the 5 M/s. Vahanvati Consultants P. Ltd. vs. DCIT subsequent year has consistently been treated as an investor. The Department’s conduct of changing its stand in every year is not appreciable as it would not only create uncertainty each year about the ‘Head’ of such income but may deprive the assessee from claiming set off of capital losses of a previous year in the subsequent year because of change of Head of such income. The Hon’ble Bombay High Court in the case of “CIT vs. Gopal Purohit” (2011) 336 ITR 287 (Bom.) has held that though principle of resadjudicata is not applicable to income tax proceedings, as each year is a separate year, however, the principle of consistency is to be followed, if there is no change in fact and circumstances in the subsequent year. So far as the contention of the Department that borrowed funds were used for investments, we find that lending and borrowing being business of assessee and the assessee having surplus borrowed funds having invested in the share transaction would not change the status of the assessee from an investor to a trader in relation to share transactions carried out by it. The Hon’ble Karnataka High Court in the case of CIT vs. Kanpur Investments Private Limited [2015] 61 taxmann.com 91 (Karnataka) held that the Income Tax Act does not prohibit the assessee from making investments in capital assets after using borrowed funds and that even if the assessee has invested the borrowed funds in share transaction that would not mean that the same would become business activity of the assessee. There is another peculiar fact of the case that there is not repetitive transaction and even the assessee from the income earned from the shares has invested the same in property. The major part of the funds of the assessee being invested either in mutual fund or in the property; over all activity of the assessee suggest that the funds have been used by the assessee for investment purposes only. We do not found any justification on the part of the lower authorities in treating the assessee as a trader in relation to the share transaction when in the earlier as well as in subsequent year, 6 M/s. Vahanvati Consultants P. Ltd. vs. DCIT the assessee has been treated as investor in the shares. We accordingly direct the AO to treat the income of the assessee from share transaction as capital gains and not as business income of the assessee.

The assessee in this ground has contested the confirmation of disallowance made by the AO u/s 14A r.w. Rule 8D on account of disallowance of expenditure incurred for the purpose of earning the tax exempt income. Ld. AR of the assessee at the outset had stated that though the dividend income earned by the assessee out of the investment activities was only 46,218/-. However the AO applied rule 8D of the Income Tax Rules and has computed the disallowance at Rs.63,29,768/-. Though the ld. CIT(A) has given a part relief in directing the AO not to treat the sum of Rs.96,596/- incurred on account of Demat expenditure as directly relating to earning of exempt income and further to exclude the investment in property of Rs.5,47,21,652/- for computation of disallowance under Rule 8D. However, the ld. CIT(A) has wrongly confirmed the remaining disallowance made by the AO. The ld. AR of the assessee has relied upon the decision of the Hon’ble Delhi High Court in the case of Joint investments Private Ltd. vs. CIT decided on 25.02.2015 and further in the case of ACB India Limited vs. ACIT ITA No.615/Mum/2014 decided on 24.03.2015 to contend that the disallowance under Rule 8D(2)(iii) cannot be made on the basis of entire investments but should be worked out by taking only those investments which yielded dividend during the year. He has further relied in this respect on the decision of the co-ordinate bench of the tribunal in the case of M/s Amrit Diamond Trade vs. ACIT, ITA No.2642/Mum/13 vide order dated 15.01.2016. Ld. DR on the other hand has relied upon the finding of the lower authorities.