ITO, NEW DELHI vs. M/S TRIUMPH ENGINEERING PVT. LTD., NEW DELHI

This is an appeal filed by the Revenue against the order of ld. CIT(A)- XIV, New Delhi dated 12.05.2011 for the assessment year 2008-09 on the following grounds : “

The brief facts of the case are that the assessee filed return of income on 23.09.2008 declaring income of Rs.63,07,541/-. The details of source of income are as follows : Balance as per P & L a/c 8,354,503 1) Depreciation as per books 23,840 2) Security transaction tax 44,613 - 68,453 8,422,956 Less: i) Dividend Income 975,644 ii) Depreciation as per I.Tax rules 14,490 iii) Capital Gain 7,715,415 8,705,549 _____________ Business Income / (Loss) (282,593 Income from Capital gain 434,159 Long term gain 7,181,256 7,715,415 Less: Long term gain exempt from income tax 534,159 7,181,256 Less: Brought forward short term loss 591,122 Taxable short term gain for the year 6,590,134 Taxable income (Short term gain) 6,307,541 The case was selected for scrutiny and the assessment was completed. The Assessing Officer noticed from the details of share transactions given by the assessee that the assessee has shown purchase and sale of shares and the profit earned thereon was claimed as capital gain. The Assessing Officer also noticed that during the year, the assessee company was carrying on the same business as in earlier years. The assessee has shown its main source of income on account of dividend, interest received and profit on sale of investments.

With respect to ground No. 1 & 2 of appeal preferred by the Revenue, the ld. DR has basically placed reliance on the assessment order. He referred to contents of page No. 1, 2 & 3 para No. 3 & 5 of the assessment order with the submissions that frequency and volumes of the transaction suggested that it was not a case of investment, but business. He submitted that where a company purchase and sells shares, it must be shown that they were held as stock in trade and that existence of the power to purchase and sale shares in the memorandum of association is not decisive of the nature of transaction. He submitted that the substantial nature of transactions, the manner of maintaining the books of account, the magnitude of purchase and sales and the ratios between the purchase and sale and the holding period would furnish a good guide to determine the nature of transaction. He contended that ordinarily, the purchases and sales of shares with the motive of earning a profit would result in transaction being in the nature of trade/adventure in the nature of trade, but where the objects of investments in shares of a company is to derive income by way of dividend etc., then the profits accruing by change in such investments “by sale of shares” will yield capital gain and not revenue receipts. He further submitted that there were lot of frequency and volumes of transactions. Therefore, the income should be treated as business income and not capital gain as claimed by the assessee.

The ld. AR on the other hand, placed reliance on the first appellate order on the issue. He submitted that the company have categorized the investment as stock in trade in his balance sheet. He placed reliance on the judgment of Hon’ble Mumbai Tribunal “B” Bench in the case of ACIT vs. Naishadh V. Vachharajani dated 25.02.2011. He further submitted that intention of the assessee behind the transaction is significant and frequency of transaction alone would not decide the issue ipso facto. He explained that the assessee can hold shares either as investment or as stock in trade as qualified by CBDT Circular No. 4/2007 dated 15.06.2007. He pointed out that entries in the books of account prove that the shares in question were held as investment.

We have heard the rival submissions and have gone through the entire material available on record and we find that there is no justification to interfere with the impugned order. The ld. CIT(A) has decided the first issue regarding purchase and sale of shares in para 6 to 7.6 at pages 4 & 5 of the impugned order. For the sake of convenience, the same is reproduced as under : “6. I have gone through the assessment order and the detailed written filed by the AR. 7.1 The main observation of the AO is that the assessee has been doing business in shares and hence the gain is to be taxed as business income. 7.2 The main contention of the AR is that the shares meant for trading are shown as stock in trade and the shares meant for investment are shown under the head investment. In such a case the gain on the sale of shares shown as investment should be taxed under the head capital gains. For this proposition, he relied on the following case law : ACIT vs. Naishadh v. Cachharajani (ITAT Mumbai dated 25.02.2011), ITA No. 6429/Mum/2009.

In view of the above discussion, made in the impugned order, we are of the considered opinion that the ld. CIT(A) has rightly treated the profit earned on purchase and sale of shares as capital gain. On perusal of the above chart, it reveals that the assessee has purchased shares only on two occasions on 18.09.2006 (HDFC Equity fund) and July, 2007(Borcil Glass Ltd.) and he has sold the shares only on seven occasions. There is wide gap between the purchase and sale of shares. Hence, the ld. CIT(A) was quite justified in accepting the contention of the assessee. Accordingly, the appeal of the Revenue on this issue has no merit and is liable to be dismissed.

As regards the disallowance of expenditure u/s. 14A, the ld. CIT(A) has made reasoned order which needs no interference. The CIT(A) has decided the issue at page 5 & 6 para 8 to 12 of the impugned order. For the sake of convenience, the same is reproduced as under : “8. Ground No.3 reads as under: "a) That Assessing Officer has erred in making addition u/s. 14-A of the I.T. Act, b) That the addition as made is highly excessive and arbitrary." 9. Vide this ground the appellant challenged the action of the AO in making disallowance of expenditure of Rs. 1,60,746 by invoking Rule 8D r.w.s. 14A. The reasons given by the AO are as under: "Assessee has an investment amounting to Rs.53,71,380/- at the end of the year is equity shares from which it earned dividend income of Rs.975,644/- which it claimed as exempt. The assessee was asked to explain as to why the expenses relating to the dividend income on this investment should not be made to the total income in the light of provisions of Section 14-A read with Rule 8D of IT Rules. It has been contended that Clause 2(ii) of Rule 8D deals with the situation wherein amount of expenditure directly relating to 'income which does not form part of income' cannot be ascertained......the assessee has earned an interest of Rs.8174/- during the previous year and that it had advanced loans on which it has earned interest to the tune of Rs.657,863/- whereas the assessee company has paid less interest on loans that it has raised. The contention of the assessee has been considered but not found acceptable in the absence of any details to substantiate the fact that borrowed funds in which interest has been paid have been utilized for advancing the loan on interest income earned. The interest paid on borrowed funds in July, 2007 have been utilized for earning tax free income whereas interest earned on the fund lent is in the month of Dec, 2007. Therefore, it establishes that there is no nexus for interest earned and interest paid for interest bearing advances. Therefore, as per the working of Rule 8-D, the proportionate expenses incurred for earning the dividend income are worked out below at Rs.160,746/- which is disallowed and added to the total income of the assessee. i) Amount of expenditure directly relating to income which does not form part of total income. Nil ii) a = Amount of expenditure by way of interest 649,689/- b = Average value of investment income. 58,90,628/- c = Average of total assets. 291,48,916/- a x b/c = 131,293/- iii) .05% of Average value of investment = 29,453/- Aggregate of above = 160,146/- 10. The AR filed detailed written submissions in this regard which are as under: “The learned Assessing Officer has made an addition of Rs. 1,60.746/- u/s. 14-A of the I.T. Act based on the calculations as per Rule 8D of the Income Tax Rules. In this connection, the appellant has objection to the disallowance of Rs. 1,31,293/- being the proportionate interest disallowed by the Assessing Officer. Enclosed please find copy of submission made before the assessing officer wherein it is clearly stated that the liability of the interest on the appellate firm during the year under assessment was Nil, (Page- 19) In fact, the interest earned is more than interest paid and the net result is that income of Rs. 8,174/- is taxed as interest income in the total income declared by the appellant company. Thus, there was no justification whatsoever in making disallowing of the interest in Rule 8D of the Income Tax Rules."

I have gone through the assessment order and the detailed written submissions filed by the AR.

The main contention of the AR is that the interest receipt is higher than the interest expenditure and there is net gain of Rs. 8,174 (6,57,863 - 6,49,689). Hence no disallowance should be made in respect of interest expenditure. I am in total agreement with the contention of the AR. The disallowance is restricted to Rs. 29,453 against which there is no objection.”

In view of the discussion, made in the impugned order, we are of the considered opinion that the ld. CIT(A) has passed the reasoned order which requires no interference. The ld. DR has not been able to rebut the findings of the ld. CIT(A). Therefore, the impugned order does not call for any interference on this issue also. As a result, the appeal of the revenue is liable to be dismissed.